<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                        FOR ANNUAL AND TRANSITION REPORTS
                       PURSUANT TO SECTIONS 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
      ACT OF 1934

For the fiscal year ended December 31, 1997

                                       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 No. 1-12759


                           PHYSICIANS' SPECIALTY CORP.
             (Exact name of registrant as specified in its charter)





          Delaware                                              58-2251438
---------------------------------------------             ----------------------
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                            Identification Number)

1150 Lake Hearn Drive, Suite 640, Atlanta, GA                      30342
---------------------------------------------             ----------------------
(Address of principal executive offices)                        (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:  (404) 256-7535

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $.001
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 twelve (12) months (or for such shorter period that the registrant
was required to file such report(s)), and (2) has been subject to the filing
requirements for the past ninety (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 [ ].



<PAGE>   2



The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant was approximately $44,000,000 based on the last
sales price of the Common Stock as of March 25, 1998.

As of March 25, 1998, 6,515,863 shares of Common Stock, $.001 par value, of the
registrant were issued and outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

See the Exhibit Index hereto.




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<PAGE>   3



PART I

         Statements in this Form 10-K that are not statements or descriptions of
historical facts are forward-looking statements under the Private Securities
Litigation Reform Act of 1995 and are subject to numerous risks and
uncertainties. These forward looking statements and other forward looking
statements made by the Company or its representatives are based on a number of
assumptions and actual results could differ materially from those currently
anticipated due to a number of factors, including those set forth under "Risk
Factors" and elsewhere in, or incorporated by reference into, this Form 10-K
including, in particular, risks relating to the Company's limited operating
history; limited history of combined operations; risks relating to acquisitions
and managing growth; dependence on affiliated physicians; risks related to
substantial leverage and credit facility; dependence on contracts with managed
care organizations; risks associated with capitated arrangements; potential
reductions in reimbursement by third party payors; competition; regulatory
risks; and other risks. See "Risk Factors."

ITEM 1.  BUSINESS.

         (a) General Development of Business

         Physicians' Specialty Corp. (the "Company") provides comprehensive
practice management services to physician practices and health care providers
specializing in the treatment and management of diseases and disorders of the
ear, nose and throat, head and neck ("ENT"), including specialists practicing in
the fields of allergy, audiology, oral surgery, plastic surgery and sleep
medicine (collectively the "Related Specialties"). The Company seeks to
affiliate with physician practices and health care providers who provide high
quality, cost effective medical and surgical services to fee-for-service
patients and capitated managed care enrollees. The Company provides financial
and administrative management, enhancement of clinical operations, access to
ancillary services, network development and payor contracting services,
including the negotiation and administration of capitated arrangements. The
Company is currently affiliated with 47 physicians, one temporo-mandibular joint
("TMJ") specialist and 49 allied health care professionals operating 41 clinical
locations in Alabama, Florida, Georgia and Illinois. The Company holds, manages
and administers capitated ENT managed care contracts covering an aggregate of
approximately 315,000 enrollees of health maintenance organization ("HMO") plans
of United HealthCare of Georgia, Inc. ("United HealthCare") and Cigna HealthCare
of Georgia, Inc. ("Cigna") and enrollees of HMOs which have contracted with FPA
Medical Management, Inc. ("FPA"). The Company believes it is the leading
physician practice management company focusing solely or substantially on
affiliating with and managing ENT physician practices.

         Since the closing of its initial public offering (the "IPO") and the
acquisition of ENT Networks and substantially of all of the assets of five ENT
physician practices located in the metropolitan Atlanta area and Birmingham,
Alabama (the "Initial Practices") in March 1997, the Company has acquired
substantially all of the assets of four ENT physician practices located in the
metropolitan Atlanta area, one ENT physician practice located in North Georgia,
one ENT physician practice in the metropolitan Chicago area and one ENT
physician practice located in South Florida, as well as the stock and related
assets of professional associations comprising one ENT physician practice group
located in South Florida (the "Additional Practices" and together with the
Initial Practices, the "Practices"). As a result of these acquisitions, the
Company affiliated with an additional


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24 physicians and 19 allied health care professionals operating 21 clinical
locations. In March 1998, the Company entered into a non-binding letter of
intent relating to the Company's proposed acquisition of substantially all of
the tangible assets of Physicians' Domain, Inc., a New York based ENT physician
practice management company ("Physicians' Domain"), along with the stock of
corporations that are successors to six ENT physician practices affiliated with
Physicians' Domain (collectively, "PDI"). The PDI transaction consists of 25
physicians and 20 allied health care professionals operating 13 clinical offices
located in Southern New York and Northern New Jersey. In addition, as of March
30, 1998, the Company had non-binding letters of intent relating to the proposed
acquisition of assets or equity of two other ENT physician practices consisting
of an aggregate of two physicians and two allied health care professionals
operating two clinical offices in South Florida (together with PDI, the
"Probable Practice Acquisitions"). There can be no assurance that any of these
acquisitions will be completed on the terms contemplated, as to the terms of
such acquisitions or that the Company will be able to integrate any of these
practices into its business.

         Unless the context indicates otherwise, "PSC" refers to Physicians'
Specialty Corp., a Delaware corporation, the "Company" refers to PSC, and its
wholly-owned subsidiaries (i) PSC Management Corp. ("PSC Management"), PSC
Acquisition Corp., ENT & Allergy Associates, Inc. and South Florida
Otolaryngology, Inc. and (ii) ENT Center of Atlanta, Inc., Atlanta ENT Center
for Physicians, Inc. and Atlanta-AHP, Inc. (collectively, the "ENT Networks")
and "Common Stock" refers to the common stock, $.001 par value, of PSC.

         The Company was incorporated in Delaware in July 1996. The Company's
executive offices are located at 1150 Lake Hearn Drive, Suite 640, Atlanta,
Georgia 30342. The Company's telephone number is (404) 256- 7535 and its fax
number is (404) 256-1078.

         (b) Financial Information about Industry Segments

         The Company operates in only one business segment.

         (c) Narrative Description of Business

         GENERAL

         The Company provides comprehensive practice management services to
physician practices and health care providers specializing in the treatment and
management of ENT diseases, including specialists practicing in the Related
Specialties. The Company seeks to affiliate with physician practices and health
care professionals who provide high quality, cost effective medical and surgical
services to fee-for-service patients and capitated managed care enrollees. The
Company provides financial and administrative management, enhancement of
clinical operations, access to ancillary services, network development and payor
contracting services, including the negotiation and administration of capitated
arrangements. The Company is currently affiliated with 47 physicians, one TMJ
specialist and 49 allied health care professionals operating 41 clinical
locations in Alabama, Florida, Georgia and Illinois. The Company holds, manages
and administers capitated ENT managed care contracts covering an aggregate of
approximately 315,000 enrollees of HMO plans of United HealthCare and Cigna and
enrollees of HMOs which have contracted with FPA.




                                       -4-

<PAGE>   5



         HEALTH CARE INDUSTRY OVERVIEW

         GENERAL

         The health care delivery system in the United States has been
undergoing substantial change, largely in response to concerns over the quality
and escalating cost of health care. The growth in health care expenditures has
increased the demand by government and third party payors to control health care
costs. The emphasis on cost containment, the consolidation of the health care
market in general, the increased market share of managed care companies, the
transfer of risk from payors to providers and the focus on improving the quality
of patient care have precipitated and accelerated significant changes in the way
physicians organize themselves.

         Health care in the United States historically has been delivered by a
fragmented system of health care providers, including hospitals, individual
physicians and physician group practices.  Compared to physician practice
management companies and larger group practices, individual physicians and small
group practices tend to have limited capacity for any of the following: ties to
other health care providers (restricting their ability to coordinate care across
a variety of specialties); access to patients; capital to invest in new clinical
equipment and technologies; and purchasing power with vendors of medical
supplies. In addition, individual physicians and small group practices typically
lack the negotiating leverage with payors and information systems necessary to
manage risk-sharing contracts.

         In response to the foregoing factors, physicians are increasingly
forming larger group practices and affiliating with physician networks and
physician hospital organizations. In addition, physicians are affiliating with
physician practice management companies in order to gain greater access to
third party payor contracts, patient information and management systems,
leverage with vendors and payors, capital resources and ancillary services
frequently unavailable to independent practitioners. In addition, many payors
and their intermediaries, including governmental entities and managed care
companies, are increasingly looking to outside providers of physician services
to develop and maintain quality outcomes, management programs and patient care
data.

         OTOLARYNGOLOGY

         Otolaryngology is the management of diseases and disorders of the ear,
nose, nasal passages, sinuses, larynx, mouth and throat, as well as structures
of the neck and face. An otolaryngologist is commonly referred to as an ENT
physician and provides some or all of the following subspecialty services:

         -  Pediatric Otolaryngology: the medical and surgical treatment of
             diseases of the ear, nose and throat in children.

         -   Head and Neck Surgery: the medical and surgical treatment of
             cancerous and noncancerous tumors in the head and neck, including
             thyroid and parathyroid surgery.

         -   Rhinology: the medical and surgical treatment of disorders of the
             nose and sinuses.

         -   Allergy: the medical treatment of inhalant allergies affecting the
             upper respiratory system.



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<PAGE>   6




         -   Facial Plastic and Reconstructive Surgery: the treatment of
             cosmetic, functional and reconstructive abnormalities of the face
             and neck.

         -   Otology/Neurotology: the medical and surgical treatment of diseases
             of the ear, including traumatic and cancerous disorders of the
             external, middle and inner ear, as well as the nerve pathways which
             affect hearing and balance.

         -   Laryngology: the medical and surgical treatment of disorders of the
             throat, including the voice.

ENT services in the United States are delivered largely through individual and
small single specialty group practices and, to a lesser extent, multi-specialty
clinics.

         According to the American Academy of Otolaryngology-Head and Neck
Surgery, Inc. (the "Academy"), there were approximately 8,600 ENT physicians in
the United States as of December 31, 1996 and, based upon membership in the
Academy, the Company estimates that approximately 70% of all ENT practices
consist of individual practitioners or small group practices (less than four
physicians). According to industry sources, ENT physicians and Related
Specialists are increasingly seeking to form larger group practices and
affiliate with physician practice management companies which understand the
needs of ENT physicians and can enhance practice performance.

         THE AFFILIATED PRACTICES

         The Company is affiliated with 47 physicians, one TMJ specialist and 49
allied health care professionals operating 41 clinical offices in Alabama,
Florida, Georgia and Illinois.




                                       -6-

<PAGE>   7



The following table sets forth certain information concerning the Company's
affiliated practices as of March 26, 1998:

<TABLE>
<CAPTION>
                                                   Areas                Year                       Allied Health        Office
Medical Group             Location                 Served              Founded      Physicians    Care Professionals   Locations
-------------             --------                 ------              -------      ----------    ------------------   ---------

<S>                       <C>                    <C>                   <C>          <C>           <C>                  <C>
Atlanta Ear,              Atlanta,               Metropolitan            1979          32*                  37             31
Nose & Throat             Georgia                Atlanta
Associates, P.C

ENT & Allergy             Birmingham,            Birmingham              1988           2                    1              1
Associates, Inc.          Alabama

Allatoona E.N.T           Cartersville,          Cartersville            1994           2                    1              1
& Facial Plastic          Georgia
Surgery, P.C

Otolaryngology            Chicago,               Barington, Crystal      1981           4                    3              3
Medical &                 Illinois               Lake and McHenry
Surgical
Associates, Ltd.

Ear, Nose &               Boca Raton,            Boca Raton, Pompano     1981           8                    7              5
Throat Associates         Florida                Beach, West Palm
of South Florida,                                Beach & Delray Beach
P.A.
                                                                         Total         48*                  49             41
                                                                                       ==                   ==             ==
</TABLE>

*   Includes one TMJ specialist.


         ATLANTA EAR, NOSE & THROAT ASSOCIATES, P.C.

         The Company believes Atlanta ENT is the largest independent
(non-academic) otolaryngology group practice in the United States. Atlanta ENT
consists of 31 ENT physicians, one TMJ specialist, 26 audiologists, eight
physician assistants, two nurse practitioners and one clinical esthetician with
31 clinical offices. Atlanta ENT offers a wide range of ENT subspecialty
services, including pediatric otolaryngology, head and neck surgery, rhinology,
facial plastic and reconstructive surgery, otology and laryngology, to children
and adults in the metropolitan Atlanta area. The practice also provides
audiology services, hearing aid sales, TMJ diagnostics and snoring and sleep
apnea laser surgical services. The affiliated physicians at Atlanta ENT maintain
privileges at 18 hospitals and three ambulatory surgical centers throughout
metropolitan Atlanta. Ramie A. Tritt, M.D., Chairman of the Board and President
and a principal stockholder of the Company, is the President and founder of
Atlanta ENT. See "Certain Relationships and Related Transactions."



                                       -7-

<PAGE>   8





         ENT & ALLERGY ASSOCIATES, INC.

         ENT & Allergy Associates, Inc. is a wholly-owned subsidiary of the
Company and consists of two ENT physicians and one audiologist with one clinical
office. ENT & Allergy Associates provides a wide range of ENT subspecialty
services, including allergy testing and treatment, head and neck surgery,
rhinology, facial plastic and reconstructive surgery, otology, neurotology and
laryngology, to children and adults in the metropolitan Birmingham area.

         ALLATOONA E.N.T. & FACIAL PLASTIC SURGERY, P.C.

         Allatoona ENT consists of two ENT physicians and one audiologist with
one clinical office. Allatoona ENT provides a wide range of ENT subspecialty
services, including allergy testing and treatment, head and neck surgery,
rhinology, facial plastic and reconstructive surgery, otology and laryngology,
to children and adults in the North Georgia area. In addition, the physicians at
Allatoona ENT have instituted a hearing screening program for infants and
newborns.

         OTOLARYNGOLOGY MEDICAL & SURGICAL ASSOCIATES, LTD.

         Otolaryngology Medical & Surgical Associates, Ltd. ("OMSA") consists of
four ENT physicians and three clinical audiologists with three clinical offices
in the Barington, Crystal Lake and McHenry suburbs of Chicago. OMSA provides a
wide range of ENT subspecialty services, including head and neck surgery,
rhinology, facial plastic and reconstructive surgery, otology and laryngology,
to children and adults in the metropolitan Chicago area. The practice also
provides audiology services, hearing aid sales and snoring and sleep apnea
surgical services. The affiliated physicians at OMSA maintain privileges at
three hospitals and one ambulatory surgical center in metropolitan Chicago.

         EAR, NOSE & THROAT ASSOCIATES OF SOUTH FLORIDA, P.A.

         Ear, Nose & Throat Associates of South Florida, P.A. ("ENTSF") consists
of eight ENT physicians and seven clinical audiologists with five clinical
offices in Boca Raton, Pompano Beach, West Palm Beach and Delray Beach, Florida.
ENTSF provides a wide range of ENT subspecialty services, including allergy
testing and treatment, head and neck surgery, rhinology, facial plastic,
otology and neurotology, to children and adults in the South Florida area. The
practice also provides audiology services, hearing aid sales and snoring and
sleep apnea surgical services. The affiliated physicians at ENTSF maintain
privileges at six hospitals and two ambulatory surgical centers in South
Florida.

         PROBABLE PRACTICE ACQUISITIONS

         In March 1998, the Company entered into a non-binding letter of intent
with PDI relating to the Company's proposed affiliation with six ENT physician
practices consisting of 25 physicians and 20 allied health care professionals



                                       -8-

<PAGE>   9



operating 13 clinical offices located in Southern New York and Northern New
Jersey. In addition, the Company has non-binding letters of intent for the other
two Probable Practice Acquisitions. These two ENT practices consist of an
aggregate of two physicians and two allied health care professionals operating
two clinical offices in South Florida. See "Acquisition of ENT Practices --
Probable Practice Acquisitions." There can be no assurance that any of these
acquisitions will be completed on the terms contemplated, as to the terms of
such acquisitions or that the Company will be able to integrate any of these
practices into its business.

         COMPANY OPERATIONS

         Upon affiliating with the Company, the physician practice enters into a
long term management services agreement with the Company. Under the terms of a
management services agreement, the Company employs the practice's non-medical
personnel, provides offices for the practice and provides services in the areas
of practice management, information systems and negotiation and management of
payor contracts. The non-medical personnel, along with additional personnel at
the Company's headquarters, manage the day-to-day non-medical operations of each
affiliated practice, including, among other things, providing administrative,
bookkeeping, scheduling and other routine services. The governance structure
established by the Company pursuant to its management services agreements
facilitates close cooperation between the Company and the affiliated practice,
while ensuring that the affiliated practice maintains clinical autonomy.

         Pursuant to the terms of the management services agreements, the
Company assists the affiliated practices in strategic planning, preparation of
operating budgets and capital project analysis. The Company coordinates group
purchasing of supplies, inventory and insurance for the practices. In addition,
the Company assists the affiliated practices in physician recruitment by
introducing physician candidates to the affiliated practices and advising the
affiliated practices in structuring employment arrangements. The Company also
provides or arranges for a variety of additional services relating to the
day-to-day non-medical operations of the affiliated practices, including (i)
managing and monitoring each practice's billing levels, invoicing and accounts
receivable collection by payor type, (ii) accounting, payroll and legal services
and records and (iii) cash management and centralized disbursements. These
services are designed to reduce the amount of time physicians spend on
administrative matters, thereby enabling the physicians to dedicate more of
their efforts toward the delivery of health care.

         The Company establishes an advisory board at each affiliated practice
consisting of physicians of the affiliated practice and Company management
personnel whose responsibilities are advisory in nature. The advisory board
reviews, evaluates and makes recommendations to the officers of the affiliated
practice and the officers of the Company with respect to strategic and
operational planning, physician employment and recruitment, patient fees and
collection policies, quality review and the establishment and maintenance of
relationships with managed care and other payors. Notwithstanding
recommendations of the advisory board, the Company has ultimate control over all
decisions relating to the non-medical operations of the affiliated practice and
the affiliated practice has ultimate control over all decisions relating to the
practice of medicine. See "--Affiliation Agreements."



                                       -9-

<PAGE>   10



         CAPITATED MANAGED CARE CONTRACTS; NETWORK DEVELOPMENT AND MANAGEMENT

         Atlanta ENT began providing ENT medical and surgical services under a
capitated managed care contract in 1982 covering approximately 50,000 enrollees.
In order to provide ENT medical and surgical professional services under its
capitated managed care contracts, the ENT Networks assembled an ENT provider
panel consisting of physicians at Atlanta ENT and Allatoona ENT and independent
physicians. At December 31, 1997, Atlanta ENT and Allatoona ENT served as the
primary ENT provider network for three capitated managed care contracts for
United HealthCare, Cigna and FPA covering an aggregate of 315,409 enrollees in
the metropolitan Atlanta area. The following table sets forth the covered lives
for each managed care contract as of December 31, 1997:

<TABLE>
<CAPTION>
                                                           CAPITATED
                                                         COVERED LIVES
                                                         -------------

          <S>                                            <C>
          United HealthCare of Georgia, Inc.                  162,141
          Cigna HealthCare of Georgia, Inc.                   143,164
          FPA Medical Management, Inc.                         10,104
                                                             --------
                                                              315,409
                                                             ========
</TABLE>


These managed care contracts are held, managed and administered by three
wholly-owned subsidiaries of the Company which together comprise the ENT
Networks. The Company, through the ENT Networks, also manages the existing
provider networks, and performs quality assurance and utilization management
under each contract. The ENT Networks receive a pre-determined capitation fee
for professional services per enrollee per month from the payors of the managed
care contracts in exchange for agreeing to provide ENT medical and surgical
professional services required by enrollees. In turn, the ENT Networks have
contracted with physicians at Atlanta ENT and Allatoona ENT and with independent
physicians ("independent physicians" and, together with affiliated physicians,
"associated physicians") to provide such services to these enrollees. The
physicians providing services are compensated by the ENT Networks on a
discounted fee-for-service basis. For the year ended December 31, 1997,
approximately 23% of the net revenue of the Company was attributable to ENT
medical and surgical professional services rendered pursuant to the managed care
contracts of the ENT Networks.

         The Company intends to develop or acquire additional ENT provider
networks in order to enter into exclusive managed care contracts with payors.
The Company expects that the networks will consist of affiliated physicians and
Related Specialists as well as independent physicians and other health care
providers engaged in ENT and the Related Specialties who will enter into network
administration agreements with the Company. These agreements will provide for
management of the provider network, negotiation of managed care contracts and
performance of quality assurance and utilization management functions by the
Company. The Company anticipates working with specialty group practices in
developing capitated contract proposals, evaluating and assembling provider
networks, negotiating contract rate schedules and exclusions, managing
utilization and developing provider compensation



                                      -10-

<PAGE>   11



methodologies. The Company also anticipates eventually tracking outcomes to
demonstrate the cost effectiveness of care being delivered in connection with
its managed care contracts. The Company believes the principal benefit from
including affiliated as well as independent physicians in its provider networks
will be the expansion and diversification of provider networks available to
managed care enrollees, as increasingly required by managed care companies.

         INFORMATION SYSTEMS

         The Company supports free-standing practice management systems utilized
by affiliated practices to facilitate patient scheduling, billing and
collection, accounts receivable management, provider productivity analysis and
certain cash disbursement functions. Rather than replacing systems utilized by
affiliated practices, the Company generally integrates an affiliated practice's
systems in order to streamline consolidated financial reporting, accounts
receivable management and productivity analysis functions. The Company is also
evaluating patient electronic medical record systems for possible implementation
at affiliated practices. The Company believes that the use of an electronic
medical record system may enhance operating efficiency through automation of
many routine functions, as well as the capacity to link "procedure specific"
treatment protocols, thereby enhancing the physician's ability to provide
quality cost-effective patient care.

         The Company believes that effective and efficient access to key patient
data is critical in controlling costs and improving quality outcomes in
connection with managing risk contracts. The Company's proprietary comprehensive
network administration and utilization management system designed specifically
for ENT practices (the "Capitated Network System") provides effective and
efficient access to key patient data and performs the complex processing and
analytical tasks required to manage risk contracts effectively. The Company's
system facilitates the automation of many routine functions and provides
affiliated physicians with Internet access to the clinical and financial data
necessary to issue and manage authorization for surgeries, to track diagnosis,
procedures and admissions and to perform outcome studies, cost analysis, quality
assurance and utilization management and reviews.

         The Capitated Network System integrates the following functions:

         -   Tracking referrals from primary care and other physicians

         -   Issuing and managing authorization for surgeries and tracking
             diagnoses, procedures and admissions

         -   Processing claims for physician payment

         -   Providing extensive customized management reports (including
             diagnosis and procedure utilization data)

         -   Maintaining support files

         The Company believes that the Capitated Network System provides it with
a competitive advantage in procuring, managing and administering risk contracts.



                                      -11-

<PAGE>   12



         COMPETITION

         The physician practice management industry is highly competitive. The
restructuring of the health care system is leading to rapid consolidation of the
existing highly fragmented health care delivery system into larger and more
organized groups and networks of health care providers. The Company expects
competition to increase as a result of consolidation and ongoing cost
containment pressures, among other factors. The Company competes with physician
practice management companies, hospitals, managed care companies, physician
practices and other competitors seeking to affiliate with physicians or provide
management services to physicians. Many of these competitors are significantly
larger, provide a wider variety of services, have greater experience in
providing practice management services, have longer established relationships
with customers for these services and have access to substantially greater
financial resources than the Company. There can be no assurance the Company will
be able to affiliate with a sufficient number of competent physicians and other
health care professionals to expand its business. The Company believes that the
quality of its management services, experience in procuring, managing and
administering capitated managed care contracts, the breadth of ENT medical and
surgical professional services provided by affiliated physicians and the utility
of the Capitated Network System position it to compete favorably for affiliation
with additional ENT and Related Specialty practices.

         Physicians are facing the challenge of providing quality patient care
while experiencing rising costs, strong competition for patients and a general
reduction of reimbursement rates by both private and government payors. The
Company believes that competition for patients is dependent upon, among other
things, the geographic coverage of affiliated practices, the reputation and
referral patterns of affiliated physicians and the breadth of ENT and Related
Specialty medical and surgical professional services provided by physicians
practicing at affiliated practices. Therefore, the success of the Company is
dependent upon the ability of the Company or affiliated practices to recruit,
train and retain qualified health care professionals in new and existing
markets. The Company faces competition for these personnel from other health
care providers, research and academic institutions, government entities and
other organizations. There can be no assurance that sufficient numbers of
qualified health care professionals can be hired and retained. The inability to
hire and retain such health care professionals could have a material adverse
effect on the Company's business, financial condition and results of operations.

         Concern over the rising cost of health care has led to the emergence
and increased prominence of managed care and a resulting increase in competition
for managed care contracts. The Company's ability to compete successfully for
managed care contracts may depend upon the Company's ability to manage
utilization under such contracts and to increase the number of associated
physicians and other health care professionals included in its provider
networks.

         MEDICAL ADVISORY BOARD

         The Company established a Medical Advisory Board whose responsibilities
include, among other duties, (i) reviewing the medical appropriateness of the
Company's policies and procedures with respect



                                      -12-

<PAGE>   13



to disease management and utilization management protocols and practice and
surgery guidelines, (ii) consulting with the Company on acquisitions, (iii)
reviewing the medical appropriateness of information systems utilized or
developed by the Company, (iv) evaluating new medical technologies to be
utilized by affiliated practices and (v) developing and coordinating Company
sponsored managed care and practice management seminars for ENT physicians. The
Medical Advisory Board consists of three affiliated ENT physicians, including
Ramie A. Tritt, M.D., the Company's Chairman of the Board and President, and
five non-affiliated ENT physicians.

         AFFILIATION AGREEMENTS

         The relationship between the Company and affiliated practices and
physicians is set forth in asset or stock acquisition agreements, management
services agreements and employment agreements.

         ACQUISITION AGREEMENTS

         Pursuant to acquisition agreements (the "Acquisition Agreements"), the
Company or a wholly-owned subsidiary of the Company acquires either (i)
substantially all of the assets utilized in a practice (other than certain
excluded assets such as employment agreements and patient charts, records and
files) and assumes certain leases and other contracts or obligations of the
practice group or (ii) the equity of the practice. The practice remains liable
for the payment of liabilities not assumed by the Company under the acquisition
agreement. The Acquisition Agreements provide that the medical practice and the
stockholders of such practice, if any, will not, for a period of time following
the closing of the acquisition, compete with the Company within a specified
geographic area, will not solicit patients of the practice within such
geographic area and will not solicit employees of the Company. The Acquisition
Agreements also contain representations and warranties and indemnification
provisions by each of the parties to the agreement. The closing of acquisitions
are conditioned upon, among other things, the execution and delivery of (i)
employment agreements between the practice and each of its physicians and (ii) a
management services agreement between the Company and the practice.

         MANAGEMENT SERVICES AGREEMENTS

         The Company has entered into management services agreements with
Atlanta ENT, Allatoona ENT, ENT & Allergy Associates, OMSA and ENTSF on
substantially the terms described below (the "Management Services Agreements").
The Management Services Agreements provide for the affiliated practice to assign
to the Company all of its non-governmental accounts receivable and all of its
rights and interest in the proceeds of its governmental accounts receivable (or
the revenue it receives) to the extent permitted by applicable law and to grant
to the Company the right to collect and retain the proceeds of the accounts
receivable (or revenue) for the Company's account to be applied in accordance
with the Management Services Agreement. Although such proceeds of the accounts
receivable (or revenue) are collected by the Company on behalf of the practice,
the practice grants to the Company the right to grant a security interest and
factor such amounts and accounts receivable to secure Company borrowings under
the Credit Facility.



                                      -13-

<PAGE>   14



         The Company generally retains a management fee equal to (i) a
stipulated percentage of all revenue generated by or on behalf of physicians at
the affiliated practice (after adjustment for contractual allowances) as payment
for the services provided by the Company and non-allocable costs incurred by the
Company attributable to the provision of management services under the
Management Services Agreement and (ii) an amount equal to all operating and
capital expenses of the practice, including depreciation, amortization and
interest. In certain states where the Company expects to do business, such as
New York, the Company will be reimbursed for operating and non-operating
expenses of the affiliated practices and will be paid a fixed management fee,
pursuant to state regulatory laws. The Company is responsible for the payment
for and incurs (i) operating expenses of the affiliated practice, including
salaries and benefits of non-medical employees of the practice, lease
obligations for office space and equipment and medical and office supplies and
(ii) the non-operating expenses of the affiliated practice. The Company pays for
all such expenses including its fees directly out of the proceeds of the
accounts receivable (or revenue) assigned to the Company by the affiliated
practice. The remaining net practice revenue is remitted to the affiliated
practice, which is responsible for and pays compensation and benefits to (i)
physicians pursuant to employment agreements between the practice and each
physician and (ii) physician assistants.

         The affiliated practice retains the responsibility for, among other
things, (i) compensating physician employees and physician assistants, (ii)
paying insurance premiums and deductibles for professional liability insurance
policies, (iii) ensuring that affiliated physicians have the required licenses,
credentials, approvals and other certifications needed to perform their duties
and (iv) complying with certain federal and state laws and regulations
applicable to the practice of medicine. In addition, the affiliated practice
will retain exclusive control over all aspects of the practice of medicine and
the delivery of medical services.

         Under the Management Services Agreements, the Company, among other
things, (i) acts as the exclusive manager and administrator relating to all
non-medical operations of the affiliated practice, (ii) bills patients,
insurance companies and other third party payors and collects, on behalf of the
affiliated practice, the fees for professional medical services and other
services and products rendered or sold by the affiliated practice, (iii)
provides, as necessary, clerical, accounting, purchasing, payroll, bookkeeping
and computer services and personnel and information management services to the
affiliated practice, (iv) supervises and maintains custody of all files and
records of the affiliated practice, (v) provides facilities, furniture and
equipment for the affiliated practice, (vi) prepares all annual and capital
operating budgets of the affiliated practice, (vii) orders and purchases
inventory and supplies as reasonably required by the affiliated practice, (viii)
assists in marketing the services provided by the affiliated practice, where
allowable, (ix) provides financial and business assistance to the affiliated
practice in the negotiation, establishment, evaluation and administration of
contracts and relationships with managed care and other similar providers and
payors and (x) performs administrative services relating to the recruitment of
physicians for the affiliated practice.



                                      -14-

<PAGE>   15



         The Management Services Agreements are for an initial term of 40 years,
which may be extended for separate and successive five year terms. The
Management Services Agreements may be terminated by either party if the other
party (i) files a petition in bankruptcy or other similar events occur or (ii)
defaults on the performance of a material duty or obligation, which default
continues without cure for a specified term after notice.

         During the term of a Management Services Agreement, the affiliated
practice agrees, with respect to management services, not to compete with the
Company and the other practices for which the Company provides management
services within a specified geographic area. In addition, during the term of a
Management Services Agreement and for a period following the termination of such
agreement, the affiliated practice agrees not to solicit any employee of the
Company or persons affiliated with the Company or to contract with any entity
for the provision of management services substantially of the kind contemplated
by the Management Services Agreement. The affiliated practice also agrees not to
disclose certain confidential and proprietary information relating to the
Company and the affiliated practice.

         PHYSICIAN EMPLOYMENT AGREEMENTS

         Physicians at Atlanta ENT, Allatoona ENT, OMSA, ENTSF and ENT & Allergy
Associates have employment agreements with their respective affiliated practice.
The employment agreements with the physicians at Atlanta ENT, Allatoona ENT,
OMSA and ENTSF generally provide for an initial term of five years, which will
be automatically renewed for successive one or two year terms unless an
affiliated physician or the medical practice elects not to renew the term by
providing at least 90 days written notice of such election or such agreement is
otherwise terminated for cause or the death or disability of an affiliated
physician. The employment agreements with the physicians of ENT & Allergy
Associates, a wholly-owned subsidiary of the Company, provide for an initial
term of six years and six months, which will be automatically renewed for
successive one or two year terms unless the physician or ENT & Allergy
Associates elects not to renew. Affiliated physicians are compensated based upon
either productivity or other negotiated formulas agreed upon between the
affiliated physician and the medical practice, and the medical practice may
provide the affiliated physicians with health, death and disability insurance
and other benefits. Affiliated physicians are obligated to obtain and maintain
professional liability insurance coverage which may be procured on behalf of the
affiliated physicians by the Company. Pursuant to the employment agreements,
affiliated physicians agree not to compete with the medical practice, not to
solicit patients of the medical practice and not to interfere with employees of
the medical practice for a certain period following the termination of such
employment agreement unless the agreement is terminated by the affiliated
physician for cause. However, in certain states (such as Alabama), certain types
of restrictive covenants, including non-competition covenants, are deemed to be
unenforceable as against professionals (including physicians), and in other
states (such as Florida, Georgia and Illinois), such provisions may be deemed to
be unenforceable if a court determines that the duration of the restriction, the
territory covered by such restriction or the activities restricted were
unreasonable or otherwise violated public policy. In addition, affiliated
physicians agree not to disclose any confidential and proprietary information of
the medical practice during the term of the agreement



                                      -15-

<PAGE>   16



and for a certain period following the termination of the agreement.
Furthermore, under the employment agreements, affiliated physicians agree to
assign to the medical practice all revenue related to contracts with managed
care companies and grant an irrevocable power of attorney to the medical
practice to enter into such contracts on behalf of the physicians. The
employment agreements also provide that the affiliated physicians exercise
independent professional and ethical judgment in all patient care
responsibilities.

         ACQUISITION OF ENT PRACTICES

         THE REORGANIZATION

         The Company acquired substantially all of the assets (other than
certain excluded assets such as employment agreements and patient charts,
records and files) and certain contractual liabilities of (i) Atlanta ENT, (ii)
ENT & Allergy Associates, (iii) Metropolitan Ear, Nose & Throat, P.C., (iv)
Atlanta Head and Neck Surgery, P.C. and (v) Ear, Nose & Throat Associates, P.C.
and all of the outstanding shares of common stock of the corporations comprising
the ENT Networks in March 1997. In connection with the acquisition of assets of
the practices and the common stock of the ENT Networks, the Company issued an
aggregate of 3,104,755 shares of Common Stock (valued at the time of issuance at
approximately $24.8 million). See "-- The Affiliated Practices," "--
Affiliation Agreements" and "Certain Relationships and Related Transactions."

         POST REORGANIZATION ACQUISITIONS

         Since the Reorganization, the Company has acquired (a) substantially
all of the assets (other than certain excluded assets such as employment
agreements and patient charts, records and files) and assumed certain
contractual liabilities of (i) Allatoona ENT, (ii) Ear, Nose & Throat
Specialists, P.C. ("ENT Specialists"), (iii) Ear, Nose & Throat Specialists,
Head & Neck Surgery, P.C. ("ENT Specialists H&N"), (iv) Northside Ear, Nose &
Throat Associates, P.C. ("Northside"), (v) OMSA, (vi) Cobb Ear, Nose & Throat
Associates, P.C. ("Cobb") and (vii) James J. Murata, M.D., P.A. ("Murata") and
(b) the stock of six professional associations owned by seven ENT physicians and
a partnership owned and operated by the professional associations in Palm Beach
and Broward Counties, Florida. See "-- The Affiliated Practices" and "--
Affiliation Agreements."

         In connection with the acquisition of assets or equity of these
practices, the Company (i) paid an aggregate of approximately $5.2 million in
cash, (ii) issued an aggregate of 611,215 shares of Common Stock (valued at an
aggregate of approximately $4.6 million), (iii) agreed to issue an aggregate of
301,779 additional shares of Common Stock (valued at an aggregate of
approximately $2.8 million) to three of the affiliated practices beginning in
September 1998, (iv) issued subordinated convertible promissory notes in the
aggregate principal amount of approximately $912,000, which notes mature in
October 2000 and accrue interest at a rate of 5.61% per annum and are
convertible into shares of Common Stock at a conversion price of $10.00 per
share and (v) issued non-interest bearing contingent subordinated promissory
notes in the aggregate principal amount of approximately $3.0 million. The



                                      -16-

<PAGE>   17



payment of these notes is contingent upon the physicians or practice holding
such notes reaching certain performance targets. Substantially all of these
contingent notes are payable by the Company, at the Company's option, in shares
of Common Stock, valued at the average closing price of the Common Stock for the
ten trading days preceding the date of delivery of such shares. In connection
with these acquisitions, the Company paid an aggregate of approximately $429,000
to Premier HealthCare, an affiliate of Gerald R. Benjamin, the Company's Vice
Chairman and Secretary, for advisory services rendered by Premier HealthCare.
See "Certain Relationships and Related Transactions."

         In connection with the OMSA acquisition, the physician shareholders of
OMSA granted to Dr. Tritt (or his designee or assignee) the option to acquire
all of the ownership interest of such physician shareholders in OMSA in the
event that at any time there are less than two shareholders who continue as full
time physician-employees of OMSA and those shareholders who remain do not, in
Dr. Tritt's or management of the Company's sole discretion, control the
operations of OMSA in a manner consistent with the requirements of the
Management Services Agreement between OMSA and the Company. In order to exercise
the option, Dr. Tritt or his designee or assignee must at the time of exercise
be licensed to practice medicine in the State of Illinois. See "Certain
Relationships and Related Transactions."

         PROBABLE PRACTICE ACQUISITIONS

         In March 1998, the Company entered into a non-binding letter of intent
relating to the Company's proposed acquisition of substantially all of the
tangible assets of Physicians' Domain, along with the stock of corporations that
are successors to six ENT physician practices affiliated with Physicians'
Domain. The PDI transaction consists of 25 physicians and 20 allied health care
professionals operating 13 clinical offices located in Southern New York and
Northern New Jersey. Based on the terms of the letter of intent, the aggregate
consideration to be paid by the Company in connection with the PDI acquisition
will be approximately $22.5 million consisting of approximately $2.1 million in
cash, the repayment of approximately $4.2 million of outstanding indebtedness of
these physician practices and the issuance of a subordinated promissory note in
the principal amount of approximately $16.2 million. The letter of intent
provides that the subordinated promissory note will bear interest at a rate of
6% per annum, payable quarterly, and will be secured by certain of the assets
acquired by the Company in the transaction. Pursuant to the proposed terms of
the subordinated promissory note, approximately $9.2 million of the principal
amount of the note will mature five years from the date of issuance and the
remaining approximately $7.0 million principal amount of the note will mature
upon the earlier of (i) three days following the closing of a public offering by
the Company and (ii) December 31, 1998. The proposed terms of the letter of
intent also provide that (i) the management services agreement to be entered
into between the Company and the practices will provide for a fixed management
fee of approximately $3.0 million per year subject to annual increases
consistent with the annual percentage increase in the consumer price index after
the fifth anniversary of the date of the agreement, (ii) the Company will
receive a break-up fee equal to $250,000 in the event the transaction is not
consummated on or before June 1, 1998, (iii) the physicians at these practices
will have the right to nominate one member to the Board of Directors of the
Company and (iv) the Company will pay an additional $500,000, payable in shares
of Common Stock at the Company's option, if these practices achieve stipulated
performance targets. In addition, the Company has non-binding letters of intent
for the other Probable Practice Acquisitions for an aggregate purchase price of
$1.2 million. These two ENT physician practices consist of an aggregate of two
physicians and two allied health care professionals operating two



                                      -17-

<PAGE>   18



clinical offices located in South Florida. The letters of intent are mere
statements of intention and each of the Probable Practice Acquisitions is
subject to various conditions to closing, including the negotiation and
execution of an acquisition agreement related to such potential acquisition.
There can be no assurance that any of these acquisitions will be completed on
the terms contemplated, as to the terms of such acquisitions or that the Company
will be able to integrate any of these Probable Practice Acquisitions into its
business.

         CAPITATED AGREEMENTS WITH THIRD PARTY PAYORS

         Pursuant to participation agreements between the ENT Networks and the
physicians providing services to the managed care enrollees, the physicians must
follow administrative procedures established by the Company and the managed care
companies, such as referring enrollees to participating providers; obtaining
prior authorization for certain medical procedures; and participating in quality
assurance and utilization management programs. Quality assurance management is
the process established by the payor to improve the quality of covered services
and utilization management is the process established to review whether certain
health care services provided to enrollees are in accordance with the
requirements established by each payor. Under the participation agreements, the
physicians are also required to procure and maintain medical malpractice and
general liability insurance. The participation agreements may be terminated by
(i) the respective ENT Network without cause upon 60 days notice or with cause
upon 30 days notice and (ii) a physician, with or without cause, upon 60 days
notice. In addition, the participation agreements automatically terminate upon
the termination of the relevant capitated managed care contract.

         The ENT Networks entered into capitated managed care contracts with
United HealthCare, Cigna and FPA in 1991, 1992 and 1997, respectively. The
current contract with United HealthCare is a renewal of an earlier contract and
expires in May 1998. Under the contract with United HealthCare, capitation fees
are automatically increased annually based upon the percentage change, in the
Atlanta region, of a consumer index identified in the contract. The current
contract with Cigna is the original contract and provides for automatic annual
renewals and annual renegotiation of the capitation fees. The managed care
contracts with Cigna and United HealthCare may be terminated by either party (i)
for cause, including a material breach of the contract, generally upon 30 to 60
days notice by the terminating party or (ii) without cause upon 90 to 120 days
notice by the terminating party. The contract with FPA has an initial team of
three years and provides for automatic annual renewals following the initial
term. The agreement with FPA provides for a renegotiation of the capitation fees
15 months into the initial term of the agreement. In the event that parties
cannot renegotiate the capitation fees within 60 days, the agreement may be
terminated by either party. The agreement also provides for annual renegotiation
of the capitation fees following the initial term and may be terminated at any
time by FPA for cause. Aetna Health Plans of Georgia ("Aetna") modified its
delivery system of physician specialty services in the Atlanta market and
terminated its capitated managed care contracts with each physician specialty
group, including the Company, effective June 30, 1997. The Company's affiliated
physicians at Atlanta ENT and Allatoona E.N.T. & Facial Plastic Surgery, P.C.
("Allatoona ENT") continue to provide services to Aetna under new physician
provider agreements, which reimburse physicians on a modified



                                      -18-

<PAGE>   19



fee-for-service basis. For the six months ended December 31, 1997, the Company's
capitation revenue decreased as a result of the termination of the Aetna
capitated managed care contract. However, this decrease was offset by an
increase in the Company's management fee revenue as a result of an increase in
modified fee-for-service revenue at Atlanta ENT and Allatoona ENT. The Company
does not believe the termination of the Aetna contract will have a material
adverse effect on the Company's business, financial condition or results of
operations in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

         GOVERNMENT REGULATION

         The health care industry is highly regulated, and there can be no
assurance that the regulatory environment in which the Company operates will not
change significantly and adversely in the future. The regulation of the health
care industry, including scrutiny of the methods and levels of payment to health
care providers is increasing on both the federal and state levels. Federal and
state authorities are expending significant resources to enforce both federal
and state health care laws and to combat fraud in the health care industry.
Additionally, in 1997, Congress enacted the Balanced Budget Act which contains
several amendments to the enabling laws for the Medicare and Medicaid Programs.
These amendments do affect the methods and levels of payment to health care
providers, and at this time, it is not clear how or to what extent these
amendments will affect the operation of the Company and its affiliated
practices. Additionally, the Company believes that health care legislation,
regulations and interpretations will continue to change and, as a result, plans
to continue routinely to monitor developments in health care law. The Company
expects to modify its agreements and operations from time to time as the
business and regulatory environments change. While the Company believes it will
be able to structure all of its agreements and operation in accordance with
applicable law, the lack of definitive interpretations of many statutory and
regulatory provisions means that there can be no assurance that the Company's
arrangements are in compliance with such provisions or will not be successfully
challenged.

         GOVERNMENT REIMBURSEMENT PROGRAMS

         Under the federal Medicare program, payment for physician services
(other than under Medicare risk contracts and Medicare+Choice plans) is based on
an annually adjusted fixed fee schedule known as the Resource-Based Relative
Value Scale ("RBRVS"). This payment system is intended to reflect the relative
resources required to provide a given service as compared to another service.
Fee schedule amounts are also based upon a geographic adjustment factor and a
national conversion factor which converts relative value units into payment
amounts and insures that expenditures remain within budgetary constraints. The
Balanced Budget Act modified the RBRVS system to adjust the per patient payments
from the Medicare program for certain physician services, and the Company
anticipates further modifications in the RBRVS system in the future.
Additionally, the Balanced Budget Act creates the Medicare+Choice plan which
provides Medicare beneficiaries with the option to receive services through
managed care entities including HMOs and preferred provider organizations, and
payment for physician services under the Medicare+Choice plan may be on a
capitated basis as opposed to the RBRVS system.



                                      -19-

<PAGE>   20



This change of payment method may result in an overall decrease in compensation
for physician services under the Medicare program. Because the Company
anticipates that approximately 10% of its revenues will be derived from
government-funded health care programs (principally, Medicare and Medicaid), the
Company does not believe that such reductions will result in a material adverse
change in the results of operations of the Company. The Medicaid program is a
partially federal-funded state administered program for the indigent. Payment to
physicians under state Medicaid programs is generally based upon fee schedules;
however, some states have authorized Medicaid HMOs, and payments for physician
services under these programs may be on a capitated basis. Both the Medicare and
Medicaid programs are subject to statutory and regulatory changes, retroactive
and prospective rate adjustments, administrative rulings, interpretations of
policy, intermediary/carrier determinations and government funding restrictions,
all of which may materially increase or decrease the rate of program payments to
physicians and other health care providers.

         STARK LEGISLATION, FRAUD AND ABUSE LAWS AND SIMILAR LAWS

         The Company and its affiliated physicians are subject to a variety of
laws and regulations governing the referral of patients for certain health
services to entities with which the referring physician has a financial
relationship. 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 ("Stark I" and "Stark II" are collectively referred to as the
"Stark Law"). The Stark Law prohibits, subject to certain exceptions, a
physician (or a member of the physician's immediate family) from referring
Medicare patients for "designated health services" to an entity with which the
physician has a financial relationship. In addition, a state cannot received
federal financial payment under the Medicaid program for designated health
services furnished to an individual on the basis of a physician referral that
would result in a denial of payments under the Medicare program if Medicare
covered the services to the same extent and under the same terms and conditions
as under the state Medicaid plan. Financial arrangements include both ownership
arrangements and compensation arrangements, including such an arrangement with
the physician's own group practice. The designated health services include
clinical laboratory services, radiology 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 Stark Law further imposes reporting
requirements on any entity providing covered items or services for which payment
may be made under Medicare or Medicaid. An entity is required to report
information concerning the entity's ownership, investment and compensation
arrangements. The penalties for violating the Stark Law include a prohibition on
payment by Medicare or federal financial payment under the Medicaid program for
services resulting from prohibited referrals, 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 the Stark Law. However, the Stark Law is broad and ambiguous. Final
regulations under the provisions of Stark I (clinical laboratory services) were
issued on August 14, 1995, and proposed regulations clarifying the provisions of
the Stark Law



                                      -20-

<PAGE>   21



were published on January 9, 1998. Although the proposed regulations do not have
the effect of law, they provide guidance to HCFA's interpretation of the Stark
Law. Therefore, the Company expects to review the proposed regulations to
determine if any changes in the operations of the Company or its affiliated
practices are appropriate.

         In addition, a number of states have enacted similar laws which apply
to referrals made for services reimbursed by all payors, and not simply Medicare
or Medicaid. For example, the Georgia Patient Self-Referral Act of 1993 (the
"Georgia Act") prohibits a physician from making a referral to an entity in
which the physician or a family member has an ownership interest or compensation
relationship if the referral is for any of a list of designated health services.
The list of designated health services includes clinical laboratory services,
physical therapy services, rehabilitation services, diagnostic imaging services,
pharmaceutical services, durable medical equipment and outpatient surgical
services. Exceptions are provided for physicians' services and certain in-office
ancillary services of a group practice, as defined by the Georgia Act.
Similarly, the Florida Patient Self-Referral Act of 1992 (the "Florida Act")
prohibits any health care provider from making a referral of any health care
item or service to an entity in which the health care provider has an investment
interest. However, certain referrals are not covered by the Florida Act,
including referrals of physician services within a group practice or ancillary
services performed under the direct supervision of a physician or group
practice. The Illinois Health Care Worker Self-Referral Act (the "Illinois Act")
prohibits health care workers from referring patients for health services to an
entity outside the health care worker's office or group practice in which the
health care worker is an investor, unless the health care worker directly
provides health services within the entity and will be personally involved with
the provision of care to the referred patient. The Company believes that its
activities are not in violation of these laws. However, there can be no
assurances that future interpretations of these laws will not require structural
and organizational modification of the Company's affiliation structure in those
states. Additionally, future legislation or regulations could require the
Company to modify the form of its relationships with physician organizations.
Moreover, the violation of the Stark Law or similar state laws by the Company's
affiliated physician organizations could result in significant fines and loss of
reimbursement which could materially adversely affect the Company's business,
financial condition and results of operations.

         The Company and its affiliated physicians are also subject to federal
and state fraud and abuse laws (the "Fraud and Abuse Laws"). These laws include
the federal anti-kickback statute, which prohibits, among other things, the
offer, payment, solicitation or receipt of any remuneration, directly or
indirectly in return for the referral of patients, or arranging for the
furnishing of items and services that are paid for in whole or in part by
Medicare, Medicaid or federally-funded programs. The courts and the Office of
Inspector General of The Department of Health and Human Services have stated
that the anti-kickback statute is violated if one purpose, as opposed to a
primary or sole purpose, of the arrangement is to induce referrals. Violations
of the anti-kickback statute are punishable by criminal or civil penalties,
and/or exclusion of the provider from future participation in the Medicare,
Medicaid and federally-funded programs. The federal government has published
exemptions, or "safe harbors," for business transactions that will be deemed not
to violate the anti-kickback statute. Although satisfaction of the requirements
of these safe harbors provides protection from enforcement action under the
anti-



                                      -21-


<PAGE>   22

kickback legislation, failure to meet the safe harbors does not necessarily mean
that the activity violates the statutory prohibitions. Rather, the legality of a
particular business arrangement will be assessed by comparing the particular
facts of the transaction to the proscriptions of the statute. In addition, a
number of states have enacted similar laws, which vary from state to state,
prohibiting remuneration or fee-splitting arrangements between health care
providers for the referral of patients to a particular provider, regardless of
the payor source. Also, under separate statutes, submission of claims for
payment that are "not provided as claimed" may lead to civil money penalties,
criminal fines and imprisonment and/or exclusion from participation in the
Medicare, Medicaid and federally-funded health care programs. These false claims
statutes include the Federal False Claims Act, which allows any person to bring
suit alleging false or fraudulent Medicare or Medicaid claims or other
violations of the statute and to share in any amounts paid by the entity to the
government in fines or settlement. Such qui tam actions have increased
significantly in recent years and have increased the risk that a health care
company will have to defend a false claims action, pay fines or be excluded from
participation in the Medicare and/or Medicaid programs as a result of an
investigation arising out of such an action. Congress also enacted the Health
Insurance Portability and Accounting Act of 1996, which includes an expansion of
certain fraud and abuse provisions to health care programs. Due to the breadth
of the statutory provisions of the Fraud and Abuse Laws and the absence of
definitive regulations or court decisions addressing the type of arrangements by
which the Company and its affiliated entities conduct and will conduct their
business, from time to time certain of their practices may be subject to
challenge under these laws.

         The Company has attempted to structure its business relations to comply
with the Stark Law, the Fraud and Abuse Laws and all other applicable federal
and state health care laws and regulations. However, there can be no assurance
that such laws and regulations will be interpreted in a manner consistent with
the Company's practices. There can be no assurance that challenges under such
laws or regulations or new laws or regulations will not require the Company or
its affiliated entities to change their practices or will not have a material
adverse effect on the Company's business, financial condition or operating
results. Furthermore, the addition of ancillary services may require the Company
or its affiliated practices to alter their operations to comply with applicable
federal or state health care laws and regulations. In addition, state
legislatures and other governmental entities are considering additional measures
restricting or regulating referrals, and there can be no assurance that new laws
or regulations will not be enacted which will require restructuring of the
Company's operations or otherwise have a material adverse effect on the
Company's business, financial conditions or operating results.

         HEALTH CARE REFORM

         Political, economic and regulatory influences are continuously
subjecting the health care industry in the United States to fundamental change.
On August 5, 1997, President Clinton signed the Balanced Budget Act of 1997 (the
"Balanced Budget Act") which contemplates savings of $115 billion in Medicare
spending and $13 billion in Medicaid spending over the five-year period from
1998 to 2002. The savings will result primarily from reductions in
reimbursements to providers due to several factors, including but not limited
to, alterations in the methodology for calculating physician fee schedule
payments, application of a budget neutrality adjustment to prevent physician
fees from increasing above



                                      -22-

<PAGE>   23



a certain aggregate amount, and expansion of options for Medicare delivery
including provider-sponsored organizations, HMOs, preferred provider
organizations and private fee-for-service plans. The Balanced Budget Act also
establishes more stringent sanctions for convictions of health care related
crimes including permanent exclusion from participation in the Medicare Program
after conviction of three health care related crimes and imposition of civil
monetary penalties for violations of the federal anti-kickback statute. Due to
the recent enactment of this health care reform and uncertain interpretation of
these reform measures by regulatory authorities, it is difficult to determine
the impact that this reform will have upon the Company and its affiliated
physicians, and there can be no assurances that these reform measures will not
have a material adverse effect on the Company's business, financial condition or
operating results. In addition to federal health care reform, some states in
which the Company operates or may operate in the future are also considering
various health care reform proposals. The Company anticipates that both federal
and state governments will continue to review and assess alternative health care
delivery systems and payment methodologies, and that additional reforms will
likely occur in the future. Due to uncertainties regarding the additional
reforms and their enactment and implementation, the Company cannot predict
which, if any, reform proposals will be adopted, when they may be adopted or
what impact they may have on the Company, and there can be no assurance that the
adoption of reform proposals will not have a material adverse effect on the
Company's business, financial condition or operating results. In addition, the
actual announcement by competitors and third party payors of their strategies to
respond to such initiatives or reforms, could produce volatility in the trading
and market price of the Common Stock of the Company.

         OTHER LICENSING REQUIREMENTS

         Every state imposes licensing requirements on individual physicians,
and some regulate facilities and services operated by physicians. In addition,
many states require physicians to obtain regulatory approval, including
certificates of need, before establishing certain types of health care
facilities, offering certain services, or making certain capital expenditures in
excess of statutory thresholds for health care equipment, facilities or
services. To date, the Company and its affiliated practices have not been
required to obtain certificates of need or similar approvals for their
activities. However, the addition of ancillary services by one of the affiliated
practices or changes in law or regulations could require licensure, a
certificate of need, or both. There is no assurance that such required state
regulatory approvals could be obtained, or even if initially obtained, would not
thereafter be withdrawn or restricted. In connection with the expansion of its
operations into new markets and contracting with managed care companies, the
Company and its affiliated practices may become subject to compliance with
additional regulations. In addition, the Company and its affiliated practices
are subject to federal, state and local laws dealing with issues such as
occupational safety, employment, medical leave, insurance regulation, civil
rights and discrimination, medical waste and other environmental issues.
Increasingly, federal, state and local governments are expanding the regulatory
requirements for businesses, including medical practices. The imposition of
these regulatory requirements may have the effect of increasing operating costs
and reducing the profitability of the Company's operations.


                                      -23-


<PAGE>   24


         RESTRICTIONS ON CORPORATE PRACTICE OF MEDICINE AND UNLAWFUL FEE
         SPLITTING

         The laws of certain states in which the Company operates or may operate
in the future prohibit non-physician entities from practicing medicine or from
exercising control over the professional judgments or decisions of physicians
concerning the treatment and diagnosis of patients. In Illinois, there is case
law which prohibits corporations (other than specifically licensed medical
corporations or hospital corporations) from providing professional medical
services or employing physicians. In Georgia, there is also case law which could
be interpreted as prohibiting a corporation from employing physicians, but the
continued viability of such doctrine in Georgia is unclear. Florida law does not
prohibit the corporate practice of medicine although it does prohibit the
corporate practice of other medical services such as dentistry and optometry. In
Alabama, recent interpretations by state authorities have indicated that a
corporation may employ physicians as long as the physicians exercise their
independent professional judgment in rendering medical decisions concerning the
treatment and diagnosis of patients. Although the Company has structured its
affiliations with physician groups so that the associated physicians maintain
exclusive authority regarding the delivery of medical care and exercise their
independent professional judgment in rendering medical decisions, there can be
no assurance that these laws will be interpreted in a manner consistent with the
Company's practices or that other laws or regulations will not be enacted in the
future that could have a material adverse effect on the Company's business.

         In addition, the laws of certain states in which the Company operates
or may operate in the future prohibit certain practices such as splitting fees
with physicians or receiving fees for the referral of patients. In Illinois, it
is unlawful for a physician to divide with anyone other than physicians with
whom the physician practices in a legally recognized entity or organization any
fee or other form of compensation for professional services. In Florida, the
Board of Medicine recently issued a declaratory statement (the "Declaratory
Statement") interpreting Florida fee splitting statutes. The Declaratory
Statement, which has been stayed pending its appeal to the Florida courts, is
broadly drafted and could be construed as prohibiting physician management
companies from being compensated based on a percentage of the managed practice's
revenues or profits. In addition, the Declaratory Statement could be construed
as restricting the manner in which the management company provides marketing
services to a managed practice. If Florida courts uphold the Declaratory
Statement, the Company could be required to revise its contracts with its
affiliated practices in a manner that could have adverse effects on the Company.
Although the Company has endeavored to structure its affiliations with physician
groups to comply with applicable state fee splitting laws and anti-referral
laws, there can be no assurance that these laws will be interpreted in a manner
consistent with the Company's practices or that other laws or regulations will
not be enacted in the future which could have a material adverse effect on the
Company's business. If a corporate practice of medicine law or fee splitting
statute is interpreted in a manner that is inconsistent with the Company's
practices, the Company would be required to restructure or terminate its
relationship with the applicable physician group in order to bring its
activities into compliance with such law. The termination of, or failure of the
Company to successfully restructure, any such relationship could result in fines
or a loss of revenue that could have a material adverse effect on the Company's
business, financial condition or results of operations.



                                      -24-

<PAGE>   25


         LIABILITY AND INSURANCE

         The provision of health care services entails the risk of potential
claims of medical malpractice and similar claims. The Company does not itself
engage in the practice of medicine or have responsibility for compliance with
regulatory requirements directly applicable to physicians and requires
affiliated physicians performing medical services at its facilities to maintain
medical malpractice insurance. Nevertheless, there can be no assurance that
malpractice will not be asserted against the Company directly in the event that
services or procedures performed at one of the Company's facilities are alleged
to have resulted in injury or other adverse effects. In addition, in connection
with the acquisition of assets of affiliated practices, the Company has assumed
certain of the stated liabilities of such practices. Additionally, claims may be
asserted against the Company for events related to affiliated practices that
occurred prior to its affiliation with the Company. Although the Company
maintains liability insurance that it believes will be adequate as to both risk
and amounts, successful malpractice claims could exceed the limits of the
Company's insurance and could have a material adverse effect on the Company's
business, financial condition or results of operations. Moreover, a malpractice
claim asserted against the Company could be costly to defend, could consume
management resources and could adversely affect the Company's reputation and
business, regardless of the merit or eventual outcome of such claim. In
addition, there can be no assurance that the Company will be able to obtain such
insurance on commercially reasonable terms in the future or that any such
insurance will provide adequate coverage against potential claims.

         In addition to the liability insurance maintained by the Company, the
Company is named as an additional insured on the professional liability
insurance policies held by affiliated physicians. Such insurance would provide
coverage, subject to policy limits in the event the Company were held liable as
a co-defendant in a lawsuit for professional malpractice against an affiliated
physician. In addition, the Company is indemnified under the Management Services
Agreements by the affiliated physician groups for liabilities resulting from the
performance of medical services.

         EMPLOYEES

         As of December 31, 1997, the Company had approximately 285 full-time
employees, including two physicians and 35 allied health care professionals.
None of the Company's employees is represented by a labor union and the Company
believes its relations with its employees are good.

ITEM 2.  PROPERTIES

         The Company leases approximately 5,000 square feet of office space for
its executive offices in Atlanta, Georgia. The lease provides for annual rent of
approximately $80,000, subject to specified annual increases, and expires in
July 2002. The Company also leases the 41 facilities currently used by the
physicians at the affiliated practices. These leases have varying remaining
terms ranging from approximately one month to 13 years and aggregate annual rent
of approximately $2.1 million. The Company believes that these facilities are
suitable for the current and anticipated needs of the Company. See "Certain
Relationships and Related Transactions."



                                      -25-

<PAGE>   26



ITEM 3.  LEGAL PROCEEDINGS

         No legal proceedings are currently pending against the Company, and the
Company is not aware of any outstanding claims against any of its affiliated
practices that would have a material adverse effect on the Company's business,
financial condition or results of operations. The Company and its affiliated
practices may be involved from time to time in litigation incidental to their
respective businesses.

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

         Not applicable.

PART II

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

         Price Range of Securities

         PSC's Common Stock began trading on March 21, 1997 on the Nasdaq
National Market under the symbol "ENTS." The table below sets forth the high and
low sales prices of PSC's Common Stock as reported by the Nasdaq National Market
for the periods indicated. These prices are based on quotations between dealers,
do not reflect retail mark-up, mark-down or commissions, and do not necessarily
represent actual transactions.



<TABLE>
<CAPTION>
                                                            HIGH            LOW
                                                            ----            ---
<S>                                                        <C>            <C>

Fiscal Year Ended December 31, 1997:

      March 21 through March 31, 1997                      $ 8.25         $7.25

      April 1 through June 30, 1997                         7.625          5.00

      July 1 through September 30, 1997                     11.00          5.50

      October 1 through December 31, 1997                   13.75          8.25
</TABLE>



         Approximate Number of Equity Security Holders

         The number of record holders of the Company's Common Stock as of March
23, 1998 was approximately 50. The Company believes that the number of
beneficial owners exceeds 800.




                                      -26-

<PAGE>   27

         Dividends

         The Company has never paid cash dividends on the Common Stock. The
Company expects that it will retain all earnings, if any, for the development
and growth of its business and does not anticipate paying any cash dividends to
its stockholders in the foreseeable future. Any future determination as to
dividend policy will be made by the Board of Directors of the Company in its
discretion, and will depend on a number of factors, including the future
earnings, if any, capital requirements, financial condition and business
prospectus of the Company and such other factors as the Board of Directors may
deem relevant. In addition, the Company's $20 million credit facility with
NationsBank, N.A. (the "Credit Facility") restricts the payment of cash
dividends. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

         Recent Sales of Unregistered Securities

         The Company did not issue any securities during the year ended December
31, 1997 which were not registered under the Securities Act of 1933, as amended,
except as follows:

         In connection with the acquisition in March 1997 of substantially all
of the assets of (i) Atlanta Ear, Nose & Throat Associates, P.C., (ii)
Metropolitan Ear, Nose & Throat, P.C., (iii) Atlanta Head and Neck Surgery,
P.C., (iv) Ear, Nose & Throat Associates, P.C. and (v) W.J. Cornay, III, M.D.,
P.C. and (vi) the outstanding shares of capital stock of ENT Networks, the
Company issued an aggregate of 3,104,755 shares of Common Stock to the physician
shareholders of the practices and the physician owner of the ENT Networks.

         In connection with the acquisition of substantially all of the assets
of (i) Allatoona in July 1997, (ii) ENT Specialists in July 1997, (iii) ENT
Specialist, H&N in July 1997, (iv) Northside in August 1997, (v) OMSA in
September 1997, and (vi) Cobb in December 1997, the Company issued an aggregate
of 598,450 shares of Common Stock, agreed to issue an aggregate of 276,249
additional shares of Common Stock beginning in September 1998, and issued
approximately $750,000 aggregate principal amount of contingent convertible
promissory notes, $600,000 of principal amount of which is payable solely in
Common Stock, and the remaining $150,000 is payable in cash or common stock.
Payment of these notes is contingent upon the holders of such notes reaching
certain performance thresholds. All of the shares of Common Stock and notes were
issued to the physician shareholders of the practices.

         In connection with the acquisition of six Florida professional
corporations and related assets, in October 1997, the Company issued (i)
approximately $912,000 aggregate principal amount of convertible promissory
notes, which notes mature in October 2000, accrue simple interest at a rate of
5.61% per annum and are convertible, at the option of the holders, into shares
of Common Stock at $10.00 per share and (ii) approximately $2.25 million
aggregate principal amount of contingent convertible promissory notes which are
payable, contingent upon the holders of such notes reaching certain performance
thresholds. These contingent notes are payable in Common Stock, at the option of
the Company, and are non-interest bearing. These notes were issued to the
physician shareholders of the practice.



                                      -27-

<PAGE>   28



         The above transactions were private transactions not involving a public
offering and were exempt from the registration provisions of the Securities Act
of 1933, as amended, pursuant to Section 4(2) or Regulation D thereof. The sale
of securities was without the use of an underwriter, and the certificates
evidencing the shares bear a restrictive legend permitting the transfer thereof
only upon registration of the shares or an exemption under the Securities Act of
1933, as amended.

         Uses of Proceeds from Registered Securities

         The shares of common stock issued in the Company's IPO were registered
under a registration statement on Form S-1 (File No. 333-17091) which was
declared effective by the Securities and Exchange Commission (the "Commission")
on March 20, 1997.

         During the three months ended December 31, 1997, a portion of the net
proceeds received from the Company's IPO in March 1997 were used by the Company
(i) to pay an aggregate of approximately $3.5 million in cash in connection with
the acquisition of the assets of ENTSF and Cobb, (ii) to pay approximately
$177,500 to Premier HealthCare, a corporation of which Gerald R. Benjamin, the
Company's Vice Chairman and Secretary, is a principal, for consulting services
in connection with the acquisition of assets of ENTSF and Cobb and (iii) to
purchase, among other things, medical and computer equipment and office
furniture in the aggregate amount of approximately $552,000.

ITEM 6. SELECTED FINANCIAL DATA

         The selected financial data presented below summarizes certain
financial data which has been derived from and should be read in conjunction
with the more detailed financial statements of the Company and the notes thereto
which have been audited by Arthur Andersen L.L.P., independent accountants,
whose report thereon is included elsewhere in this Annual Report on Form 10-K
along with said financial statements. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations".



                                      -28-

<PAGE>   29

                  (AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                 From Inception
                                                                 (July 31, 1996)
                                                                     Through            Year Ended December
                                                                December 31, 1996              31, 1997
                                                                -----------------        -------------------

<S>                                                             <C>                      <C>
Statement of Operations Data:
Net revenue ................................................      $      51                     $   15,560
Expenses:
  Salaries, wages and benefits .............................             47                          7,819
  Depreciation and amortization ............................              2                            377
  Other expenses ...........................................            357                          4,371
                                                                  ---------                     ----------
Total expenses .............................................            406                         12,567
                                                                  ---------                     ----------
Operating (loss) income ....................................           (355)                         2,993
                                                                  ---------                     ----------
Net (loss) income...........................................      $    (355)                    $    2,060
                                                                  =========                     ==========
(Loss) earnings per share
     Basic .................................................      $   (0.64)                    $     0.42
     Dilute.................................................          (0.64)                          0.42
Weighted average shares outstanding
     Basic .................................................        552,894                      4,868,035
     Diluted ...............................................        552,894                      4,966,778
Supplemental system-wide revenue(1)  .......................      $      51                     $   25,191

<CAPTION>
                                                                            As of December 31,
                                                                       1996                      1997
                                                                -----------------        -------------------
<S>                                                             <C>                      <C>
Balance Sheet Data:
Cash and cash equivalents ..................................      $     124                     $    5,352
Working capital ............................................           (473)                        10,469
Total assets ...............................................            613                         30,598
Total debt .................................................            505                            912
Stockholders' equity .......................................            (10)                        25,114
</TABLE>

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

(1)  The unaudited supplemental system wide revenue is being presented for
     supplemental purposes only and should be read in conjunction with the
     Company's financial statements. In accordance with a recently issued
     Consensus Opinion issued by the Emerging Issues Task Force of the FASB
     ("EITF 97-2"), the Company is evaluating pertinent criteria contained in
     each of its management services agreements. Based upon the provisions of
     EITF 97-2, the Company anticipates that during 1998 it will begin
     consolidating the operating results of its managed physician practices.
     Upon adoption of consolidation, all previously issued Company financial
     statements will be restated so as to provide for comparability. See
     "Management's Discussion and Analysis of Financial Conditions and Results
     of Operations."



                                      -29-

<PAGE>   30



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

         The following discussion of the historical results of operations and
financial position of the Company should be read in conjunction with the
Company's financial statements and the notes thereto, appearing elsewhere
herein. In these discussions, most percentages and dollar amounts have been
rounded to aid presentation. As a result, all such figures are approximations.

         OVERVIEW

         The Company is a physician practice management company which provides
comprehensive management services to physician practices specializing in the
treatment and management of ENT diseases and disorders, including specialists
practicing in the related fields of allergy, audiology, oral surgery, plastic
surgery and sleep medicine. In March 1997, simultaneously with the closing of
the Company's IPO, the Company effected the Reorganization in which the Company
acquired all of the common stock of the ENT Networks and substantially all of
the assets of the Initial Practices. Since the consummation of the
Reorganization, the Company has acquired substantially all of the assets of four
ENT physician practices in the metropolitan Atlanta area, one ENT physician
practice located in North Georgia, one ENT physician practice located in the
metropolitan Chicago area and one ENT physician practice located in South
Florida, as well as the stock and related assets of six professional
associations comprising one ENT physician practice group located in South
Florida. As a result of these acquisitions, the Company is currently affiliated
with 47 physicians, one TMJ specialist and 49 allied health care professionals
operating 41 clinical locations in Alabama, Florida, Georgia and Illinois.

         The Company's revenue is derived (i) under management services
agreement with affiliated practices; (ii) from capitated managed care contracts
held by the ENT Networks, wholly-owned subsidiaries of the Company; and (iii)
from patient service revenue generated by the Company's wholly-owned subsidiary,
ENT & Allergy Associates, which directly employs physicians in Birmingham,
Alabama.

         Management fees consist of a stipulated percentage of revenue generated
by or on behalf of physicians practicing at (non-owned) affiliated practices,
along with reimbursement of Practice Expenses (as defined). Capitation revenue
consists of fixed monthly payments received by the Company directly from HMOs
(or payors subcontracting with HMOs). Patient service revenue consists of gross
charges, less allowances for bad debts and contractual adjustments, generated by
or on behalf of physicians practicing at the Company's wholly-owned subsidiary,
ENT & Allergy Associates.

         References to "supplemental system wide revenue" include patient
service revenue generated by all company-affiliated and owned practices,
together with capitation revenue received by the Company.


         In March 1998, the Company entered into a non-binding letter of intent
with PDI relating to the Company's proposed affiliation with six ENT physician
practices



                                      -30-

<PAGE>   31



consisting of 25 physicians and 20 allied health care professionals operating 13
clinical offices located in Southern New York and Northern New Jersey. In
addition, the Company has non-binding letters of intent for the two other
Probable Practice Acquisitions. These two ENT physician practices consist of an
aggregate of two physicians and two allied health care professionals operating
two clinical locations located in South Florida. The letters of intent are mere
statements of intention and each of the Probable Practice Acquisitions is
subject to various conditions to closing, including the negotiation and
execution of an acquisition agreement related to such potential acquisition.
There can be no assurance that any of these acquisitions will be completed on
the terms contemplated, as to the terms of such acquisitions or that the Company
will be able to integrate any of the Probable Practice Acquisitions into its
business. Based on the terms contemplated by the letters of intent, the Company
expects that the purchase prices will be comprised of cash, promissory notes or
shares of Common Stock of the Company, or a combination thereof. See "Liquidity
and Capital Resources."

MANAGEMENT SERVICES AGREEMENTS

     The management services agreements delineate the responsibilities and
obligations of the affiliated practice and the Company. Pursuant to the
management services agreements, the affiliated practice assigns to the Company
all of its non-governmental accounts receivable and all of its right and
interest in the proceeds of its governmental accounts receivable and grants to
the Company the right to collect and retain the proceeds of the accounts
receivable for the Company's account to be applied in accordance with the
agreement. The Company is responsible for the payment for and incurs (i)
operating expenses of the affiliated practice, including salaries and benefits
of non-medical employees of the practice, lease obligations of office space and
equipment, medical and office supplies; and (ii) the non-operating expenses of
the affiliated practice (the "Practice Expenses"). The Company pays for all such
expenses directly out of the proceeds of the accounts receivable assigned to the
Company by the affiliated practice. In addition, under the management services
agreements, the Company retains, as a part of its management fee, a stipulated
percentage (generally between 12.5% and 15%) of all revenue (after adjustment
for contractual allowances) generated by or on behalf of physicians practicing
at such practice. Contractual allowances are the differences between the amounts
customarily charged by physicians practicing at such practice and the amounts
received pursuant to negotiated fee schedules from payors under managed care,
governmental and indemnity arrangements. The Company believes that such
contractual allowances are not currently expected to materially adversely affect
the Company's revenue. In certain states where the Company expects to do
business, such as New York, the Company expects to be reimbursed for the
Practice Expenses and to be paid a fixed management fee in accordance with state
regulations. Based upon the terms of the letter of intent with PDI, the fixed
management fee to be paid by PDI under its management services agreement with
the Company, if the transaction is consummated, is expected to be $3.0 million
per year subject to annual increases after the fifth anniversary of the
date of the management services agreement, consistent with the annual
percentage increase in the consumer price index. The percentage or fixed
components of the management fee to be retained by the Company under future
management services



                                      -31-

<PAGE>   32



agreements will be determined based upon negotiations between the Company and
future affiliating practices and may vary significantly in the future.

CAPITATED MANAGED CARE CONTRACTS

         The Company holds capitated managed care contracts with Cigna, United
HealthCare and FPA which require the Company to contract for the provision of
substantially all of the ENT medical and surgical professional services required
by the enrollees of these managed care companies in the metropolitan Atlanta
area. The Company has contracted with associated physicians, including those at
the Company's affiliated practices in Atlanta and North Georgia, to provide
substantially all of such medical professional services in exchange for
compensation on a discounted fee-for-service basis. Affiliated physicians
provided 87% of 1997 services, based upon claims paid or incurred, in connection
with the Company's capitated managed care contracts.

         The Company incurs direct costs (or provides claims) based on medical
services provided by the participating physicians to the managed care company's
enrollees, and as a result, if capitation amounts received by the Company are
reduced by the managed care companies or if enrollees covered by capitated
contracts require more frequent or more extensive care than is anticipated,
operating margins may be reduced or the revenue derived from such contracts may
be insufficient to cover the direct costs of the professional services provided
by associated physicians to enrollees under the contracts, requiring the Company
to adjust its discounted fee-for-service rates paid to participating physicians.
As a result, the Company's business, financial condition and results of
operations may be adversely affected, particularly if the Company is unable to
renegotiate compensation levels paid to participating physicians under the
participation agreements on a timely or favorable basis or negotiate capitated
managed care contracts on terms favorable to the Company. See
"Business--Capitated Managed Care Contracts; Network Development and
Management."

         Prior to entering into a capitated managed care contract, the Company
analyzes the costs of managing such contracts including a study of the number of
lives to be covered, the geographic region to be covered and the historical
utilization patterns of enrollees. The Company then determines the capitation
fee (generally, a fixed amount per enrollee per month) necessary to generate
acceptable returns under the contract and will negotiate the capitation rate
with the managed care company. Capitated managed care contracts frequently
provide for annual renegotiation of capitation fees and adjustments in such
capitation fees based upon changes in the number of enrollees under the
contracts, changes in the types of professional services to be provided under
the contracts, and changes in the geographic areas to be covered under the
contracts.

         To assist in monitoring and controlling direct costs (or provider
claims) under capitated managed care contracts held by the Company, the Company
utilizes the Capitated Network System, a comprehensive capitation administration
and utilization management system. The Company believes the Capitated Network
System enables it to effectively analyze clinical and cost data necessary to
monitor and control expenses and manage profitability under capitated
arrangements and to accurately anticipate



                                      -32-

<PAGE>   33
\


the costs participating physicians will incur in providing services under such
contracts so that the Company undertakes contracts which it can expect to
realize adequate profit margins or otherwise meet its objectives.

         During the year ended December 31, 1997, approximately 23.3% and 14.3%
of the Company's net revenue and supplemental system wide revenue, respectively,
was derived from capitated arrangements.

RESULTS OF OPERATIONS - HISTORICAL

         The Company was incorporated in July 1996 and did not conduct any
significant operations prior to the closing of the Reorganization in March 1997.
Accordingly, no revenue and only nominal general and administrative expenses
were incurred during the period from inception to the closing of the
Reorganization. However, the Company did incur various legal, accounting and
auditing costs in connection with the IPO and Reorganization during the period
from inception through December 31, 1996.

YEAR ENDED DECEMBER 31, 1997

         Revenue. Net revenue for the year ended December 31, 1997 was $15.6
million, consisting of $11.0 million of management fees, $3.6 million of
capitation revenue and $970,000 of patient service revenue. The number of
covered lives under the capitated managed care contracts was 315,000 at December
31, 1997.

         Supplemental system wide revenue for the year ended December 31, 1997
was $25.2 million. Supplemental system wide revenue increased each quarter
during 1997 in conjunction with increases in affiliated practice (same
physician) revenue, as well as revenue associated with acquired practices.
Supplemental system wide revenue increased from $6.0 million (pro-forma giving
effect to the Reorganization as if it had occurred on January 1, 1997) during
the first quarter of 1997 to $9.8 million during the fourth quarter of 1997. Of
this increase, 7.5% (or $450,000) was attributable to same physician revenue
growth and 92.5% (or $5.5 million) was attributable to revenue associated with
acquired practices.

         Effective June 30, 1997 the Company's affiliated physicians at Atlanta
ENT and Allatoona ENT began providing medical and surgical services to Aetna HMO
enrollees on a discounted fee-for-service basis, superseding a previous
capitated arrangement entered into with Aetna. Accordingly, capitation revenue
decreased $176,000 (or 13.5%) in the fourth quarter of 1997 compared to the
second quarter of 1997. Under the new Aetna fee-for-service arrangement, the
Company believes that for the six months ended December 31, 1997 its affiliated
physicians captured and will continue to capture the vast majority of Aetna
patient service revenue related to ENT services in the Atlanta market.
Accordingly, the Company does not believe that the termination of the Aetna
capitated arrangement had or will have a material adverse effect on the
Company's business, financial condition or results of operations.



                                      -33-

<PAGE>   34



         Operating Expenses. Operating expenses consist of (i) provider claims,
wages and benefits; (ii) general and administrative expenses; and (iii)
depreciation and amortization. Provider claims include claims paid or incurred
in connection with medical and surgical services provided to managed care
enrollees covered under the Company's capitated managed care agreements. Wages
and benefits include all salary and benefit costs associated with corporate and
clinic level personnel. General and administrative expenses include all other
corporate and clinic level operating expenses, including real and personal
property rent, medical and office supplies, utilities and professional fees.
Depreciation and amortization expense includes non-cash charges related to
corporate and clinic level equipment depreciation, along with amortization of
intangible assets, including the costs of acquisitions in excess of the fair
value of tangible and identifiable intangible assets acquired. Depreciation is
computed utilizing the straight-line method over lives ranging from three to
seven years, while intangible assets are amortized utilizing the straight-line
method primarily over a period of 25 years.

         Operating expenses for the year ended December 31, 1997 were $12.6
million, or 80.8% of net revenue for the year ended December 31, 1997,
consisting of provider claims, wages and benefits ($7.8 million, or 50.3% of net
revenue); general and administrative expenses ($4.4 million, or 28.1% of net
revenue); and depreciation and amortization expense ($377,000, or 2.4% of net
revenue). The Company had 285 employees and operated 41 clinical locations at
December 31, 1997.

         Other Income (Expense). Other income (expense) for the year ended
December 31, 1997 was $429,000 of interest income, net of immaterial amounts of
interest expense.

         Income Taxes. Income tax expense for the year ended December 31, 1997
was $1.4 million and has been provided at an effective tax rate of 39%.

LIQUIDITY AND CAPITAL RESOURCES

         The Company utilizes capital primarily (i) to acquire assets or equity
of physician practices; (ii) to acquire equipment utilized by affiliated
practices; (iii) to fund corporate capital expenditures including management
information systems; and (iv) to fund ongoing corporate working capital
requirements. At December 31, 1997 the Company had working capital of $10.5
million, including cash and cash equivalents of $5.4 million.

         Net cash used in operating activities was $1.3 million for the year
ended December 31, 1997 compared with net cash provided by operating activities
of $81,000 for the period from inception (July 31, 1996) through December 31,
1996. The Company conducted limited operating activities prior to the closing of
its IPO and the Reorganization in March 1997. Net cash used in operating
activities consists of the Company's net income, increased by non-cash expenses
such as depreciation and amortization, and adjusted by changes in the components
of working capital, primarily accounts receivable and income taxes. For the year
ended December 31, 1997, the Company remitted estimated income tax payments of
$2.2 million related to Company pre-tax earnings and the realization of accounts
receivable acquired in connection with physician practice acquisitions having
zero basis for income tax purposes.


                                      -34-

<PAGE>   35



         Net cash used in investing activities was $5.7 million and $22,000 for
the year ended December 31, 1997 and the period from inception (July 31, 1996)
through December 31, 1996, respectively. The Company's uses of cash in investing
activities related exclusively to physician practice asset acquisitions and
capital expenditures.

         Net cash provided by financing activities for the year ended December
31, 1997 and for the period from inception (July 31, 1996) through December 31,
1996 was $12.2 million and $65,000, respectively. The Company realized net
proceeds of $14.3 million in connection with its IPO, of which $2.3 million was
utilized to extinguish debt assumed in connection with physician practice asset
acquisitions. For the period from inception (July 31, 1996) through December 31,
1996, cash provided by financing activities consisted of the proceeds of
borrowings under short term notes advanced by Company founders and affiliates.
Deferred offering costs of $442,000 were funded in 1996 in connection with the
IPO. Although the Company had no debt outstanding under the Credit Facility at
December 31, 1997, in the event the proposed PDI acquisition is consummated on
the terms contemplated, the Company expects to use cash and borrow $4.2 million
under the Credit Facility. In connection with a 1997 physician practice
acquisition, the Company issued long-term promissory notes in the aggregate
principal amount of $912,000, which promissory notes bear simple interest,
payable quarterly, at 5.62% per annum, have varying maturity dates, and are
convertible into shares of Common Stock at the option of the holders. In
connection with 1997 practice acquisitions, the Company issued various
contingent promissory notes in the aggregate principal amount of $3.0 million
which are payable only in the event the holders of such notes attain certain
performance targets, certain of which notes are payable by the Company, at the
Company's option, in shares of Common Stock.

         In April 1997, the Company entered into a $20.0 million credit facility
with NationsBank, N.A. primarily to provide financing for the acquisition of
assets or equity of physician practices and for working capital purposes.
Borrowings under the Credit Facility (i) are secured by the assignment to the
bank of the Company's stock in all of its subsidiaries and the Company's
accounts receivable, including the accounts receivable assigned to the Company
by affiliated practices pursuant to management services agreements; (ii) are
guaranteed by all subsidiaries (including future subsidiaries); and (iii)
restrict the Company from pledging its assets to any other party. Advances for
working capital are governed by a borrowing base related primarily to the
Company's EBITDA. Based on the borrowing base at December 31, 1997, the maximum
availability under the Credit Facility would have been approximately $13.5
million. Advances bear interest at the Company's option of either a prime-based
rate or a LIBOR-based rate and interest-only payments are required for the first
three years from the date of the closing of the Credit Facility, with maturity
in April 2002.

         The Credit Facility contains affirmative and negative covenants which,
among other things, require the Company to maintain certain financial ratios
(including maximum indebtedness to pro forma EBITDA, maximum indebtedness to
capital, minimum net worth, minimum current ratio, and minimum fixed charges
coverage), limit the amounts of additional indebtedness, dividends, advances to
officers, shareholders and physicians, acquisitions, investments and advances to
subsidiaries, and restrict changes in management and the Company's business.



                                      -35-

<PAGE>   36


         The Company intends to acquire the assets or equity of additional ENT
physician practices and Related Specialty practices and to fund this growth in
part with its existing cash resources and borrowings under the Credit Facility,
as well as through equity and debt issuances. In March 1998, the Company entered
into a non-binding letter of intent with PDI relating to the Company's proposed
affiliation with six ENT physician practices consisting of 25 physicians and 20
allied health care professionals operating 13 clinical offices located in
Southern New York and Northern New Jersey. Based on the terms of the letter of
intent, the aggregate consideration to be paid by the Company in connection with
the PDI acquisition, if such acquisition is consummated, will be $22.5 million
consisting of $2.1 million in cash, the repayment of $4.2 million of outstanding
indebtedness of PDI and the issuance of a subordinated promissory note in the
principal amount of $16.2 million. The letter of intent provides that the
subordinated promissory note will accrue interest at a rate of 6% per annum,
payable quarterly, and will be secured by certain of the assets acquired by the
Company in the transaction. Pursuant to the proposed terms of the subordinated
promissory note, $9.2 million of the principal amount of the note will mature
five years from the date of issuance and the remaining $7.0 million of the
principal of the note will mature upon the earlier of (i) three days following
the closing of a public offering by the Company or (ii) December 31, 1998. In
the event the transaction is consummated on the terms contemplated, the Company
expects to borrow $4.2 million under the Credit Facility to repay the
outstanding indebtedness of PDI and, if sufficient funds are not available to
repay the $7.0 million due December 31, 1998, the Company expects to borrow
additional amounts under the Credit Facility. The Company will also pay an
additional $500,000, payable in shares of Common Stock at the Company's option,
if the practices achieve stipulated performance targets. In addition, the
Company has non-binding letters of intent for the other two Probable Practice
Acquisitions for an aggregate purchase price of $1.2 million. These two ENT
physician practices consist of an aggregate of two physicians and two allied
health care professionals operating two clinical offices located in South
Florida. The letters of intent are mere statements of intention and each of the
Probable Practice Acquisitions is subject to various conditions to closing,
including the negotiation and execution of an acquisition agreement related to
such potential acquisition. There can be no assurance that any of these
acquisitions will be completed on the terms contemplated, as to the terms of
such acquisitions or that the Company will be able to integrate any of these
Probable Practice Acquisitions into its business. In the event that any of the
other two Probable Practice Acquisitions are completed, the Company expects that
the purchase price will be comprised of cash, promissory notes, or shares of
Common Stock of the Company, or a combination thereof. The Company is currently
evaluating and is in various stages of discussions in connection with the
potential acquisition of assets or equity of other additional ENT physician
practices and Related Specialty practices. However, the Company has no
agreements or arrangements with respect to the terms of any other specific
acquisitions (other than the Probable Practice Acquisitions) and, accordingly,
there can be no assurance that any of the acquisitions under evaluation will be
completed, as to the terms of any such acquisition or as to the Company's
ability to complete future acquisitions.

         While the Company believes that borrowings under the Credit Facility,
together with existing cash resources and cash flow expected to be generated
from operations, will be sufficient to fund the Company's anticipated
acquisition, expansion, and working capital needs for approximately the next 12
months, the Company intends to seek additional funds through equity and/or debt
financings. No assurance can be given that such existing cash resources or cash
flow expected to be generated from



                                      -36-

<PAGE>   37



operations will be sufficient to satisfy the Company's cash requirements for the
next 12 months or beyond. There can be no assurance that borrowings under the
Credit Facility will be available or that alternative financing will be
available for future acquisitions or expansion of the Company's business.

NEW ACCOUNTING PRONOUNCEMENT

         The Emerging Issues Task Force of the FASB has recently issued its
Consensus on Issue 97-2 ("EITF 97-2"). EITF 97-2 addresses certain specific
matters pertaining to the physician practice management industry. EITF 97-2
would be effective for the Company for its year ending December 31, 1998. EITF
97-2 addresses the ability of physician practice management companies to
consolidate the results of physician practices with which it has an existing
contractual relationship. The Company is still in the process of analyzing the
effect on all of its contractual relationships, but currently believes that
certain contracts would meet the criteria of EITF 97-2 for consolidating their
results of operations, which would require the Company to restate its prior
period financial statements to reflect such consolidation. EITF 97-2 also has
addressed the accounting method for future combinations with individual
physician practices. The Company believes that, based upon the criteria set
forth in EITF-97-2, virtually all of its future acquisitions of individual
physician practices will continue to be accounted for under the purchase method
of accounting.

YEAR 2000

      The Company has commenced review of its computer systems to identify the
systems that could be affected by the "Year 2000" issue and will develop an
implementation plan to resolve the issue. The Year 2000 problem is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations. The Company believes
that, with modifications or converting to new software, the Year 2000 problem
will not pose significant operational problems for the Company's computer
systems as so modified and converted. The Company expects to spend approximately
$115,000, in the aggregate, in 1998 and 1999 to modify its existing software or
convert to new software in order for the Company's software to be Year 2000
compliant.

SEASONALITY

         The Company's business is subject to seasonal patient visits to
affiliated physicians. Fee-for-service revenue is typically lower during the
third quarter of the Company's fiscal year. This lower level of patient visits
is attributable to physician vacations, patients returning to school and
seasonal illness patterns. Capitated revenue, however, is not susceptible to
seasonal influences. Quarterly results also may be materially affected by the
timing of acquisitions and the timing and magnitude of costs related to
acquisitions. Results for any quarter, therefore, may not necessarily be
indicative of the results that the Company may achieve for any subsequent fiscal
quarter or for a full fiscal year.



                                      -37-

<PAGE>   38




ITEM 8.  FINANCIAL STATEMENT AND SUPPLEMENTARY DATA

         The response to this item is included in a separate section of this
Report. See Index to Consolidated Financial Statements on Page F-1.

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

    Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The following table sets forth the names, ages and positions of the
executive officers and directors of the Company:



<TABLE>
<CAPTION>
NAME                                              Age    Position
----                                              ---    --------

<S>                                               <C>    <C>
Ramie A. Tritt, M.D............................    48    Chairman of the Board and President

Gerald R. Benjamin(1)..........................    40    Vice Chairman of the Board, Secretary and
                                                         Director

Richard D. Ballard(2)..........................    49    Chief Executive Officer and Director

Robert A. DiProva..............................    50    Executive Vice President and Chief Financial
                                                         Officer

Lawrence P. Kraska.............................    33    Vice President - Operations

Edward R. Casas, M.D.(1)(2)....................    38    Director

Sidney Kirschner(1)............................    63    Director

Steven L. Posar, M.D.(1)(2)....................    48    Director
</TABLE>

----------
(1)      Member of Audit Committee
(2)      Member of Compensation Committee

         Ramie A. Tritt, M.D. has served as Chairman of the Board and President
of the Company since its inception in July 1996. Dr. Tritt serves as President
of Atlanta ENT, a multi-site otolaryngology group practice which is a successor
to a practice founded by Dr. Tritt in 1979. Dr. Tritt also serves as President
and Medical Director of the ENT Center of Atlanta, Inc., Atlanta ENT Center for
Physicians, Inc., and Atlanta AHP, Inc., three otolaryngology provider networks
established to contract with HMOs in greater Atlanta, each of which is a
wholly-owned subsidiary of the Company. Dr. Tritt was a founding Member and
currently serves as President of Georgia Multi-Specialty Group, L.L.C., a
consortium of 15 specialty group practices, encompassing approximately 650
physicians, which contracts with payors for specialty


                                      -38-

<PAGE>   39



medical services throughout the metropolitan Atlanta area. Dr. Tritt has served
on the Medical Advisory Board of Healthsource of Georgia since June 1996 and the
ENT Physician Advisory Board of the Ambulatory Surgery Division of Columbia HCA
since January 1997. Dr. Tritt also serves on the Company's Medical Advisory
Board. Dr. Tritt received his M.D. degree from McGill University.

         Gerald R. Benjamin has served as Vice Chairman and Secretary of the
Company since its inception in July 1996. Mr. Benjamin serves as Chief Executive
Officer of Premier HealthCare, a division of Bock, Benjamin & Co., a boutique
health care investment banking concern which Mr. Benjamin co-founded in 1993.
Prior to founding Bock, Benjamin & Co., Mr. Benjamin served as Chief Executive
Officer of Premier HealthCare, Inc., a health care venture development and
management firm which Mr. Benjamin co-founded in 1991. Prior to co-founding
Premier HealthCare, Inc., Mr. Benjamin served for ten years as Managing Partner
and Director of Corporate Finance Services for Williams, Benjamin, Benator &
Libby, an Atlanta, Georgia-based Certified Public Accounting firm. Prior to
forming Williams, Benjamin, Benator & Libby in 1982, Mr. Benjamin was a member
of the Atlanta office of Ernst & Young. Mr. Benjamin is a Certified Public
Accountant and received his B.S. degree in accounting from the University of
Kentucky, where he was named a Coopers & Lybrand scholar.

         Richard D. Ballard has served as Chief Executive Officer and a director
of the Company since November 1996. Prior to joining the Company, Mr. Ballard
served as Vice President of Recruiting for Physicians' Online, Inc., founding an
intranet physician recruiting service. Prior to joining Physicians' Online in
September 1995, Mr. Ballard served as Executive Vice President, President and
Chief Executive Officer of Allegiant Physician Services, Inc. (formerly Premier
Anesthesia, Inc.), an anesthesia contracting and physician practice management
company. Prior to joining Premier Anesthesia in 1988, Mr. Ballard served for six
years as Executive Vice President of Jackson & Coker Inc., a national physician
recruiting firm and for seven years as director of national recruiting for
Spectrum Emergency Care, Inc.

         Robert A. DiProva has served as an Executive Vice President and Chief
Financial Officer of the Company since March 1997. Mr. DiProva served as Vice
President-Administration, Chief Financial Officer, Secretary and Treasurer of
A.D.A.M. Software, Inc., a publicly traded medical software company, from
September 1995 to February 1997. Prior to joining A.D.A.M. Software in 1995, Mr.
DiProva served for six years as Vice President, Chief Financial Officer and
Treasurer of DATEQ Information Network, Inc., a publicly traded data management
company. Mr. DiProva is a Certified Public Accountant and received his M.B.A.
from Emory University.

         Lawrence P. Kraska has served as Vice President-Operations of the
Company since March 1997. Prior to joining the Company, Mr. Kraska served as
Administrator of Atlanta ENT. Prior to joining Atlanta ENT in June 1994, Mr.
Kraska provided hospital administration, physician recruiting and practice
management services as the Regional Director of Professional Relations for the
Atlanta division of National Medical Enterprises from July 1993 to May 1994, for
Charter Medical Corporation - Charter Peachford Hospital from September 1992 to
June 1993 and as the Administrator for The Center For



                                      -39-

<PAGE>   40



Psychiatry, a large multi-specialty mental health group practice, from March
1990 to August 1992. Mr. Kraska received his M.B.A. from Kennesaw State
University.

         Edward R. Casas, M.D. has served as a director of the Company since
November 1996. Dr. Casas currently serves as Chief Executive Officer of
PrimeCare International, Inc., a California-based multi-site primary care
physician practice management concern. Prior to joining PrimeCare in September
1996, Dr. Casas served as Vice President of Mergers and Acquisitions for the
Physician Practice Management Division of Caremark International Inc. Prior to
joining Caremark International in December 1992, Dr. Casas completed his active
duty service as a designated Flight Surgeon in support of Marine special
operations and as a clinical Departmental Head in Aerospace Medicine in the
United States Navy. Prior to completing his medical training, Dr. Casas was
Executive Vice President of CES Corporation, an investment banking concern. Dr.
Casas is a graduate of Northwestern University's Medical School and Kellogg
Graduate School of Management where he concurrently earned an M.D., a Masters of
Management and a Masters in Public Health.

         Sidney Kirschner has served as a director of the Company since March
1997. Mr. Kirschner currently serves as President and Chief Executive Officer of
Northside Hospital, a 455 bed tertiary care facility located in Atlanta,
Georgia. Prior to joining Northside Hospital in 1992, Mr. Kirschner served in
numerous executive capacities, including President, Chief Executive Officer and
Chairman of the Board, of National Service Industries, Inc. a publicly traded
diversified manufacturing and industrial services concern. Mr. Kirschner is a
member of the Board of Directors of two public companies: Fortune Co. and
Superior Surgical Manufacturing Company, Inc.

         Steven L. Posar, M.D. has served as a director of the Company since
March 1997. Dr. Posar currently serves as President, Chief Operating and Chief
Medical Officer of For Health International, Inc., a long term care and
insurance services company. Prior to joining For Health International in
November 1997, Dr. Posar served as Senior Vice President, Operations Group of
AHI HealthCare Systems, Inc., a publicly traded independent physician management
company, recently acquired by FPA Medical Management, Inc. Prior to joining AHI
in 1991, Dr. Posar served as Medical Director of Blue Cross of California, a
managed care payor with approximately 2.5 million enrollees in sponsored HMO and
preferred provider organization plans. Prior to joining Blue Cross of
California, Dr. Posar spent three years as Chief of Cigna Medical Center, and
staff medical director of Cigna Healthplan of Los Angeles.
Dr. Posar received his M.D. degree from Michigan State University.

         All directors hold office until the next annual meeting of stockholders
or until their successors are elected and qualified; vacancies and any
additional positions created by board action are filled by action of the
existing Board of Directors. All officers serve at the discretion of the Board
of Directors.

         BOARD COMMITTEES

         The Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee consists of four directors and
reviews, with the Company's independent accountants,



                                      -40-

<PAGE>   41



(i) the scope and timing of audit services and any other services that the
accountants are asked to perform, (ii) the independent accountants report on the
Company's financial statements following completion of their audit and (iii) the
Company's policies and procedures with respect to internal accounting and
financial controls. In addition, the Audit Committee makes annual
recommendations to the Board of Directors for the appointment of independent
public accountants for the ensuing year.

         The Compensation Committee consists of three directors and (i) reviews
and recommends to the Board of Directors the compensation and benefits of all
officers of the Company and (ii) reviews general policy matters relating to
compensation and benefits of employees of the Company.


COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

         Section 16(a) of the 1934 Act requires the Company's executive
officers, directors and persons who beneficially own more than 10% of a
registered class of the Company's equity securities to file with the Commission
initial reports of ownership and reports of changes in ownership of common stock
and other equity securities of the Company. Such executive officers, directors,
and greater than 10% beneficial owners are required by Commission regulation to
furnish the Company with copies of all Section 16(a) forms filed by such
reporting persons.

         To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and on representations that no other
reports were required, there were no reports required under Section 16(a)
("Section 16(a)") of the Securities Exchange Act of 1934 which were not timely
filed during fiscal 1997, except that a report on Form 4 reporting the
acquisition in March 1997 of shares of Common Stock by the mother of Ramie A.
Tritt, M.D., the Company's Chairman of the Board and President, as custodian for
Dr. Tritt's children, was filed by Dr. Tritt on January 8, 1998.

ITEM 11.  EXECUTIVE COMPENSATION

         The following summary compensation table sets forth the aggregate
compensation paid or accrued by the Company to Richard D. Ballard, the Company's
Chief Executive Officer, and to executive officers whose annual compensation
exceeded $100,000 for fiscal 1997, for services rendered during the fiscal years
ended December 31, 1997 and 1996 (the "Named Executive Officers"):



                                      -41-

<PAGE>   42



                           SUMMARY COMPENSATION TABLE


<TABLE>
                          Annual Compensation                                      Long-term Compensation
                          -------------------                                      ----------------------
Name and                                                       Other Annual              Securities                All Other
Principal Position         Year      Salary       Bonus(7)    Compensation($)    Underlying Compensation(#)    Compensation(8)
-----------------------    ----      ------       --------    ---------------    --------------------------    ---------------

<S>                        <C>     <C>            <C>         <C>                <C>                           <C>

Richard D. Ballard         1997    $150,000           --                 --                  --                    $4,398
Chief Executive Officer    1996    $ 10,385(1)        --                 --               179,968                    --

Ramie A. Tritt, M.D        1997    $263,846(2)        --                 --                  --                      --
 Chairman of the Board     1996    $      0(2)        --             $210,268(3)             --                      --
  and President

Gerald R. Benjamin         1997    $ 45,231(4)        --                 --                  --                      --
 Vice Chairman of
 the Board and
 Secretary

Lawrence P. Kraska         1997    $ 98,000(5)        --                 --                  --                    $2,829
Vice President-
  Operations

Robert A. DiProva          1997    $104,933(6)        --                 --               119,980                  $2,733
Executive Vice
  President and Chief
  Financial Officer
</TABLE>

------

(1)    Mr. Ballard's employment commenced as of November 26, 1996, and
       accordingly, represents amounts accrued from November 26, 1996 to
       December 31, 1996, all of which was paid in 1996.

(2)    No compensation was paid or accrued by the Company during 1996 to Dr.
       Tritt, who received compensation in the form of distributions from the
       ENT Networks and Atlanta ENT. Dr. Tritt's employment commenced as of
       March 26, 1997, and accordingly, represents amounts accrued from March
       26, 1997 to December 31, 1997, all of which was paid in 1997. Pursuant to
       an Employment Agreement effective March 26, 1997, between the Company and
       Dr. Tritt, Dr. Tritt is entitled to an annual salary of $350,000 subject
       to adjustments, plus a performance related bonus to be approved by the
       Board of Directors. Excludes compensation received by Dr. Tritt from
       Atlanta ENT for medical services provided by Dr. Tritt as a physician at
       Atlanta ENT during the year ended December 31, 1997. See "-- Employment
       Agreements."

(3)    Represents the fair market value, on the date acquired, of an aggregate
       of 30,945 shares of Common Stock purchased by Dr. Tritt in November and
       December 1996, less the actual purchase price paid by Dr. Tritt for such
       shares.




                                      -42-

<PAGE>   43



(4)    Mr. Benjamin's employment with the Company commenced as of March 26,
       1997, and accordingly, represents amounts accrued from March 26, 1997 to
       December 31, 1997, all of which was paid in 1997. Pursuant to an
       Employment Agreement effective as March 26, 1997 between Mr. Benjamin and
       the Company, during 1997 Mr. Benjamin was employed on a part time basis
       by the Company and was entitled to an annual salary of $60,000, plus a
       performance related bonus to be approved by the Board of Directors. In
       March 1998, Mr. Benjamin's employment agreement was amended to provide
       that Mr. Benjamin would be employed on a full time basis by the Company
       and would receive an annual salary of $150,000. Excludes amounts paid by
       the Company during the year ended December 31, 1997, to Premier
       HealthCare, a division of Bock, Benjamin & Co. ("Bock Benjamin"), an
       entity in which Mr. Benjamin has a 25% ownership interest, in the
       aggregate amount of approximately $647,000 for consulting services in
       connection with acquisitions and certain other transactions. See "--
       Employment Agreements" and "Certain Relationships and Related
       Transactions."

(5)    Mr. Kraska's employment commenced as of March 26, 1997, and accordingly,
       represents amounts accrued from March 26, 1997 to December 31, 1997, all
       of which was paid in 1997. Pursuant to an Employment Agreement effective
       March 26, 1997 between Mr. Kraska and the Company, Mr. Kraska is entitled
       to an annual salary of $130,000, plus a performance related bonus to be
       approved by the Board of Directors. See "-- Employment Agreements."

(6)    Mr. DiProva's employment commenced as of March 26, 1997, and accordingly,
       represents amounts accrued from March 26, 1997 to December 31, 1997, all
       of which was paid in 1997. Pursuant to an Employment Agreement effective
       March 26, 1997 between Mr. DiProva and the Company, Mr. DiProva is
       entitled to an annual salary of $120,000, plus a performance related
       bonus to be approved by the Board of Directors. See "-- Employment
       Agreements."

(7)    The Company did not approve or pay any bonuses to the named executive
       officers during the year ended December 31, 1997.

(8)    Amounts shown in this column represent medical insurance premiums paid by
       the Company.

                      OPTION GRANTS IN THE LAST FISCAL YEAR

         The following table sets forth certain information regarding stock
options granted to the Named Executive Officers during the fiscal year ended
December 31, 1997. No stock appreciation rights were granted to these
individuals during such year.




                                      -43-

<PAGE>   44



<TABLE>
<CAPTION>
                                                Individual Grants
                        --------------------------------------------------------    Potential Realizable Value
                           Number of                                                     at Assumed Annual
                          Securities      % of Total                                      Rates of Stock
                          Underlying        Options                                   Price Appreciation for
                            Options       Granted to    Exercise or                       Option Term (2)
                            Granted      Employees in   Base Price   Expiration     ---------------------------
Name                         (#)(1)       Fiscal Year     ($/Sh)         Date           5%($)           10%($)
----                      ----------     ------------   -----------  ----------     -----------      ----------

<S>                       <C>            <C>            <C>          <C>            <C>              <C>
Richard D. Ballard....           --            --            --           --              --                 --
Ramie A. Tritt, M.D...           --            --            --           --              --                 --
Gerald R. Benjamin....           --            --            --           --              --                 --
Lawrence P. Kraska....           --            --            --           --              --                 --
Robert A. DiProva.....      119,980          62.3%        $6.80      3/27/07        $513,092         $1,300,277
----------
</TABLE>

(1)    The options listed in the table are exercisable in equal annual
       installments of 25% on a cumulative basis commencing on March 26, 1997.

(2)    Calculated by multiplying the exercise price by the annual appreciation
       rate shown (as prescribed by the Securities and Exchange Commission
       rules) and compounded for the term of the options, subtracting the
       exercise price per share and multiplying the gain per share by the number
       of shares covered by the options. These amounts are not intended to
       forecast possible future appreciation, if any, of the price of the
       Company's Common Stock. The actual value realized upon exercise of the
       options will depend on the fair market value of the Company's Common
       Stock on the date of exercise.



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

         The following table sets forth certain information with respect to the
exercise of stock options during fiscal 1997 by the Named Executive Officers and
the number and value of unexercised options held by each of the Named Executive
Officers as of December 31, 1997:


<TABLE>
<CAPTION>
                                                       Number of Securities               Value of Unexercised
                                                      Underlying Unexercised              In-The-Money Options
                                                    Options at Fiscal Year-End             At Fiscal Year-End
                         Shares           Value                (#)                              ($)(1)
                        Acquired        Realized  ------------------------------    --------------------------------
Name                 on Exercise (#)      ($)     Exercisable      Unexercisable    Exercisable        Unexercisable
----                 ---------------   ---------  -----------      -------------    -----------        -------------

<S>                  <C>               <C>        <C>              <C>              <C>                <C>
Richard D. Ballard         ---              ---       89,984        89,984            321,693           321,693
Ramie A. Tritt, M.D.       ---              ---          ---           ---                ---               ---
Gerald R. Benjamin         ---              ---          ---           ---                ---               ---
Lawrence P. Kraska         ---              ---       29,996        29,996            107,236           107,236
Robert A. DiProva          ---              ---       29,995        89,985            107,232           321,696
</TABLE>

----------

(1)   Calculated by multiplying the number of unexercised in-the-money options
      outstanding at December 31, 1997 by the difference between the fair market
      value of the Common Stock at December 31, 1997 ($10.375) and the option
      exercise price.



                                      -44-

<PAGE>   45




      DIRECTOR COMPENSATION

      Directors who are officers or employees of the Company or a subsidiary of
the Company are not compensated for attending Board of Directors meetings.
Directors who are not officers or employees of the Company ("Independent
Directors") are entitled to compensation of $1,500 for each Board of Directors
meeting attended and are reimbursed for expenses actually incurred in connection
with attending such meetings. Independent Directors are also awarded initial
grants of non-qualified stock options to purchase 7,500 shares of Common Stock
upon joining the Board of Directors and annual grants of non-qualified stock
options to purchase 2,500 shares of Common Stock. All options are granted at the
then fair market value. See "-- Stock Option Plans."

         EMPLOYMENT AGREEMENTS

         On November 26, 1996, the Company entered into employment agreements
with Ramie A. Tritt, M.D., Richard D. Ballard and Gerald R. Benjamin (effective
as of March 26, 1997 with respect to each of Dr. Tritt and Mr. Benjamin).
Pursuant to the employment agreements, Dr. Tritt, Mr. Ballard and Mr. Benjamin
agreed to serve as the Company's President, Chief Executive Officer and Vice
Chairman, respectively. The employment agreements with Dr. Tritt, Mr. Ballard
and Mr. Benjamin provide for an initial term of five, three and three years,
respectively, with automatic renewals for successive one year terms unless
terminated by either party.

         The employment agreement with Dr. Tritt provides for an initial annual
base salary of $350,000 plus an annual performance related bonus of up to 50% of
his base salary, to be approved by the Board of Directors, in consideration of
his devoting approximately 50% of his business time each week to serving as
President of the Company. The employment agreement with Dr. Tritt provides for
increases in Dr. Tritt's annual base salary, subject to approval of the Board of
Directors, if the amount of time he devotes as President of the Company is
greater than 50%. The agreement acknowledges that the remaining 50% of Dr.
Tritt's business time each week will be spent performing ENT medical and
surgical services at Atlanta ENT pursuant to an employment agreement with
Atlanta ENT. Pursuant to the employment agreement with Atlanta ENT, Dr. Tritt
will receive compensation from Atlanta ENT pursuant to a formula based upon
medical services provided by Dr. Tritt as a physician at Atlanta ENT. Dr. Tritt
does not receive compensation for providing services as a Medical Director under
the capitated managed care contracts held by the ENT Networks. In February 1997,
the Company and Dr. Tritt entered into an amended and restated employment
agreement which provides that Dr. Tritt's annual base salary from the Company in
any year will be reduced, dollar for dollar, if in such year his annual
compensation from Atlanta ENT exceeds $970,000. For the year ended December 31,
1997, Dr. Tritt's annual compensation from Atlanta ENT did not exceed $970,000,
and therefore, Dr. Tritt's annual base salary from the Company was not reduced.

         The employment agreement with Mr. Ballard provides for an annual base
salary of $150,000 plus an annual performance related bonus of up to 50% of his
base salary, to be approved by the Board of



                                      -45-

<PAGE>   46



Directors. The employment agreement with Mr. Benjamin provided that Mr. Benjamin
would work part time for the Company and his annual base salary would be
$60,000. In March 1998 Mr. Benjamin's employment agreement was amended and
provides that he will work full time for the Company and will receive an annual
base salary of $150,000 plus an annual performance related bonus of up to 50% of
his base salary, to be approved by the Board of Directors.

         Each of the employment agreements with Dr. Tritt, Mr. Ballard and Mr.
Benjamin provides for termination of the executive's employment by the Company
prior to the expiration of its term in the event of the executive's death or
disability or for cause. Each employment agreement also provides that either
party may terminate the employment agreement, effective at the end of the term
or any renewal term, upon 60 days notice of termination. The Company may
terminate each employment agreement without cause upon notice to the executive
and the executive may terminate the agreement upon a change of control of the
Company by providing at least 30 days notice of termination by the executive.
Upon termination in either such case, the executive will be entitled to receive
his base salary for a period of one year following the date of termination
(subject to a 100% offset for salary received from subsequent employment during
such one year period (subject to certain exclusions in the case of Dr. Tritt and
Mr. Benjamin)). In addition, each employment agreement provides that upon
termination of the employment agreement by the Company or its successor
following a change of control, the executive will be entitled to severance
compensation in the amount of two times his taxable compensation for the most
recently concluded fiscal year.

         In January 1997, the Company entered into an employment agreement with
Robert A. DiProva, effective March 26, 1997. The employment agreement provides
for an initial term of three years from the effective date, with automatic
renewals for successive one year terms unless terminated by either party and
provides for an annual base salary of $120,000 plus an annual performance
related bonus of up to 50% of his base salary, to be approved by the Board of
Directors. In addition to the terms contained in the agreements with Dr. Tritt,
Mr. Ballard and Mr. Benjamin, Mr. DiProva's employment agreement permits
termination by Mr. DiProva if his responsibilities are materially diminished or
if his base salary is reduced by 10% or more. If the agreement is terminated for
either of these reasons, Mr. DiProva will be entitled to receive his base salary
for a period of one year following the date of termination (subject to 100%
offset for salary received from subsequent employment during such one year
period).

         In February 1997, the Company entered into an employment agreement with
Lawrence P. Kraska, effective March 26, 1997. The employment agreement provides
for an initial term of three years from the effective date, with automatic
renewals for successive one year terms unless terminated by either party, and
provides for an annual base salary of $130,000 plus an annual performance
related bonus of up to 50% of his base salary, to be approved by the Board of
Directors. The employment agreement provides for termination of Mr. Kraska's
employment by the Company prior to the expiration of its term in the event of
Mr. Kraska's death or disability or for cause. The employment agreement also
provides that either party may terminate the employment agreement, effective at
the end of the term or any renewal term, upon 60 days notice of termination. The
Company may terminate the employment



                                      -46-

<PAGE>   47



agreement without cause and, upon termination, Mr. Kraska will be entitled to
receive his base salary for a period of one year following the date of
termination (subject to a 100% offset for salary received from subsequent
employment during such one year period). In addition, the employment agreement
provides that upon termination of the employment agreement by the Company or its
successor following a change of control, Mr. Kraska will be entitled to
severance compensation in the amount of two times his taxable compensation for
the most recently concluded fiscal year.

         Pursuant to each of the foregoing employment agreements, each of the
executives has agreed not to compete with the Company, solicit any of the
Company's customers or employees or disclose any confidential information or
trade secrets during the term of their employment agreement and for certain
periods of time following the termination of such employment agreement.

         LIMITATION ON LIABILITY; INDEMNIFICATION AGREEMENTS

         The General Corporation Law of the State of Delaware permits a
corporation through its Certificate of Incorporation to eliminate the personal
liability of its directors to the corporation or its stockholders for monetary
damages for breach of fiduciary duty of loyalty and care as a director, with
certain exceptions. The exceptions include a breach of the director's duty of
loyalty, acts or omissions not in good faith or which involve intentional
misconduct or knowing violation of law, improper declarations of dividends, and
transactions from which the directors derived an improper personal benefit. The
Company's Certificate of Incorporation exonerates its directors from monetary
liability to the fullest extent permitted by this statutory provision but does
not restrict the availability of non-monetary and other equitable relief. The
Company's By-Laws provide that the Company shall indemnify its directors and
officers to the fullest extent permitted by Delaware Law.

         The Company has entered into Indemnification Agreements with each of
its directors and executive officers. Each such Indemnification Agreement
provides that the Company will indemnify the indemnitee against expenses,
including reasonable attorney's fees, judgments, penalties, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
any civil or criminal action or administrative proceeding arising out of the
performance of his duties as an officer, director, employee or agent of the
Company. Such indemnification will be available if the acts of the indemnitee
were in good faith, if the indemnitee acted in a manner he reasonably believed
to be in or not opposed to the best interests of the Company and, with respect
to any criminal proceeding, the indemnitee had no reasonable cause to believe
his conduct was unlawful.

         COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         During the fiscal year ended December 31, 1997 Mr. Ballard, the
Company's Chief Executive Officer, served as a member of the Compensation
Committee.




                                      -47-

<PAGE>   48




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information regarding the
beneficial ownership of Common Stock by (i) each stockholder known by the
Company to own beneficially more than five percent of the outstanding Common
Stock, (ii) each director and Named Executive Officer of the Company and (iii)
all executive officers and directors of the Company as a group based upon the
number of outstanding shares of Common Stock as of March 25, 1998.



<TABLE>
<CAPTION>

                                                                     PERCENTAGE
           NAME AND ADDRESS                NUMBER OF SHARES           OF SHARES
                  OF                         BENEFICIALLY           BENEFICIALLY
          BENEFICIAL OWNER(1)                  OWNED(2)               OWNED(2)
          -------------------              ----------------         ------------

<S>                                        <C>                      <C>
Ramie A. Tritt, M.D.(3) ...........           1,776,441                 27.2%

Gerald R. Benjamin(4) .............             303,948                  4.7

Richard D. Ballard(5) .............              99,984                  1.5

Lawrence P. Kraska(6) .............              42,496                   *

Robert A. DiProva(7) ..............              67,490                  1.0

Edward R. Casas, M.D.(8) ..........               7,500                   *

Steven L. Posar, M.D.(8) ..........               7,500                   *

Sidney Kirschner(8) ...............               7,500                   *

All executive officers and                    2,312,859                 34.2%
  directors of the Company as a
  group (8 persons)(9)
</TABLE>

----------

*      Less than 1%
(1)    Unless otherwise indicated, the address is c/o Physicians' Specialty
       Corp., 1150 Lake Hearn Drive, Suite 640, Atlanta, Georgia 30342. Except
       as otherwise indicated, each of the parties listed above has sole voting
       and investment power over the shares owned.
(2)    In computing the number and percentage ownership of shares beneficially
       owned by a person, shares of Common Stock subject to options held by that
       person that are exercisable within 60 days are deemed outstanding. Such
       shares, however, are not deemed outstanding of Common Stock for purposes
       of computing the percentage ownership of stockholders other than such
       person.
(3)    Includes (i) 1,455,312 shares of Common Stock owned directly by Dr.
       Tritt, (ii) 12,500 shares of Common Stock issuable upon exercise of
       options that are exercisable within 60 days and (iii) 2,684 shares of
       Common Stock held by Dr. Tritt's mother as custodian for Dr. Tritt's
       children. Excludes 37,500 shares of Common Stock issuable upon exercise
       of options which are not exercisable within 60 days.
(4)    Includes (i) 293,948 shares of Common Stock owned by Bock, Benjamin & Co.
       Partners, L.P. and (ii) 10,000 shares of Common Stock issuable upon
       exercise of options that are exercisable within 60 days. Mr. Benjamin is
       a principal of Bock, Benjamin & Co. Partners, L.P. Excludes 30,000 shares
       of Common Stock issuable upon exercise of options which are not
       exercisable within 60 days.
(5)    Represents shares of Common Stock issuable upon exercise of options that
       are exercisable within 60 days. Excludes 119,984 shares of Common Stock
       issuable upon exercise of options which are not exercisable within 60
       days.
(6)    Represents shares of Common Stock issuable upon exercise of options that
       are exercisable within 60 days. Excludes 67,496 shares of Common Stock
       issuable upon exercise of options which are not exercisable within 60
       days.
(7)    Represents shares of Common Stock issuable upon exercise of options that
       are exercisable within 60 days. Excludes 82,490 shares of Common Stock
       issuable upon exercise of options which are not exercisable within 60
       days.
(8)    Represents shares of Common Stock issuable upon exercise of options that
       are exercisable within 60 days.



                                      -48-

<PAGE>   49



(9)    Includes 254,970 shares of Common Stock issuable upon exercise of options
       that are exercisable within 60 days. Excludes 337,470 shares of Common
       Stock issuable upon exercise of options which are not exercisable within
       60 days.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         FORMATION TRANSACTIONS

         In July 1996, Atlanta ENT, Dr. Tritt and Mr. Benjamin loaned $170,500,
$33,500 and $33,500, respectively, to the Company for legal, accounting and
other fees in connection with the formation of the Company, the IPO and the
Reorganization. The loans were evidenced by promissory notes bearing interest at
a prime rate as announced by NationsBank, and payable upon the closing of the
IPO. In February 1997, the ENT Networks and Bock Benjamin, loaned the Company
approximately $168,108 and $1,892, respectively, evidenced by promissory notes
bearing interest at the NationsBank prime rate and payable upon the closing of
the IPO. All of these loans were repaid, with interest, in March 1997 with a
portion of the net proceeds of the IPO.

         In August 1996, the Company, through PSC Management, acquired certain
assets (primarily computer hardware) of and entered into a management agreement
with the ENT Networks and began utilizing the Capitated Network System. In
connection with the acquisition of these assets, the Company executed a
promissory note payable to the ENT Networks in the principal amount of $20,000,
with interest at a prime rate as announced by NationsBank. The agreement
terminated in March 1997 upon consummation of the Reorganization and the note
was repaid in March 1997 with a portion of the net proceeds of the IPO, which
amount was distributed to Dr. Tritt.

         Each of Dr. Tritt, Gerald R. Benjamin, Bock Benjamin, Atlanta ENT and
the ENT Networks may be deemed to be a "promoter" or "founder" of the Company,
as defined under the Securities Act.

         THE REORGANIZATION

         In March 1997, upon the consummation of the Company's IPO, the Company
acquired substantially all of the assets of Atlanta ENT and acquired all of the
outstanding shares of common stock of the ENT Networks from Dr. Tritt. The
aggregate purchase price paid to Atlanta ENT and Dr. Tritt in connection with
the Reorganization was approximately $22.1 million, of which approximately $14.4
million was paid to Atlanta ENT and approximately $7.7 million was paid to Dr.
Tritt, as owner of the ENT Networks. The entire purchase price was paid in
shares of Common Stock. Accordingly, Dr. Tritt received 968,750 shares of Common
Stock and Atlanta ENT received 1,798,750 shares of Common Stock (of which
486,562 were distributed to Dr. Tritt, based on his percentage ownership of
Atlanta ENT).

         The Company used a portion of the net proceeds of the IPO to repay
outstanding indebtedness, including accrued interest, of Atlanta ENT in the
amount of approximately $1.1 million. In connection with the repayment of this
indebtedness a guarantee made by Dr. Tritt for 45% of such indebtedness was
cancelled.



                                      -49-

<PAGE>   50



         The purchase prices for the ENT Networks and Atlanta ENT were
negotiated primarily between Mr. Benjamin, representing the Company, and Dr.
Tritt representing the ENT Networks and Atlanta ENT. While the Company believes
that such purchase prices reflected fair market value, such purchase prices may
be deemed not to have resulted from arm's length negotiation because of Dr.
Tritt's affiliation with the Company. However, the Company believes such
purchase prices represented multiples of the revenues, operating income and cash
flow from operations of the ENT Networks and Atlanta ENT that were comparable
with multiples paid for similar entities with similar size and geographic
coverage.

         LEASES

         The Company leases one clinical location from Dr. Tritt. The lease is
for approximately 23,200 square feet and provides for monthly rental payments of
approximately $47,000, subject to annual increases. The Company also leases one
clinical location from Eastside Physicians Center, L.P., a Georgia limited
partnership, of which Dr. Tritt is a limited partner. The lease is for
approximately 3,500 square feet and provides for monthly rental payments of
approximately $5,750, subject to annual increases.

         EMPLOYMENT AGREEMENTS

         The Company has entered into employment agreements with each of its
executive officers and has granted options to certain of its executive officers.
See "Executive Compensation -- Employment Agreements."

         ADVISORY AND CONSULTING AGREEMENTS

         In May 1997, the Company entered into an agreement with Premier
HealthCare, an affiliate of Gerald R. Benjamin, the Company's Vice Chairman and
Secretary, which agreement was amended in March 1998, pursuant to which Premier
HealthCare will assist the Company as a financial advisor in connection with
acquisitions and similar transactions. The agreement provides that in the event
that the Company completes any transaction in which Premier HealthCare performed
advisory services, Premier HealthCare will receive a fee equal to (i) its
out-of-pocket expenses and (ii) 5% of the initial $1 million of Transaction
Value (as defined below), 4% of the next $1 million of Transaction Value, 3% of
the next $1 million of Transaction Value, 2% of the next $1 million of
Transaction Value and 1% of the amount of Transaction Value in excess of $4
million. Transaction Value is defined under the agreement as the product of (i)
the pro-forma annual management fee to be derived by the Company in connection
with the proposed transaction and (ii) 7.5. Pursuant to the agreement, the fee
to be paid to Premier HealthCare for a particular transaction will be reduced by
any finder's fee payable by the Company to a third party, which has been
approved by Premier HealthCare, and the aggregate fee to be paid to Premier
HealthCare in any given year will be reduced by the product of (i) $12,500 and
(ii) the number of months in any year in which Mr. Benjamin is employed by the
Company (the "Reduction Amount"). During 1997, based on Mr. Benjamin's 1997
salary, the Reduction Amount was approximately $45,000. Commencing March 1998,
the Reduction Amount was increased to $150,000 based upon an increase in Mr.
Benjamin's annual salary. For example, provided Mr. Benjamin is employed by the
Company at his current salary, the aggregate fee


                                      -50-

<PAGE>   51



to be paid to Premier HealthCare in any given year will be reduced by $150,000.
The agreement may be terminated by either party upon 90 days written notice to
the other.

         During the year ended December 31, 1997, the Company paid an aggregate
of approximately $647,000 to Premier HealthCare, a division of Bock, Benjamin &
Co., an entity in which Mr. Benjamin has a 25% ownership interest, consisting of
(i) $250,000 for consulting services in connection with the formation of the
Company and the Reorganization and (ii) approximately $397,000 (net of $45,000,
the amount of salary paid to Mr. Benjamin by the Company during 1997) for
consulting services in connection with the acquisition of assets or equity of
the Additional Practices. In addition, in 1998, the Company paid approximately
$32,000 (net of salary paid to Mr. Benjamin by the Company) to Premier
HealthCare in connection with the acquisition of assets of Murata in February
1998. In the event the Probable Practice Acquisitions are consummated on the
terms contemplated, the Company will pay approximately $410,000 (net of salary
paid to Mr. Benjamin by the Company) to Premier HealthCare for consulting
services.

         OMSA TRANSACTION

         In connection with the OMSA transaction, the physician shareholders of
OMSA granted to Dr. Tritt (or his designee or assignee) the option to acquire
all of the ownership interest of such physician shareholders in OMSA in the
event that at any time there are less than two shareholders who continue as full
time physician-employees of OMSA and those shareholders who remain do not, in
Dr. Tritt's or management of the Company's sole discretion, control the
operations of OMSA in a manner consistent with the requirements of the
management services agreement between OMSA and the Company. In order to exercise
the option, Dr. Tritt or his designee or assignee must at the time of exercise
be licensed to practice medicine in the State of Illinois.

         The Company believes that all of the transactions set forth above were
made on terms no less favorable to the Company than could have been obtained
from unaffiliated third parties. All future transactions, including loans,
between the Company and its officers, directors and principal stockholders and
their affiliates will be subject to approval by a majority of the Board of
Directors, including a majority of the independent directors of the Board of
Directors.

         RISK FACTORS

         LIMITED OPERATING HISTORY; LIMITED HISTORY OF COMBINED OPERATIONS. The
Company was formed in July 1996 and prior to its affiliation with the Initial
Practices in March 1997, the Company had no history of operations or earnings.
In addition, the Company recently completed the acquisition of assets of the
Additional Practices. Prior to the acquisition by the Company of the Practices,
the Practices operated as separate independent entities, and accordingly, the
Company has limited experience in integrating and managing multiple or
multi-state specialty physician practices. The Company also has limited
experience in integrating and managing physician practices outside the Atlanta
area. Therefore, there can be no assurance that the Company will be able to
successfully manage physician practices outside of the metropolitan Atlanta
area, successfully integrate the operations of the Practices, the Probable
Practice Acquisitions, if completed, or future affiliating practices and
implement Company-wide systems and procedures necessary to successfully manage
the



                                      -51-

<PAGE>   52



combined business on a profitable basis. The Company's management group has been
assembled only recently, and there can be no assurance that the management group
will be able to successfully manage the combined entity. The inability of the
Company to successfully integrate the Practices, and, if completed, the Probable
Practice Acquisitions or any future affiliating practices would have a material
adverse effect on the Company's business, financial condition and results of
operations.

         RISKS RELATING TO ACQUISITIONS AND MANAGING GROWTH. An integral part of
the Company's business strategy is growth through acquisitions. The Company's
acquisition strategy presents risks that could materially adversely affect the
Company's business and financial performance, including the diversion of
management's attention, the difficulties associated with the assimilation of the
operations and personnel of affiliated practices, the contingent and latent
risks associated with the past operations of and other unanticipated problems
arising in affiliated practices and increased competition for acquisition
opportunities. As the Company expands through acquisitions, the Company will be
required to hire and retain additional management and administrative personnel
and to develop and expand operational systems to support its growth. This growth
will continue to place significant demands on the Company's management,
technical, financial and other resources. Furthermore, as the Company acquires
additional physician practice assets, the Company will incur significant
additional charges for depreciation and amortization and, to the extent debt
financing is used, for interest expense which would have the effect of reducing
the Company's earnings and adversely affecting cash flow. The Company intends to
continue to issue equity securities in connection with future acquisitions and
may seek additional equity financings, which would result in the dilution of
existing equity positions. There can be no assurance that the Company will be
able to acquire the assets or equity of or profitably provide management
services to any specialty physician practices that may be acquired in the
future, including the Probable Practice Acquisitions, or effectively implement
its acquisition strategy or that such strategy will be successful. Furthermore,
there can be no assurance that the Company will be able to affiliate with
additional specialty physician practices on terms favorable to the Company, that
the operations of any such practices can be successfully integrated into the
Company's business, that any anticipated benefits of the affiliations will be
realized, or that there will not be substantial unanticipated costs associated
with the acquisition. The failure to manage growth effectively could have a
material adverse effect on the Company's business, financial condition and
results of operations and would negatively affect the Company's ability to
execute its acquisition strategy. The Company's ability to consummate future
acquisitions depends to a significant extent on the efforts of Gerald R.
Benjamin, the Company's Vice Chairman and Secretary. See "Certain Relationships
and Related Transactions" and "--Dependence on Key Personnel; Need for
Additional Management."

         RISKS RELATING TO THE PROBABLE PRACTICE ACQUISITIONS. The Company is
evaluating and is in various stages of discussions in connection with the
potential acquisition of assets or equity of several ENT physician practices and
Related Specialty practices, including the Probable Practice Acquisitions.
However, the Company has no agreements or arrangements with respect to the terms
of any particular acquisitions, except for the non-binding letters of intent for
the Probable Practice Acquisitions. The letters of intent are mere statements of
intention and each of the Probable Practice Acquisitions is subject to various
conditions to closing, including the negotiation and execution of an acquisition
agreement related to such potential acquisition. Accordingly, there can be no
assurance that the Company will be able to consummate any of the Probable
Practice Acquisitions on the terms



                                      -52-

<PAGE>   53



contemplated by the letters of intent or at all. The proposed PDI acquisition,
if consummated, with clinical offices located in Southern New York and Northern
New Jersey, will be the Company's largest acquisition to date, and there can be
no assurance that the Company will be able to successfully manage PDI or
successfully integrate the operations of PDI with the Company's operations. In
addition, this acquisition will substantially increase the Company's outstanding
indebtedness. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "-- Limited Operating History; Limited History of
Combined Operations" and "Potential Substantial Leverage; Risks Relating to
Credit Facility."

         DEPENDENCE ON AFFILIATED PHYSICIANS. All of the Company's revenue is
derived (i) under management services agreements with affiliated practices, (ii)
from patient service revenue generated by physicians employed by the Company,
and (iii) under capitated managed care contracts held by the Company. Revenue
derived by the Company under management services agreements, other than
management services agreements the Company may enter into with physician
practices located in certain states, including New York, which require the
Company's management fee to be fixed, depends on the fees and revenue generated
by affiliated physicians. Revenue derived by the Company under the capitated
managed care contracts depends on the continued participation of affiliated
physicians providing medical services to enrollees of the managed care companies
and, to a lesser extent, independent physicians contracting with the Company to
participate in provider networks which are developed by the Company. Although
affiliated physicians are expected to enter into employment agreements with
their respective practices, there can be no assurance as to the continued
services of any particular physician. In particular, 32 of 48 of the affiliated
physicians are employed by Atlanta ENT and generate a substantial portion of the
Company's revenue. Associated physicians can typically terminate their
agreements to provide medical services under managed care contracts by providing
notice of such termination to the payor. Termination of these agreements by
associated physicians may result in termination by the payor of a managed care
contract between the Company and the payor. Any material loss of revenue by
affiliated physicians, whether as a result of the loss of network physicians or
the termination of managed care contracts resulting from the loss of network
physicians or otherwise, could have a material adverse effect on the Company's
business, financial condition and operating results. See "Business -- Company
Operations."

         RISKS ASSOCIATED WITH CAPITATED ARRANGEMENTS INCLUDING RISK OF
OVER-UTILIZATION BY MANAGED CARE ENROLLEES, RISK OF REDUCTION OF CAPITATED RATES
AND REGULATORY RISKS. During the year ended December 31, 1997, approximately 77%
of the net revenue of the Company was derived from payments made on a
fee-for-service basis by patients and third party payors (including government
programs) and approximately 23% of the net revenue of the Company was derived
from capitated arrangements. Under capitated contracts, the health care provider
typically accepts a pre-determined amount for professional services per patient
per month from the payor in exchange for providing all covered professional
services to the enrollees under the agreement. Such contracts pass much of the
financial risk of providing care, such as over-utilization, from the payor to
the provider. The Company compensates associated physicians on a discounted
fee-for-service basis for providing ENT medical and surgical professional
services to enrollees of the managed care company. Because the Company incurs
costs based on the frequency and extent of professional services provided by
such physicians, but only receives a fixed fee for agreeing to provide such
services, to the extent that the



                                      -53-

<PAGE>   54



enrollees covered by such managed care contracts require more frequent or
extensive care than is anticipated, the Company's operating margins may be
reduced and, in certain cases, the revenues derived from such contracts may be
insufficient to cover the costs of the services provided. In either event, the
Company's business, financial condition and results of operations may be
materially adversely affected. As an increasing percentage of patients enroll in
managed care arrangements, the Company's future success will depend in part upon
its ability to negotiate, on behalf of associated physicians, contracts with
managed care payors on terms favorable to the Company and upon its effective
management of health care costs through various methods, including competitive
pricing and utilization management and review for purchased services. The
proliferation of capitated contracts in markets served by the Company could
result in decreased predictability of operating margins. There can be no
assurance that the Company will be able to negotiate, on behalf of associated
physicians, satisfactory arrangements on a capitated basis or that such
arrangements will be profitable to the Company in the future. In addition, in
certain jurisdictions, capitated agreements in which the provider bears the risk
are regulated under insurance laws. The degree to which these capitated
arrangements are regulated by insurance laws varies on a state by state basis,
and as a result, the Company may be limited in Alabama, Florida, Georgia and
Illinois and other states in which it may seek to enter into or arrange
capitated agreements for its associated physicians when those capitated
contracts involve the assumption of risk. See "-- Dependence on Contracts with
Managed Care Organizations."

          DEPENDENCE ON CONTRACTS WITH MANAGED CARE ORGANIZATIONS. The Company's
ability to expand is dependent in part on increasing the number of managed care
enrollees served by associated physicians, primarily through negotiating
additional and renewing existing contracts with managed care organizations and
contracting on a favorable basis with additional associated physicians to
provide medical professional services to such enrollees. There can be no
assurance that the Company will be successful in contracting with sufficient
numbers of associated physicians to meet the requirements of managed care
organizations or in negotiating additional or renewing existing contracts with
managed care organizations on terms favorable to the Company and associated
physicians. The Company's capitated managed care contracts together accounted
for approximately 23% of net revenue of the Company for the year ended December
31, 1997. Aetna modified its delivery systemof physician specialty services in
the Atlanta market and terminated its capitated managed care contracts with each
physician specialty group, including the Company, effective June 30, 1997. The
Company's affiliated physicians at Atlanta ENT and Allatoona ENT & Facial
Plastic Surgery, P.C. ("Allatoona ENT") continue to provide services to Aetna
under new physician provider agreements, which reimburse physicians on a
modified fee-for-service basis. The Company's capitated managed care agreements
with United HealthCare and Cigna are generally subject to 90 to 120 day
cancellation by either party, and in the case of Cigna is subject to annual
renegotiation of rates, covered benefits and other terms and conditions. The
Company's capitated managed care agreement with FPA provides for a renegotiation
of the capitation fees 15 months into the initial term of the agreement. In the
event that parties cannot renegotiate the capitation fees within 60 days, the
agreement may be terminated by either party. The agreement also provides for
annual renegotiation of the capitation fees following the initial term, which
expires in August 2000, and may be terminated at any time by FPA for cause.
There can be no assurance that the Company will be able to renew any of these
managed care agreements or, if renewed, that they will contain terms favorable
to the Company and associated physicians. The loss of any of these contracts or



                                      -54-

<PAGE>   55



significant reductions in capitated reimbursement rates under these contracts
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Managed Care Contracts,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "-- Risks Associated with Capitated Arrangements Including Risk
of Over-Utilization by Managed Care Enrollees, Risk of Reduction of Capitated
Rates and Regulatory Risks."

         POTENTIAL REDUCTIONS IN REIMBURSEMENT BY THIRD PARTY PAYORS. The health
care industry is undergoing significant change as third party payors attempt to
control the cost, utilization and delivery of health care services.
Substantially all of the revenue of the Company and affiliated practices has
been, and are expected to continue to be, derived from managed care companies,
commercial insurers, Medicare and other third party payors. Both government and
private payment sources have instituted cost containment measures designed to
limit payments made to health care providers by reducing reimbursement rates,
limiting services covered, increasing utilization review of services,
negotiating prospective or discounted contract pricing, adopting capitation
strategies and seeking competitive bids. There can be no assurance that such
measures will not adversely affect the amounts or types of services that may be
reimbursable in the future, or the future reimbursement (including reductions in
capitated rates) for any service offered by associated physicians, either of
which could have a material adverse effect on the Company's business, financial
condition or results of operations. The Company believes that these trends will
continue to result in a reduction of per patient revenue at affiliated
practices. Furthermore, government reimbursement programs are subject to
statutory and regulatory changes, retroactive rate adjustments, administrative
rulings and government restrictions, all of which could materially decrease the
range of services covered by such programs or the reimbursement rates paid for
the ENT medical and surgical services provided by associated physicians. Such
future reductions or changes would have a material adverse effect on the
Company's business, financial condition or operating results. Reimbursement
rates vary depending on the type of third party payors. Changes in the
composition of third party payors from higher reimbursement rate payors to lower
reimbursement rate payors could have an adverse effect on the Company's
operating results. See "-- Dependence on Contracts with Managed Care
Organizations."

         POTENTIAL SUBSTANTIAL LEVERAGE; RISKS RELATING TO CREDIT FACILITY.
Although the Company intends to use its existing cash resources to fund a
portion of the purchase price of the assets or equity of certain ENT and Related
Specialty practices, including the Probable Practice Acquisitions and other
acquisitions which it is currently evaluating, it will require significant
additional funds and will incur indebtedness for these and future acquisitions
and integration and management of affiliated practices. In connection with the
acquisition of assets or equity of the Additional Practices, the Company (i)
issued long-term promissory notes in the aggregate principal amount of
approximately $912,000, which promissory notes have varying maturity dates and
interest rates and are convertible into shares of Common Stock at the option of
the holders, (ii) issued various contingent promissory notes in the aggregate
principal amount of approximately $3.0 million which are payable only upon the
holders of such notes attaining certain earnings or other performance
thresholds, substantically all of which notes are payable by the Company, at the
Company's option, in shares of Common Stock, and (iii) issued and agreed to
issue an aggregate of approximately 913,000 shares of Common Stock. In the event
the proposed PDI acquisition is consummated on the terms contemplated, the
Company will incur additional indebtedness, including



                                      -55-

<PAGE>   56



the issuance of a subordinated promissory note and borrowings under the Credit
Facility, aggregating approximately $20.4 million. Accordingly, the Company is
subject to all of the risks associated with substantial indebtedness, including
the risk that the Company's cash flow may not be sufficient to make required
payments of principal and interest on the indebtedness. The Company intends to
continue to issue its securities in connection with future acquisitions and may
seek additional equity financings, which could result in the dilution of
existing equity positions. See "Business -- Acquisition of ENT Practices."

         The Company may also incur additional indebtedness to fund future
acquisitions, including borrowings under the Company's $20.0 million Credit
Facility with NationsBank, N.A. Borrowings are available under the Credit
Facility to provide financing for the acquisition of assets or equity of
physician practices and for working capital and will be governed by, among other
factors, the Company's EBITDA. There can be no assurance that amounts available
under the Credit Facility will be sufficient to fund future acquisitions or, if
such amounts are not sufficient, that the Company will be able to obtain
additional financing on terms acceptable to the Company or at all. An inability
to obtain such financing on favorable terms could limit the Company's growth. As
the Company acquires additional physician practice assets, the Company may incur
significant charges for depreciation and amortization and, to the extent
financed through borrowing, interest expense which could adversely affect the
Company's future results of operations and may result in net losses. Any
borrowings of the Company under the Credit Facility will bear interest at a
variable rate. Accordingly, increases in interest rates would increase the
Company's interest expense and would adversely affect the Company's cash flow
and results of operations. The Company is required to maintain certain financial
ratios and is restricted from engaging in certain activities under the Credit
Facility. The Company has granted to the bank a security interest in the capital
stock of its subsidiaries and all accounts receivable of the Company, including
the accounts receivable of affiliated practices assigned to the Company under
the management services agreements. Therefore, in the event of a default under
the credit agreement or a bankruptcy, liquidation or reorganization of the
Company, such stock and assets would be available to the bank to satisfy the
Company's obligations to the bank before any payment could be made to the
Company's stockholders and, in such event, the Company's stockholders could lose
all or a substantial portion of their investment in the Company The Company's
ability to generate sufficient cash flow to meet obligations incurred under the
Credit Facility will depend on the Company's future operations, which will in
turn, be subject to prevailing industry, economic, regulatory, and other
factors, many of which are beyond the Company's control. As of December 31,
1997, the Company had no borrowings under the Credit Facility. However, in the
event the PDI acquisition is consummated on the terms contemplated, the Company
expects to borrow approximately $4.2 million under the Credit Facility to repay
debt of PDI, and if additional funds are not available to pay amounts under the
subordinated promissory note issuable to the sellers due on December 31, 1998,
the Company expects to borrow additional amounts under the Credit Facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

         INFLUENCE OF RAMIE A. TRITT, M.D.; POTENTIAL ANTI-TAKEOVER PROVISIONS.
Dr. Tritt, the Chairman of the Board and President of the Company, beneficially
owns approximately 27.1% of the outstanding Common Stock. The physicians at
Atlanta ENT, an affiliated practice, together with Dr.


                                      -56-

<PAGE>   57



Tritt, the President of Atlanta ENT, in the aggregate beneficially own
approximately 55.6% of the outstanding Common Stock. The officers and directors
of the Company in the aggregate beneficially own approximately 31.6% of the
outstanding shares of Common Stock. As a result, Dr. Tritt may be able to
influence significantly the election of directors and the outcome of corporate
transactions or other matters submitted for stockholder approval. Such influence
by Dr. Tritt could preclude any unsolicited acquisition of the Company and
consequently adversely affect the market price of the Common Stock. In addition,
the Company's Board of Directors is authorized to issue from time to time,
without stockholder approval, shares of preferred stock with such terms and
conditions as the Board of Directors may determine in its sole discretion. The
Company is subject to a Delaware statute regulating business combinations. Any
of these provisions could discourage, hinder or preclude an unsolicited
acquisition of the Company and could make it less likely that stockholders
receive a premium for their shares as a result of any such attempt, which may
adversely affect the market price of the Common Stock. Upon the occurrence of
certain events, including the merger of the Company and a sale of all or
substantially all of the assets of the Company, all outstanding options under
the Company's 1996 Stock Option Plan will become immediately exercisable. The
employment agreements with the Company's executive officers allow for
termination by the executives and the payment of severance compensation to the
executives upon a change of control of the Company. See "Security Ownership of
Certain Beneficial Owners and Management."

         COMPETITION. The physician practice management industry is highly
competitive. The restructuring of the health care system is leading to rapid
consolidation of the existing highly-fragmented health care delivery system into
larger and more organized groups and networks of health care providers. The
Company expects competition to increase as a result of this consolidation and
ongoing cost containment pressures, among other factors. The Company competes
with physician practice management companies, for-profit and nonprofit
hospitals, managed care companies, physician practices and other competitors
seeking to affiliate with physicians or provide management services to
physicians. Many of these competitors are significantly larger, provide a wider
variety of services, have greater experience in providing health care management
services, have longer established relationships with customers for these
services and have access to substantially greater financial resources than the
Company. There can be no assurance the Company will be able to affiliate with a
sufficient number of competent physicians and other health care professionals to
expand its business.

         Physicians are facing the challenge of providing quality patient care
while experiencing rising costs, strong competition for patients and a general
reduction of reimbursement rates by both private and government payors. The
Company believes that competition for patients is dependent upon, among other
things, the geographic coverage of affiliated practices, the reputation and
referral patterns of affiliated physicians and the breadth of ENT and Related
Specialty medical and surgical services provided by physicians practicing at
affiliated practices. Therefore, the success of the Company is dependent upon
the ability of the Company or affiliated practices to recruit, train and retain
qualified health care professionals in new and existing markets. The Company
faces competition for these personnel from other health care providers, research
and academic institutions, government entities and other organizations. There
can be no assurance that sufficient numbers of qualified health care
professionals can be hired and retained. The inability to hire and retain such



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<PAGE>   58



health care professionals could have a material adverse effect on the Company's
business, financial condition and results of operations.

         Concern over the rising cost of health care has led to the emergence
and increased prominence of managed care and a resulting increase in competition
for managed care contracts. The Company's ability to compete successfully for
exclusive managed care contracts may depend upon the Company's ability to manage
utilization under such contracts, to increase the number of associated
physicians and other health care professionals included in its provider
networks. The Company competes with physician practice management companies,
multi-specialty physician practices and certain other entities for exclusive
managed care contracts and there can be no assurance that managed care companies
will seek to contract with an entity, such as the Company, that is affiliated
with physicians providing services in a single specialty rather than an entity
that is affiliated with physicians providing multi-specialty services. The
inability of the Company to enter into such arrangements in the future on behalf
of affiliated practices could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business --
Competition."

         ANTITRUST RISKS. The Company and its affiliated practices are subject
to federal and state antitrust statutes that prohibit conduct such as price
fixing, market allocation and other anti-competitive activities by groups of
competitors. The federal and state antitrust enforcement agencies have brought
civil and criminal enforcement actions against the joint activities of physician
organizations that violate antitrust laws. Anti-competitive activity may also be
subject to private lawsuits by those injured by the activity. Collaboration
regarding the pricing of services, market allocation and certain other types of
joint action, however, may be permissible in the context of an integrated joint
venture if those activities are ancillary to otherwise legitimate purposes of
the joint venture. The federal antitrust agencies, the Federal Trade Commission
and the United States Department of Justice, have established "antitrust safety
zones" for physician networks that meet certain criteria. The antitrust safety
zones are for networks in which providers share substantial financial risk
(e.g., capitation or substantial withholding) and in which the providers
constitute less than specified percentages (20% for exclusive networks and 30%
for non-exclusive networks) of total providers in a specialty or subspecialty in
the market. Conduct outside the safety zones is not necessarily unlawful, but
antitrust regulatory authorities will give greater scrutiny to the potential
impact on overall competition. State antitrust agencies may or may not rely on
antitrust analysis similar to that of the federal agencies. A determination that
the Company's operations violate federal or state antitrust laws could have a
material adverse effect on the Company's business, financial condition and
operating results. In addition, an antitrust claim asserted by Federal or state
antitrust agencies or a private party against the Company could be costly to
defend, could consume management resources and could adversely affect the
Company's business regardless of the merit or eventual outcome of such claim.

         GOVERNMENT REGULATION. The health care industry is highly regulated,
and there can be no assurance that the regulatory environment in which the
Company operates will not change significantly in the future. In general,
regulation of health care companies is increasing. Every state imposes licensing
requirements on individual physicians and on facilities and services operated by
physicians. Many states require regulatory approval, including certificates of
need, before establishing certain types of health care facilities, offering
certain services or making expenditures in excess of



                                      -58-

<PAGE>   59



statutory thresholds for health care equipment, facilities or programs. To date,
neither the Company nor its affiliated practices have been required to obtain
certificates of need for their activities. Federal and state laws also regulate
HMOs and other managed care organizations. In connection with the expansion of
existing operations and the entry into new markets and managed care
arrangements, the Company and its affiliated practices may become subject to
compliance with additional regulation.

         The Company and its affiliated practices are also subject to federal,
state and local laws addressing issues such as occupational health and safety,
employment, medical leave, insurance regulations, civil rights and
discrimination, and medical waste and other environmental issues. At an
increasing rate, federal, state and local governments are expanding the
regulatory requirements on businesses, including medical practices. The
imposition of these regulatory requirements may have the effect of increasing
operating costs and reducing the profitability of the Company's operations.

         Various state and federal laws regulate the relationships between
providers of health care services, physicians and other clinicians. These laws,
among others, include the federal anti-kickback statute and the Stark Law. The
anti-kickback statute prohibits the offer, payment, solicitation or receipt of
any direct or indirect remuneration in return for the referral of patients for
items or services, or for the ordering or arranging for the furnishing of items
or services for which payment may be made under Medicare, Medicaid or
federally-funded health care programs. The Stark Law prohibits physicians'
referrals for certain designated health services to entities with which they
have financial relationships. Violations of these laws may result in substantial
civil or criminal penalties, denial of payment, and/or exclusion from
participation in the Medicare, Medicaid and federally-funded health care
programs. To the extent that the Company is deemed to be a separate provider of
medical services under its management services agreements and to receive
referrals from physicians, the financial arrangements could be subject to
scrutiny under the Stark Law or anti-kickback statute. One of the Company's
wholly owned subsidiaries does employ physicians, and as such, it does maintain
a provider number. In addition, under separate statutes, submission of claims
for payment that are "not provided as claimed" are false, fictitious or
fraudulent or misrepresent a material fact may lead to substantial civil or
criminal penalties to the Company or one or more of its affiliated practices. It
may also result in the exclusion from participation in the Medicare, Medicaid
and federally-funded programs which could result in a significant loss of
reimbursement. The Company's arrangements have not been the subject of Federal
judicial or regulatory interpretation. A determination of liability under any
such laws could have a material adverse effect on the Company's business,
financial condition and results of operations.

         Several states, including Alabama, Florida, Georgia and Illinois, have
adopted laws similar to the Stark Law and federal anti-kickback law that cover
patients in private programs as well as government programs. The laws of many
states also prohibit physicians from splitting fees with non-physicians. In
Illinois, it is unlawful for a physician to divide with anyone other than
physicians with whom the physician practices in a legally recognized entity or
organization any fee or other form of compensation for professional services not
personally rendered. In Georgia, physicians are prohibited from dividing fees
with any person or entity for referring a patient and from referring patients
for certain designated health care services to any entity with which the
physician has a financial relationship. In Florida, the Florida Board of
Medicine recently issued a declaratory statement, which has been stayed pending
its appeal, indicating that certain types of arrangements



                                      -59-

<PAGE>   60



between physicians and physician practice management companies may violate fee
splitting and patient referral laws. If upheld such declaratory statement could
be construed as prohibiting physician management agreements pursuant to which
the managed company is paid based on a percentage of revenues generated by the
managed care practice and certain marketing activities performed by management
companies. The laws of some states, including certain states in which the
Company operates or may operate, prohibit non-physician entities from practicing
medicine or from exercising control over the professional judgments or decisions
of physicians concerning the treatment and diagnosis of patients. In Illinois,
there is case law which prohibits corporations (other than specifically licensed
Medicaid corporations or hospital corporations) from providing professional
medical services or employing physicians. In Georgia, there is case law which
could also be interpreted as prohibiting a corporation from employing
physicians. Florida law does not prohibit the corporate practice of medicine
although it does prohibit the corporate practice of other medical services such
as dentistry and optometry. In Alabama, recent interpretations by state
authorities have indicated that a corporation may employ physicians as long as
the physicians exercise their independent professional judgment in rendering
medical decisions concerning the treatment and diagnosis of patients. These laws
and their interpretation vary from state to state and are enforced by the courts
and by regulatory authorities with material discretion. A determination of
liability under any such laws could have a material adverse effect on the
Company.

         The Company's business operations have not been the subject of judicial
or regulatory interpretation. There can be no assurance that upon review, the
Company's business and its contractual arrangements with affiliated practices
and any practices with which it has arrangements in the future will not be
successfully challenged as constituting the unlicensed practice of medicine or
unlawful splitting of fees by physicians with non-physicians. There can be no
assurance that review of the Company's business and its arrangements with
affiliates by courts or regulatory authorities will not result in determinations
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
operations or their expansion. Additionally, any claim or proceeding asserted by
state or federal agencies or a private person against the Company or its
affiliated practices could be costly to defend, could consume management
resources and could adversely affect the Company's reputation and business
regardless of the merit or eventual outcome of such claim. In addition, the
regulatory requirements of certain jurisdictions may limit the Company's
expansion into, or ability to continue operations within, such jurisdictions if
the Company is unable to modify its operational structure to conform with such
regulatory requirements. Any limitation on the Company's ability to expand could
have a material adverse effect on the Company's operations. See "Business --
Government Regulation."

         HEALTH CARE REFORM. Political, economic and regulatory influences are
continuously subjecting the health care industry in the United States to
fundamental change. On August 5, 1997, President Clinton signed the Balanced
Budget Act of 1997 (the "Balanced Budget Act") which contemplates savings of
$115 billion in Medicare spending and $13 billion in Medicaid spending over the
five-year period from 1998 to 2002. The savings will result primarily from
reductions in reimbursements to providers due to several factors, including but
not limited to, alterations in the methodology for calculating physician fee
schedule payments, application of a budget neutrality adjustment to prevent
physician fees from increasing above a certain aggregate amount, and expansion
of options for Medicare delivery including provider-sponsored organizations,
HMOs, preferred provider


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<PAGE>   61



organizations and private fee-for-service plans. The Balanced Budget Act also
establishes more stringent sanctions for convictions of health care related
crimes including permanent exclusion from participation in the Medicare Program
after conviction of three health care related crimes and imposition of civil
monetary penalties for violations of the federal anti-kickback statute. Due to
the recent enactment of this health care reform and uncertain interpretation of
these reform measures by regulatory authorities, it is difficult to determine
the impact that this reform will have upon the Company and its affiliated
physicians, and there can be no assurances that these reform measures will not
have a material adverse effect on the Company's business, financial condition or
operating results. In addition to federal health care reform, some states in
which the Company operates or may operate in the future are also considering
various health care reform proposals. The Company anticipates that both federal
and state governments will continue to review and assess alternative health care
delivery systems and payment methodologies and that additional reforms will
likely occur in the future. Due to uncertainties regarding the additional
reforms and their enactment and implementation, the Company cannot predict
which, if any, reform proposals will be adopted, when they may be adopted or
what impact they may have on the Company, and there can be no assurance that the
adoption of reform proposals will not have a material adverse effect on the
Company's business, financial condition or operating results. In addition, the
actual announcement by competitors and third party payors of their strategies to
respond to such initiatives or reforms, could produce volatility in the trading
and market price of the Common Stock of the Company. See "Business - Government
Regulation".

         DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL MANAGEMENT. The
Company's success depends to a significant extent on the ability of its
executive officers and key personnel, including Ramie A. Tritt, M.D., the
Chairman of the Board and President of the Company and a principal stockholder
of the Company (and a principal stockholder of an affiliated practice), Richard
D. Ballard, the Company's Chief Executive Officer, and Lawrence P. Kraska, the
Company's Vice President-Operations. In addition, the Company's ability to
consummate future acquisitions depends to a significant extent on the efforts of
Gerald R. Benjamin, the Company's Vice Chairman and Secretary. The loss of Dr.
Tritt, Mr. Ballard, Mr. Benjamin or Mr. Kraska could have a material adverse
effect on the development and likelihood of success of the Company's business.
The Company believes that its future success will also depend in part upon its
ability to attract and retain additional management personnel. The Company
anticipates recruiting additional executive officers and management personnel in
the near future. Competition for such personnel is intense and the Company will
compete for qualified personnel with numerous other employers, some of whom have
greater financial and other resources than the Company. There can be no
assurance that the Company will be successful in attracting or retaining such
personnel. See "Directors and Executive Officers of the Registrant."

         POTENTIAL CONFLICTS OF INTEREST. There have been and are currently
agreements by and among the Company, certain affiliated practices, each of their
respective officers, directors and affiliates, and entities controlled by such
officers, directors and affiliates. In addition, Dr. Tritt is a physician at an
affiliated practice and will be subject to competing demands on his time. Any
future transactions and agreements between the Company and such individuals and
entities are subject to approval by a majority of the Board of Directors,
including a majority of the independent directors. See "Executive Compensation
-- Employment Agreements" and "Certain Relationships and Related Transactions."


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<PAGE>   62



         POTENTIAL LIABILITY AND INSURANCE; LEGAL PROCEEDINGS. The provision of
health care services entails the substantial risk of potential claims of medical
malpractice and similar claims. Although the Company does not itself engage in
the practice of medicine or assume responsibility for compliance with regulatory
requirements directly applicable to physicians, there can be no assurance that
claims will not be asserted against the Company in the event that services
provided by physicians at affiliated practices are alleged to have resulted in
injury or other adverse effects. Medical malpractice claims have been asserted
and are pending against a number of managed care companies. In addition,
legislation has been proposed in various states expressly providing for medical
malpractice liability for managed care companies. In the event that regulatory
authorities determine that the Company is a managed care company, the enactment
of any such laws could have a material adverse affect on the Company's business,
financial condition or operating results. Successful malpractice claims could
exceed the limits of the Company's insurance and could have a material adverse
effect on the Company's business, financial condition or operating results.
Moreover, there can be no assurance that the Company will be able to obtain such
insurance on commercially reasonable terms or that any such insurance will
provide adequate coverage against potential claims. A malpractice claim asserted
against the Company could be costly to defend, could consume management
resources and could adversely affect the Company's reputation and business,
regardless of the merit or eventual outcome of such claim. In connection with
the acquisition of assets or equity of affiliated practices, the Company may
assume or acquire certain of the stated liabilities of such practices.
Therefore, claims may be asserted against the Company for events related to an
affiliated practice that occurred prior to its affiliation with the Company.
There can be no assurance that any successful claims will not exceed applicable
policy limits of the insurance coverage maintained by the Company or such
affiliated practices. See "Business -- Liability and Insurance" and "Legal
Proceedings."

         TECHNOLOGICAL CHANGE. The health care information industry is
relatively new and is experiencing rapid technological change, changes in
physician and payor needs, frequent new product introductions and evolving
industry standards. As the computer and software industries continue to
experience rapid technological change, the Company must be able to adapt quickly
and successfully its clinical information systems so that they continue to
integrate well with the computer platforms and other software employed by
associated physicians. There can be no assurance that the Company will not
experience difficulties that could delay or prevent the successful development
and introduction of system enhancements or new systems in response to
technological changes. The Company's inability to respond to technological
changes in a timely and cost-effective manner could have a material adverse
effect on the Company's business, financial condition and results of operations
by reducing the Company's ability to facilitate receipt of accounts receivable
of affiliated practices and to efficiently and accurately analyze and anticipate
the costs incurred by associated physicians providing medical services pursuant
to capitated managed care contracts. See "Business --Information Systems."

         YEAR 2000. The Company has commenced review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and will
develop an implementation plan to resolve the issue. The Year 2000 issue is the
result of computer programs being written using two digits rather than four to
define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This



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<PAGE>   63



could result in a major system failure or miscalculations. If modifications to
existing software or converting to new software is not completed on a timely
basis, the Year 2000 problem may have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

         POSSIBLE VOLATILITY OF STOCK PRICE. The stock market often experiences
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. The market price of the Common Stock could
be subject to significant fluctuations in response to a number of factors,
including variations in the Company's quarterly operating results, changes in
estimates of the Company's earnings, perceptions about market conditions in the
health care industry or the impact of various health care reform proposals and
general economic conditions, some of which are unrelated to the Company's
operating performance. These market fluctuations could have an adverse effect on
the market price or liquidity of the Common Stock.

         SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. Future sales of
shares of Common Stock by current stockholders through the exercise of
outstanding registration rights or through the issuance of shares of Common
Stock upon exercise of options, warrants or otherwise, could have an adverse
effect on the price of the Company's Common Stock. Of the 6,515,863 shares of
Common Stock outstanding as of March 25, 1998, approximately 2,200,000 shares
are freely tradeable without restriction under the Securities Act of 1933, as
amended (the "Securities Act"), except if any shares are purchased by
"affiliates" as defined under Rule 144. The remaining 4,315,863 shares
outstanding as of March 25, 1998, of which 2,055,205 shares are held by
affiliates of the Company and 2,260,658 are held by non-affiliates of the
Company, are "restricted securities" as that term is defined under Rule 144 and
may not be sold publicly unless they are registered under the Securities Act or
are sold pursuant to Rule 144 or another exemption from registration. Of the
restricted securities, 3,704,648 shares are currently eligible for sale pursuant
to Rule 144. The remaining 611,215 shares will become eligible for sale pursuant
to Rule 144 at various times commencing July 1998. In general, under Rule 144 as
currently in effect, a person (or persons whose shares are aggregated),
including persons who may be deemed to be "affiliates" of the Company as that
term is defined under the Act, is entitled to sell within any three-month period
a number of restricted shares beneficially owned for at least one year that does
not exceed the greater of (i) one percent of the then outstanding shares of
Common Stock, or (ii) the average weekly trading volume in the Common Stock
during the four calendar weeks preceding such sale. Sales under Rule 144 are
also subject to certain requirements as to the manner of sale, notice and the
availability of current public information about the Company. However, a person
who is not an affiliate and has beneficially owned such shares for at least two
years is entitled to sell such shares without regard to the volume or other
requirements. In addition, an aggregate of 800,000 shares of Common Stock
issuable pursuant to the Company's stock purchase plan or upon exercise of
options granted or to be granted under the Company's 1996 Stock Option Plan are
eligible, upon exercise, for sale to the public pursuant to Registration
Statements on Form S-8 filed by the Company. In connection with the IPO, the
Company issued warrants to purchase up to 220,000 shares of Common Stock to the
representatives of the underwriters in the IPO, which warrants are currently
exercisable. The holders of an aggregate of 4,535,863 shares of Common Stock and
warrants to purchase shares of Common Stock have certain registration rights
with respect to their shares of Common Stock commencing in March 1998.


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<PAGE>   64



The sale of a substantial number of shares of Common Stock in the public market,
or the perception that such sales could occur, could adversely affect the market
price of the Common Stock and impair the Company's ability to raise additional
capital in the future. See "Executive Compensation -- Stock Option and Purchase
Plans.

         ABSENCE OF DIVIDENDS. The Company has never paid any cash dividends on
its Common Stock and does not intend to pay cash dividends in the foreseeable
future. The Company currently intends to retain all earnings, if any, for the
development of its business. The Credit Facility contains restrictions on the
payment of dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."


PART IV

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

(a)  1.  FINANCIAL STATEMENTS

         An index to Consolidated Financial Statements appears on page F-1.

     2.  SCHEDULES

         All financial statement schedules are omitted because they are not
         applicable, not required under the instructions or all the information
         required is set forth in the financial statements or notes thereto.

(b)      REPORTS ON FORM 8-K

         The Company did not file any reports on Form 8-K during the three month
         period ended December 31, 1997. The Company filed a report on Form 8-K
         on March 24, 1998 reporting information under Item 2.

(c)      EXHIBITS

          3.1     --       Certificate of Incorporation of the Registrant(1)
          3.2     --       Amended and Restated By-laws of the Registrant(1)
          4.1     --       Promissory Notes issued by the Registrant in
                           connection with certain acquisitions
         10.1     --       Asset Acquisition Agreement dated November 26, 1996
                           between the Registrant, PSC Management Corp.
                           ("PSC Management") and Atlanta Ear, Nose & Throat
                           Associates, P.C. ("Atlanta ENT")(1)
         10.2     --       Acquisition Agreement dated November 26, 1996 between
                           the Registrant, PSC Acquisition Corp. and Ramie A.
                           Tritt, M.D.(1)
         10.3     --       Amended and Restated Employment Agreement between the
                           Registrant and Ramie A. Tritt, M.D. dated as of
                           February 10, 1997(1)


                                      -64-

<PAGE>   65


<TABLE>
         <S>      <C>      <C>
         10.4     --       Employment Agreement between the Registrant and Richard D. Ballard dated as
                           of November 26, 1996(1)
         10.5     --       Employment Agreement between the Registrant and Gerald R. Benjamin dated as
                           of November 26, 1996(1)
         10.6     --       Management Services Agreement to be entered into between the Registrant, PSC
                           Management Corp. and Atlanta ENT(1)
         10.8     --       Form of Registration Rights Agreement(1)
         10.10    --       Lease Agreement for office space located at The Medical Quarters, 5555 Peachtree
                           Dunwoody Road, Suite 235, Atlanta, Georgia dated October 1, 1988 between
                           Atlanta ENT and Ramie A. Tritt, M.D., as amended(1)
         10.11    --       Lease Agreement for office space located at the Gwinnett Medical Building, 3540
                           Duluth Park Lane, Duluth Georgia dated December 29, 1989 between Duluth
                           Professional Center, L.P., Gwinnett Pulmonology, P.C. and Atlanta ENT as
                           amended(1)
         10.12    --       Lease Agreement for office space located at Eastside Physicians Center, 1700 Tree
                           Lane, Snellville, Georgia dated July 11, 1994 and effective June 1, 1995 between
                           Atlanta ENT and Eastside Physicians Center, L.P.(1)
         10.13    --       1996 Stock Option Plan(1)
         10.14    --       1996 Health Care Professionals Stock Option Plan(1)
         10.15    --       Form of Indemnification Agreement(1)
         10.16    --       Group Practice Managed Care Agreement dated September 1, 1992 by and
                           between CIGNA HealthCare of Georgia, Inc. and The ENT Center of Atlanta,
                           Inc.++(1)
         10.18    --       Agreement dated June 1, 1995 by and between United HealthCare of Georgia, Inc.
                           and Atlanta ENT Center for Physicians, Inc.++(1)
         10.19    --       Non-Negotiable Promissory Note payable by the Registrant to Gerald R. Benjamin
                           in the principal amount of $33,500 (one in a series of identical notes in the
                           aggregate amount of $485,000)(1)
         10.20    --       Non-Negotiable Promissory Note payable by the Registrant to Ramie A. Tritt,
                           M.D. in the principal amount of $33,500 (one in a series of identical notes in the
                           aggregate amount of $485,000)(1)
         10.21    --       Termination Agreement effective as of October 7, 1996 by and among Kevin
                           Thomas, M.D., Stephen B. Levine, M.D., various affiliated professional
                           corporations affiliated with Thomas and Levine, Ramie A. Tritt, M.D., Atlanta
                           ENT, Rande H. Lazar, M.D., Otolaryngology of Memphis, P.C., Gerald R.
                           Benjamin, Premier HealthCare and the Registrant(1)
         10.23    --       Employment Agreement between the Registrant and Robert A. DiProva dated as
                           of January 6, 1997(1)
         10.24    --       Employment Agreement between the Registrant and Lawrence P. Kraska dated as
                           of February 11, 1997(1)
         10.25    --       Acquisition Agreement dated as of February 13, 1997 by and among  the
                           Registrant, PSC Acquisition Corp. and Metropolitan Ear, Nose & Throat, P.C.(1)
         10.26    --       Acquisition Agreement dated as of February 13, 1997 by and among the
                           Registrant, PSC Acquisition Corp. and Atlanta Head and Neck Surgery, P.C.(1)
</TABLE>


                                      -65-


<PAGE>   66



<TABLE>
         <S>      <C>      <C>
         10.27    --       Acquisition Agreement dated as of February 13, 1997 by and among the
                           Registrant, PSC Acquisition Corp. and Ear, Nose & Throat Associates, P.C.(1)
         10.28    --       Acquisition Agreement dated as of February 20, 1997 by and among the
                           Registrant, PSC Acquisition Corp. and W.J. Cornay, III, M.D., P.C.(1)
         10.29    --       Non-Negotiated Promissory Note payable by the Registrant to ENT Center of
                           Atlanta, Inc. in the principal amount of $168,108.46(1)
         10.30    --       Non-Negotiable Promissory Note payable by the Registrant to Bock, Benjamin &
                           Co., Partners, L.P. in the principal amount of $1,891.54(1)
         10.33    --       Credit Agreement by and between the Registrant and NationsBank, N.A. (South)
                           dated April 30, 1997.(2)
         10.34    --       Agreement dated May 19, 1997 by and between the Registrant and Premier
                           HealthCare.(3)
         10.35    --       Management Services Agreement dated July 1, 1997 by and among New Allatoona
                           E.N.T. & Facial Plastic Surgery, P.C., Thomas U. Muller, M.D., PSC Management
                           Corp. and the Registrant. (4)
         10.36    --       Management Services Agreement dated September 22, 1997 by and among New
                           Otolaryngology Medical and Surgical Associates, Ltd., PSC Management Corp.
                           and the Registrant. (4)
         10.37    --       Specialist Group Physician Agreement dated August 1, 1997 by and between AHI
                           Medical Group Atlanta, P.C. and ENT Center of Atlanta, Inc. (4)+
         10.38    --       Lease dated July 31, 1997 by and between the Registrant and Pavilion Partners,
                           L.P. (4)
         10.39    --       Stock Purchase Agreement dated as of October 31, 1997 by and among the
                           Registrant, PSC Management Corp., South Florida Otolaryngology, Inc. and the
                           other parties named therein.(5)
         10.40    --       Asset purchase agreement dated December 31, 1997 among the Registrant, PSC
                           Management Corp. And Cobb Ear, Nose & Throat Associates, P.C.(5)
         10.41    --       Management Services Agreement dated October 31, 1997 by and among New Ear,
                           Nose & Throat Associates of South Florida, P.A., PSC Management Corp. and the
                           Registrant.
         10.42    --       1997 Employee Stock Purchase Plan
         10.43    --       Amendment No. 1 to Restated and Amended Lease Agreement dated January 1,
                           1998 between Ramie A. Tritt, M.D. and the Registrant as successor in interest to
                           Atlanta ENT.
         10.44    --       Amendment dated March 19, 1998 to Agreement dated May 19, 1997 by and
                           between the Registrant and Premium HealthCare.
         21.1     --       Subsidiaries of the Registrant
         23.1     --       Consent of Arthur Andersen LLP
         27.1     --       Financial Data Schedule (for SEC use only)
</TABLE>

----------

+      Confidential treatment has been requested with respect to portions of
       this exhibit.
++     Confidential treatment was granted with respect to portions of this
       exhibit.




                                      -66-

<PAGE>   67



(1)    Incorporated by reference to the Registrant's Registration Statement on
       Form S-1 (File No. 333-17091) declared effective on March 20, 1997.
(2)    Incorporated by reference to the Registrant's Quarterly Report on Form
       10-Q for the three months ended March 31, 1997.
(3)    Incorporated by reference to the Registrant's Quarterly Report on Form
       10-Q for the six months ended June 30, 1997.
(4)    Incorporated by reference to the Registrant's Quarterly Report on Form
       10-Q for the nine months ended September 30, 1997.
(5)    Incorporated by reference to the Registrant's Current Report on Form 8-K
       filed on March 24, 1998.



                                      -67-

<PAGE>   68




                                   SIGNATURES

         Pursuant to the requirements of Section 13 of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Date:  March 30, 1998                  PHYSICIANS' SPECIALTY CORP.


                                       By:     /s/ Ramie A. Tritt, M.D.
                                          -------------------------------------
                                          Ramie A. Tritt, M.D.
                                          Chairman of the Board and President


                                    SIGNATURE

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



<TABLE>
<CAPTION>
           SIGNATURE                                   Title                                       Date
           ---------                                   -----                                       ----


<S>                                        <C>                                                <C>
                                           Chairman of the Board and President
/s/ Ramie A. Tritt                         (principal executive officer)                      March 30, 1998
----------------------------------
Ramie A. Tritt, M.D.







                                           Chief Executive Officer and Director
/s/ Richard D. Ballard                                                                        March 30, 1998
----------------------------------
Richard D. Ballard







/s/ Gerald R. Benjamin                     Vice Chairman of the Board and                     March 30, 1998
----------------------------------         Secretary
Gerald R. Benjamin







/s/ Robert A. DiProva                      Executive Vice President and Chief                 March 30, 1998
----------------------------------         Financial Officer
Robert A. DiProva                          (principal financial officer)







/s/ Lawrence P. Kraska                     Vice President-Operations                          March 30, 1998
----------------------------------
Lawrence P. Kraska
</TABLE>





<PAGE>   69






<TABLE>
<CAPTION>

<S>                                        <C>                                                <C>
/s/ Edward R. Casas, M.D.                  Director                                           March 30, 1998
----------------------------------
Edward R. Casas, M.D.







/s/ Sidney Kirschner                       Director                                           March 30, 1998
----------------------------------
Sidney Kirschner







/s/ Steven L. Posar, M.D.                  Director                                           March 30, 1998
----------------------------------
Steven L. Posar, M.D.
</TABLE>







<PAGE>   70
                         INDEX TO FINANCIAL STATEMENTS



<TABLE>
<CAPTION>

                                                                                                              Page
                                                                                                              ----


AUDITED FINANCIAL STATEMENTS
<S>                                                                                                           <C>
Report of Independent Public Accountants..................................................................... F-2
Consolidated Balance Sheets at December 31, 1997 and 1996.................................................... F-3
Consolidated Statement of Operations for the Year ended December 31, 1997 and
  for the Period from Inception (July 31, 1996) to December 31, 1996......................................... F-4
Consolidated Statement of Stockholders' Equity for the Year ended December 31, 1997 and
  for the Period from Inception (July 31, 1996) to December 31, 1996......................................... F-5
Consolidated Statement of Cash Flows for the Year ended December 31, 1997 and
  for the Period from Inception (July 31, 1996) to December 31, 1996......................................... F-6
Notes to Consolidated Financial Statements................................................................... F-7
</TABLE>

                                      F-1
<PAGE>   71

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS





To the Stockholders and Board of Directors of
Physicians' Specialty Corp.:


We have audited the accompanying consolidated balance sheets of PHYSICIANS'
SPECIALTY CORP. (a Delaware corporation) AND SUBSIDIARIES as of December 31,
1997 and 1996 and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year ended December 31, 1997 and
for the period from inception (July 31, 1996) to 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 Physicians' Specialty Corp.
and subsidiaries as of December 31, 1997 and 1996 and the results of their
operations and their cash flows for the year ended December 31, 1997 and for
the period from inception (July 31, 1996) to December 31, 1996 in conformity
with generally accepted accounting principles.


ARTHUR ANDERSEN LLP

Atlanta, Georgia
February 12, 1998


                                     F-2
<PAGE>   72

                  PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES


                          CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 1997 AND 1996



                                     ASSETS
<TABLE>
<CAPTION>
                                                                                            1997          1996
                                                                                        ------------    --------
<S>                                                                                     <C>             <C>
CURRENT ASSETS:
   Cash and cash equivalents                                                            $  5,351,639    $123,540
   Accounts receivable, net of allowance for doubtful accounts of $261,714 and $0
      in 1997 and 1996, respectively                                                       9,273,565      26,976
   Notes receivable                                                                           81,682           -
   Prepayments and other                                                                     335,650           -
                                                                                        ------------    --------
            Total current assets                                                          15,042,536     150,516

EQUIPMENT, NET                                                                             3,431,707      19,897

INTANGIBLE ASSETS, NET                                                                    11,793,777           -

OTHER ASSETS                                                                                 330,338     442,567
                                                                                         -----------    --------
            Total assets                                                                 $30,598,358    $612,980
                                                                                         ===========    ========


                                       LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Notes payable                                                                         $         -    $505,000
   Due to physicians                                                                       1,177,009     108,828
   Accounts payable                                                                          397,185       9,442
   Accrued expenses                                                                        1,701,667           -
   Accrued income taxes                                                                      321,302           -
   Provider claims payable                                                                   637,726           -
   Deferred income taxes                                                                     338,218           -
                                                                                         -----------    --------
            Total current liabilities                                                      4,573,107     623,270

SUBORDINATED SELLER NOTE                                                                     911,715           -
                                                                                         -----------    --------
            Total liabilities                                                              5,484,822     623,270
                                                                                         -----------    --------
COMMITMENTS AND CONTINGENCIES (NOTE 11)

STOCKHOLDERS' EQUITY:
   Preferred stock, $1.00 par value; 10,000 shares authorized, no shares issued and
       outstanding at December 31, 1997 and 1996, respectively                                     -          -
   Common stock, $0.001 par value; 50,000,000 shares authorized, 6,503,098 and
      599,893 shares issued and outstanding at December 31, 1997 and 1996,
      respectively                                                                             6,503         600
   Additional paid-in capital                                                             23,401,657     343,711
   Retained earnings (deficit)                                                             1,705,376    (354,601)
                                                                                         -----------    --------
            Total stockholders' equity                                                    25,113,536     (10,290)
                                                                                         -----------    --------
            Total liabilities and stockholders' equity                                   $30,598,358    $612,980
                                                                                         ===========    ========
</TABLE>


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


                                      F-3

<PAGE>   73

                  PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES


                     CONSOLIDATED STATEMENTS OF OPERATIONS

                FOR THE YEAR ENDED DECEMBER 31, 1997 AND FOR THE

           PERIOD FROM INCEPTION (JULY 31, 1996) TO DECEMBER 31, 1996

<TABLE>
<CAPTION>

                                                            1997             1996
                                                        -----------      ----------
<S>                                                     <C>              <C>
REVENUE:
    Management fees                                     $10,973,756      $   51,240
    Capitation revenue                                    3,619,408               -
    Net patient service revenue                             966,646               -
                                                        -----------      ----------
              Total revenue                              15,559,810          51,240
                                                        -----------      ----------

OPERATING EXPENSES:
    Provider claims, wages, and benefits                  7,819,370          46,582
    General and administrative                            4,370,611         357,340
    Depreciation and amortization                           377,286           1,919
                                                        -----------      ----------
              Total operating expenses                   12,567,267         405,841
                                                        -----------      ----------
OPERATING INCOME (LOSS)                                   2,992,543        (354,601)



OTHER INCOME, NET                                           429,254               -
                                                        -----------      ----------
INCOME (LOSS) BEFORE INCOME TAXES                         3,421,797        (354,601)

PROVISION FOR INCOME TAXES                                1,361,820               -
                                                        -----------      ----------
NET INCOME (LOSS)                                       $ 2,059,977      $ (354,601)
                                                        ===========      ==========

EARNINGS (LOSS) PER SHARE:
    Basic                                               $      0.42      $    (0.64)
                                                        ===========      ==========

    Diluted                                             $      0.42      $    (0.64)
                                                        ===========      ==========
WEIGHTED AVERAGE SHARES OUTSTANDING:

    Basic                                                 4,868,035         552,894
                                                        ===========      ==========
    Diluted                                               4,966,778         552,894
                                                        ===========      ==========
</TABLE>

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


                                     F-4
<PAGE>   74


                  PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES


                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                FOR THE YEAR ENDED DECEMBER 31, 1997 AND FOR THE

           PERIOD FROM INCEPTION (JULY 31, 1996) TO DECEMBER 31, 1996

<TABLE>
<CAPTION>


                                                         COMMON STOCK             ADDITIONAL         RETAINED
                                                     ---------------------         PAID-IN           EARNINGS
                                                       SHARES      AMOUNT           CAPITAL          (DEFICIT)          TOTAL
                                                     ----------  ---------        ----------         ---------      -----------
<S>                                                  <C>         <C>              <C>                <C>            <C>
BALANCE, INCEPTION (JULY 31, 1996)                            -  $        -       $        -         $              $
                                                                                                             -                -

    Issuance of common stock                            599,893         600               711                -            1,311
    Compensation expense                                      -           -           343,000                -          343,000
    Net loss                                                  -           -                 -         (354,601)        (354,601)
                                                     ----------  ----------       -----------        ---------      -----------
BALANCE, DECEMBER 31, 1996                              599,893         600           343,711         (354,601)         (10,290)

    Issuance of common stock, net of offering cost    2,200,000       2,200        14,272,859                -       14,275,059
    Issuance of common stock--practice acquisitions   3,703,205       3,703         8,737,087                -        8,740,790
    Compensation expense                                      -           -            48,000                -           48,000
    Net income                                                -           -                 -        2,059,977        2,059,977
                                                      ---------  ----------       -----------       ----------      -----------
BALANCE, DECEMBER 31, 1997                            6,503,098  $    6,503       $23,401,657       $1,705,376      $25,113,536
                                                      =========  ==========       ===========       ==========      ===========
</TABLE>


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


                                     F-5
<PAGE>   75


                  PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES


                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                FOR THE YEAR ENDED DECEMBER 31, 1997 AND FOR THE

           PERIOD FROM INCEPTION (JULY 31, 1996) TO DECEMBER 31, 1996

<TABLE>
<CAPTION>
                                                                                        1997              1996
                                                                                     ------------       ---------
<S>                                                                                  <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income (loss)                                                                $  2,059,977       $(354,601)
                                                                                     ------------       ---------
    Adjustments to reconcile net income (loss) to net cash (used in) provided
       by operating activities:
           Depreciation and amortization                                                  377,286           1,919
           Provision for deferred income taxes                                           (338,218)              -
           Compensation expense                                                            48,000         343,000
           Increase in accounts receivable                                             (3,971,923)        (26,976)
           Increase in prepayments and other                                             (318,721)         (1,100)
           Increase in accounts payable and accrued liabilities                           853,751         118,270
                                                                                     ------------       ---------
              Total adjustments                                                        (3,349,825)        435,113
                                                                                     ------------       ---------
              Net cash (used in) provided by operating activities                      (1,289,848)         80,512
                                                                                     ------------       ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Payment for acquisitions, net of cash acquired                                     (4,933,104)              -
    Purchase of property and equipment                                                   (870,526)        (21,706)
    Decrease in other assets                                                              135,078               -
                                                                                     ------------       ---------
              Net cash used in investing activities                                    (5,668,552)        (21,706)
                                                                                     ------------       ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Issuance of common stock, net of offering costs                                    14,275,059           1,311
    Borrowing under short-term debt                                                       170,000         505,000
    Repayment of short-term debt                                                         (505,000)              -
    Repayment of long-term debt                                                        (1,753,560)              -
    Deferred offering costs                                                                     -        (441,577)
                                                                                     ------------       ---------
              Net cash provided by financing activities                                12,186,499          64,734
                                                                                     ------------       ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS                                                 5,228,099         123,540

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                            123,540               -
                                                                                     ------------       ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                             $  5,351,639       $ 123,540
                                                                                     ============       =========
</TABLE>


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

                                      F-6
<PAGE>   76

                  PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 1997 AND 1996



  1.  ORGANIZATION

      Physicians' Specialty Corp. (the "Company") was organized in July 1996 to
      provide comprehensive physician practice management services to physician
      practices and health care providers specializing in the treatment and
      management of diseases and disorders of the ear, nose, throat, head, and
      neck ("ENT"). The Company commenced its business activities upon
      consummation of the reorganization, as described in Note 3, and its
      initial public offering ("IPO") on March 26, 1997. The Company provides
      financial and administrative management, enhancement of clinical
      operations, network development, and payor contracting services,
      including the negotiation and administration of capitated arrangements.
      The Company has operations in Atlanta, Georgia; Chicago, Illinois;
      Birmingham, Alabama; and Boca Raton, Florida.

  2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      PRINCIPLES OF CONSOLIDATION

      The accompanying consolidated financial statements include the accounts
      of the Company and its subsidiaries, all of which are wholly owned.
      Intercompany balances 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 and disclosures in the
      Company's financial statements and the accompanying notes.  Actual results
      could differ from those estimates.

      CASH AND CASH EQUIVALENTS

      The Company considers cash on deposit with financial institutions and all
      highly liquid investments with original maturities of three months or
      less to be cash and cash equivalents.

      EQUIPMENT

      Equipment is recorded at cost. Depreciation is computed using the
      straight-line method over the estimated useful lives of depreciable
      assets for financial statement reporting


                                      F-7
<PAGE>   77




      purposes. Maintenance and repairs are charged to expense as incurred.
      The cost of renewals and betterments is capitalized and depreciated over
      the applicable estimated useful lives. The cost and accumulated
      depreciation of assets sold, retired, or otherwise disposed of are
      removed from the accounts, and the related gain or loss is credited or
      charged to operations.

      ORGANIZATION COSTS

      The Company has capitalized legal expenses incurred prior to July 31,
      1996 related to the organization and start-up of the Company. These costs
      are included in other assets on the accompanying balance sheets and are
      being amortized over a five-year period.

      INTANGIBLE ASSETS

      The Company's physician practice acquisitions involve the purchase of
      tangible and intangible assets and the assumption of certain liabilities
      of the acquired practices. As part of the purchase price allocation, the
      Company allocates the purchase price to the tangible and identifiable
      intangible assets acquired and liabilities assumed based on estimated
      fair market values. Costs of acquisitions in excess of the net estimated
      fair value of tangible and identifiable intangible assets acquired and
      liabilities assumed are amortized using the straight-line method over a
      period of 25 years. At December 31, 1997, the amount of such intangible
      assets was approximately $11,884,000, with accumulated amortization
      totaling $90,405.

      REVENUE RECOGNITION

      The Company primarily generates management fee revenue from contracts in
      which the Company provides management services to physician practices. In
      addition, the Company generates revenue from capitated managed care
      contracts. The Company also generates net patient revenue through
      employed physicians. Revenue is recognized as services are performed.

      ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

      The Company provides an allowance for doubtful accounts equal to the
      estimated losses expected to be incurred in the collection of accounts
      receivable. Bad debt expense was $133,794 and $0 during 1997 and 1996,
      respectively.

      CAPITATED CONTRACTS

      The Company establishes accruals for costs incurred in connection with
      its capitated contracts based on historical trends. Any contracts that
      would have a realized loss would be immediately accrued for and the loss
      would be charged to operations.

      FAIR VALUE OF FINANCIAL INSTRUMENTS

      The Company estimates that the carrying amounts of financial instruments,
      including cash and cash equivalents, accounts receivable, accounts
      payable, subordinated seller note, and short-term debt approximated their
      fair values as of December 31, 1997 and 1996 due to the relatively short
      maturity of these instruments.


                                      F-8
<PAGE>   78




      NEW ACCOUNTING PRONOUNCEMENTS

      In June 1997, the Financial Accounting Standards Board (the "FASB") issued
      Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
      Comprehensive Income." SFAS No. 130 is designed to improve the reporting
      of changes in equity from period to period. SFAS No. 130 is effective for
      fiscal years beginning after December 15, 1997. The Company will adopt
      SFAS No. 130 for fiscal 1998. Management does not expect SFAS No. 130 to
      have a significant impact on the Company's financial statements.

      In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
      of an Enterprise and Related Information." SFAS No. 131 requires that an
      enterprise disclose certain information about operating segments. SFAS
      No. 131 is effective for financial statements for the Company's fiscal
      year ending December 31, 1998. The Company does not expect that SFAS No.
      131 will require significant revision of prior disclosures.

      The Emerging Issues Task Force of the FASB has recently issued its
      Consensus on Issue 97-2 ("EITF 97-2"). EITF 97-2 addresses certain
      specific matters pertaining to the physician practice management
      industry. EITF 97-2 would be effective for the Company for its year
      ending December 31, 1998. EITF 97-2 addresses the ability of physician
      practice management companies to consolidate the results of physician
      practices with which it has an existing contractual relationship. The
      Company is in the process of analyzing the effect of all its contractual
      relationships but currently believes that certain contracts would meet
      the criteria of EITF 97-2 for consolidating the results of operations of
      the related physician practices, which would require the Company to
      restate its prior period financial statements to conform to such
      consolidation. EITF 97-2 also has addressed the accounting method for
      future combinations with individual physician practices. The Company
      believes that, based on the criteria set forth in EITF 97-2, virtually
      all of its future acquisitions of individual physician practices will
      continue to be accounted for under the purchase method of accounting.

      EARNINGS PER SHARE

      The Company has restated its earnings per share to conform with SFAS No.
      128, "Earnings Per Share." This new statement requires presentation of
      basic and diluted earnings per share. Basic earnings per share are
      calculated by dividing net income available to common stockholders by the
      weighted average number of common shares outstanding for the years
      presented. Diluted earnings per share reflects the potential dilution
      that could occur if securities and other contracts to issue common stock
      were exercised or converted into common stock or resulted in the issuance
      of common stock that then shared in the earnings of the entity.


                                      F-9
<PAGE>   79



      A reconciliation of the number of weighted average shares used in
      calculating basic and diluted earnings per share is as follows:

<TABLE>
<CAPTION>

                                                                                  1997            1996
                                                                                ----------    -----------
                <S>                                                             <C>           <C>
                Weighted average number of common shares
                outstanding-basic                                                4,868,035        552,894

                Effect of potentially dilutive shares outstanding                   83,294              -

                Effect of convertible debt                                          15,449              -
                                                                                ----------    -----------
                Weighted average number of common shares
                outstanding-diluted                                              4,966,778        552,894
                                                                                ==========    ===========
</TABLE>

      INCOME TAXES

      The Company follows the practice of providing for income taxes based on
      SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires
      recognition of deferred tax liabilities and assets for the expected
      future tax consequences of events that have been included in the
      financial statements or tax returns.

      INDUSTRY RISKS

      The health care industry is subject to numerous laws and regulations at
      all levels of government. These laws and regulations include, but are not
      necessarily limited to, matters such as licensure, accreditation,
      government health care program participation requirements, reimbursement
      for patient services, and Medicare and Medicaid fraud and abuse.
      Recently, government activity has increased with respect to
      investigations and allegations concerning possible violations of fraud
      and abuse statutes and regulations by health care providers. Violations
      of these laws could result in significant fines and penalties as well as
      significant payments for services previously billed. The Company is
      subject to similar regulatory reviews. A determination of liability under
      any such laws could have a material effect on the Company's financial
      position, results of operations, stockholders' equity, and cash flows.

      SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                                                      1997          1996
                                                                                  ------------    --------
                <S>                                                               <C>             <C>
                Cash paid during the period for interest                          $     87,474    $      -
                Cash paid during the period for income taxes,
                  net of refunds                                                     2,233,550           -
                Liabilities assumed in connection with
                  businesses acquired
                                                                                    (5,758,144)          -
</TABLE>

                                      F-10
<PAGE>   80



      RECLASSIFICATIONS

      Certain amounts in the December 31, 1996 financial statements have been
      reclassified to conform to the current year presentation.


  3.  REORGANIZATION

      Concurrently with the closing of the Company's IPO, the Company acquired
      substantially all of the assets of Atlanta Ear, Nose, & Throat
      Associates, P.C., three additional ENT practices in the metropolitan
      Atlanta area (collectively, "Atlanta ENT"), and one ENT practice in
      Birmingham, Alabama. In addition, the Company purchased the common stock
      of three corporations (the "ENT Networks"), which as of that date held,
      managed, and administered capitated ENT managed care contracts for
      enrollees of health maintenance organizations ("HMOs") sponsored by
      United Healthcare of Georgia, AEtna Health Plans of Georgia ("AEtna"),
      and Cigna Health Care of Georgia ("Cigna").

      In connection with the acquisitions, the Company issued an aggregate of
      3,104,755 shares of common stock and entered into management services
      agreements with the physician practices providing for the comprehensive
      management of the practices by the Company, while enabling the practices
      to retain authority over the provision of medical care. The management
      services agreement with Atlanta ENT provides for the assignment to the
      Company by Atlanta ENT of all or substantially all of its nongovernmental
      accounts receivable and all of its rights and interest in the proceeds of
      its governmental accounts receivable and grants to the Company the right
      to collect and retain the proceeds of the accounts receivable for the
      Company's account to be applied in accordance with the agreement. The
      Company is responsible for the payment of operating and nonoperating
      expenses of Atlanta ENT (excluding compensation to physicians and
      physician assistants) and is responsible for the payment of all such
      expenses directly out of the proceeds of the accounts receivable assigned
      to the Company by Atlanta ENT. In addition, the Company retains a
      management fee equal to 12.5% of all revenue (after adjustment for
      contractual allowances) generated by or on behalf of physicians
      practicing at Atlanta ENT, subject to specified maximum annual amounts,
      as payment for the Company's services and nonallocable costs incurred by
      the Company attributable to the provision of management services under
      the management services agreement. The remaining revenue is remitted to
      Atlanta ENT to pay physician and physician assistant compensation and
      benefits.

      Simultaneous with the acquisition of substantially all of the assets of
      ENT and Allergy Associates, the physicians at ENT and Allergy Associates
      entered into employment agreements with PSC Alabama, a wholly owned
      subsidiary of the Company. The assignment of accounts receivable,
      realization of revenue, and allocation of costs and expenses are
      governed by a management services agreement between PSC Alabama and the
      Company, which is substantially similar to the management services
      agreement between Atlanta ENT and the Company.

                                      F-11
<PAGE>   81



  4.  INITIAL PUBLIC OFFERING

      On March 26, 1997, the Company completed its IPO of 2,200,000 shares of
      its common stock. The net proceeds of the IPO were approximately
      $14,275,000 and were used for repayment of indebtedness of the acquired
      practices, repayment of indebtedness of the Company, payment of a
      consulting fee, general corporate purposes, and working capital
      requirements.


  5.  ACQUISITIONS

      Since the IPO, the Company has acquired (a) substantially all of the
      assets (other than certain excluded assets such as employment agreements
      and patient charts, records, and files) and assumed certain contractual
      liabilities of (i) Allatoona ENT, (ii) Ear, Nose & Throat Specialists,
      P.C. ("ENT Specialists"), (iii) Ear, Nose & Throat Specialists, Head &
      Neck Surgery, P.C. ("ENT Specialists H&N"), (iv) Northside Ear, Nose &
      Throat Associates, P.C. ("Northside"), (v) Otolaryngology, Medical, and
      Surgical Associates, LTD. ("OMSA"), and (vi) Cobb Ear, Nose & Throat
      Associates, P.C. ("Cobb") and (b) the stock of six professional
      associations owned by seven ENT physicians and a partnership owned and
      operated by the professional associations in Palm Beach and Broward
      Counties, Florida (collectively, "ENT of South Florida").

      In connection with the acquisition of assets or equity of these
      practices, the Company (i) paid an aggregate of approximately $5.0
      million in cash, (ii) issued an aggregate of 598,450 shares of common
      stock (valued at the time of issuance at an aggregate of approximately
      $4.5 million), (iii) agreed to issue an aggregate of 276,249 additional
      shares of Common Stock (valued at an aggregate of approximately $2.5
      million) to two of the affiliated practices beginning in September 1998,
      (iv) issued subordinated convertible promissory notes in the aggregate
      principal amount of approximately $912,000, which notes mature in October
      2000 and accrue interest at a rate of 5.61% per annum and are convertible
      into shares of common stock at a conversion price of $10.00 per share,
      and (v) issued noninterest-bearing contingent subordinated promissory
      notes in the aggregate principal amount of approximately $3.0 million.
      The contingent notes are payable in shares of common stock, valued at the
      average closing price of the common stock for the ten trading days
      preceding the date of delivery of such shares, and the payment of these
      notes is contingent upon the physicians or practice holding such notes
      reaching performance targets. In connection with these acquisitions, the
      Company paid an aggregate of approximately $397,000 to Premier
      HealthCare, an affiliate of the Company's Vice Chairman and Secretary,
      for advisory services rendered by Premier HealthCare.

      In connection with the OMSA acquisition, the physician shareholders of
      OMSA granted to the Chairman of the Board and President of the Company
      (or his designee or assignee), the option to acquire all of the ownership
      interest of such physician shareholders in OMSA in the event that at any
      time there are less than two shareholders who continue as full time
      physician-employees of OMSA and those shareholders who remain do not, at
      the optionee's or management of the Company's sole discretion, control
      the operations of OMSA in a manner consistent with the requirements of
      the Management Services Agreement between OMSA and the Company. In order
      to exercise the option, the


                                     F-12
<PAGE>   82



      optionee or his designee or assignee must at the time of exercise be
      licensed to practice medicine in the State of Illinois.

  6.  EQUIPMENT

      Equipment at December 31, 1997 and 1996 consisted of the following:

<TABLE>
<CAPTION>
                                                                   1997            1996          USEFUL LIVES
                                                                 ----------      ---------      --------------

       <S>                                                       <C>             <C>            <C>
       Equipment                                                 $1,132,111      $  21,706      3 to 7 years
       Computer system and software                                 432,157              -      3 years
       Furniture and fixtures                                     1,678,971              -      7 years
       Automobiles                                                   57,548              -      5 years
       Leasehold improvements                                       495,144              -      3 to 5 years
                                                                 ----------      ---------
             Total cost                                           3,795,931         21,706
       Less accumulated depreciation                               (364,224)        (1,809)
                                                                 ----------      ---------
                                                                 $3,431,707      $  19,897
                                                                 ==========      =========
</TABLE>


  7.  CREDIT AGREEMENT, SUBORDINATED DEBT, AND NOTES PAYABLE

      On April 30, 1997, the Company closed on a five-year $20 million Credit
      Agreement (the "Credit Agreement") with NationsBank, N.A. (the "Bank"),
      with up to $5.0 million of such $20 million available for working capital
      purposes. Advances under the Credit Agreement will bear interest at
      either a prime-based rate or a LIBOR-based rate, at the Company's option,
      with interest-only payments required during the first three years of the
      credit agreement. Thereafter, in years four and five of the agreement,
      the term loan commitment will be reduced to $13,333,333 and $6,666,666,
      respectively. Borrowings under the Credit Agreement are secured by the
      capital stock of the Company's subsidiaries and the Company's accounts
      receivable and will be secured by acquisition documents in connection
      with physician practice equity or assets acquired. At December 31, 1997,
      the Company had no outstanding borrowings under the Credit Agreement.

      The Credit Agreement contains certain restrictive covenants, including,
      among other things, consent from the Bank related to additional
      acquisitions and restrictions on additional indebtedness. In addition,
      the Company must maintain certain financial covenants, including, among
      others, a minimum current ratio, a minimum tangible net worth, a minimum
      debt service coverage ratio, and a minimum interest coverage ratio. The
      Company was in compliance with the debt covenants at December 31, 1997.

      Concurrent with the acquisition of ENT of South Florida (Note 5), the
      Company issued subordinated convertible promissory notes in the aggregate
      principal amount of $911,715, which notes mature in October 2000 and
      accrue interest at a rate of 5.61%. The Notes are convertible into shares
      of Common Stock at a conversion price of $10.00 per share.



                                     F-13
<PAGE>   83



      SHORT-TERM DEBT

      The Company's short-term debt at December 31, 1996 consisted of
      promissory notes in principal amounts ranging from $20,000 to $170,500
      and bearing simple interest at a bank prime rate (8.25% at December 31,
      1996). The amounts were repaid in 1997 from the proceeds of the IPO.


  8.  INCOME TAXES

      For all periods presented, the accompanying financial statements reflect
      provisions for income taxes computed in accordance with the requirements
      of SFAS No. 109.

      The following summarizes the components of the income tax provision:

<TABLE>
<CAPTION>

                                                                                   1997          1996
                                                                                 -----------     ----
                <S>                                                              <C>             <C>
                Current:
                  Federal                                                        $   868,153     $  -
                  State                                                              155,449        -
                Deferred:
                  Federal                                                            279,108        -
                  State                                                               59,110        -
                                                                                 -----------      ---
                          Provision for income taxes                             $ 1,361,820      $ -
                                                                                 ===========      ===
</TABLE>

      The provision for income taxes differs from the amounts computed by
      applying federal statutory rates due to the following:

<TABLE>
<CAPTION>
                                                                                          1997             1996
                                                                                       ----------       ---------
       <S>                                                                             <C>              <C>
       Provision computed at the federal statutory rate                                $1,163,411       $(120,564)
       State income taxes, net of federal income tax benefit                              142,573         (14,042)
       Amortization of intangibles                                                         18,116               -
       Nondeductible compensation expense                                                       -         130,260
       Other, net                                                                          43,740          (1,674)
       Change in valuation allowance                                                       (6,020)          6,020
                                                                                       ----------       ---------
                     Provision for income taxes                                        $1,361,820       $       -
                                                                                       ==========       =========
</TABLE>



                                     F-14
<PAGE>   84




       The tax effect of significant temporary differences representing
       deferred tax assets and liabilities at December 31, 1997 and 1996 is as
       follows:

<TABLE>
<CAPTION>

                                                                1997        1996
                                                             ---------    ---------
       <S>                                                   <C>          <C>
       Deferred income tax assets:
           Accrued shareholder compensation                  $ 129,433    $       -
           Allowance for doubtful accounts                      10,745            -
           Net operating loss carryforward                           -        6,500
                                                             ---------    ---------
                   Total deferred income tax assets            140,178        6,500
       Deferred income tax liabilities:
           Acquired accounts receivable                       (418,458)           -
           Depreciation and amortization                       (59,938)        (480)
                                                             ---------    ---------
                    Total deferred tax liabilities            (478,396)        (480)
                                                             ---------    ---------
           Valuation allowance                                       -       (6,020)
                                                             ---------    ---------
                    Net deferred income tax liabilities      $(338,218)   $       -
                                                             =========    =========
</TABLE>

      The Company had no income tax net operating loss carryforward as of
      December 31, 1997.

      Management believes that a valuation allowance against deferred income
      tax assets is not considered necessary at December 31, 1997 based on the
      Company's earnings history, the projections for future taxable income,
      and other relevant considerations over the periods during which the
      deferred tax assets are deductible.

  9.  STOCKHOLDERS' EQUITY

      The Company has authorized 10,000 shares of preferred stock with $1.00 par
      value. No shares have been issued, and therefore, there were no shares
      outstanding at December 31, 1997 and 1996. The board of directors has the
      authority to issues these shares and to fix dividends, voting and
      conversion rights, redemption provisions, liquidation preferences, and
      other rights and restrictions. During the period ended December 31, 1996,
      the Company declared a .6875 to 1 reverse stock split. All financial
      information has been restated to reflect for the stock split. In
      connection with certain stock issuances during 1997 and 1996, the Company
      recorded a charge to compensation of approximately $48,000 and $343,000,
      respectively.

10.   STOCK PLANS

      STOCK OPTION PLANS

      In November 1996, the Company adopted two stock option plans, the 1996
      Stock Option Plan (the "1996 Plan") and the 1996 Health Care
      Professionals  Stock Option Plan (the "Health Care Professionals Plan").

      The Company may grant options for up to 825,000 shares under two plans,
      the 1996 Plan and the Health Care Professionals Plan. The Company has
      granted options for up to


                                     F-15
<PAGE>   85


      439,940 and 247,460 shares through December 31, 1997 and 1996,
      respectively, under the 1996 Plan and has granted options for up to
      35,000 and 0 shares under the Health Care Professionals Plan through
      December 31, 1997 and 1996, respectively. The 1996 Plan and the Health
      Care Professional Plan options vest over periods ranging from three to
      five years, and all expire after ten years. A summary of the status of
      the Company's two stock option plans at December 31, 1997 and 1996 is
      presented in the table below:

<TABLE>
<CAPTION>

                                                                                    WEIGHTED
                                                                                    AVERAGE
                                                                OPTION PRICE        EXERCISE
                                                    SHARES       (PER SHARE)         PRICE
                                                   --------    --------------       --------
       <S>                                         <C>         <C>                  <C>
       Outstanding at inception (July 31, 1996)           -             $0.00       $  0.00
              Granted                               247,460             $6.80          6.80
              Exercised                                   -               N/A           N/A
              Canceled                                    -               N/A           N/A
                                                   --------    --------------       -------
       Outstanding at December 31, 1996             247,460             $6.80          6.80
              Granted                               227,480     $6.00-$12.125          7.42
              Exercised                                   -                 -          0.00
              Canceled                               (3,000)    $        8.00          8.00
                                                   --------     -------------       -------
       Outstanding as of December 31, 1997          471,940     $6.00-$12.125       $  7.09
                                                   ========     =============       =======
</TABLE>


<TABLE>
<CAPTION>
                                                                                   1997          1996
                                                                                --------       -------
                <S>                                                             <C>            <C>
                Options exercisable at year-end                                  173,100        67,490
                Weighted average exercise price of options
                  exercisable at year-end                                       $   6.91       $  6.80
                Per share weighted average fair value of options
                  granted during the period                                     $   4.78       $  3.96

</TABLE>

      The weighted average remaining contractual life of options outstanding at
      December 31, 1997 was nine years.

      The Company has adopted the disclosure-only provisions of SFAS No. 123,
      "Accounting for Stock-Based Compensation," but applies Accounting
      Principles Board Opinion No. 25 and related interpretations in accounting
      for its stock option plans. If the Company had elected to recognize
      compensation cost for these plans based on the fair value at the grant
      dates for awards under the plans, consistent with the method prescribed by
      SFAS No. 123, net income(loss) and earnings(loss) per share would have
      been changed to the pro forma amounts indicated below at December 31, 1997
      and 1996:


                                      F-16
<PAGE>   86


<TABLE>
<CAPTION>

                                                                                 1997             1996
                                                                              ----------       ---------

                <S>                                                           <C>              <C>
                Net income (loss):
                   As reported                                                $2,059,977       $(354,601)
                   Pro forma                                                   1,464,400        (634,924)
                Earnings (loss) per share:
                   Basic:
                     As reported                                              $     0.42       $   (0.64)
                     Pro forma                                                      0.30           (1.15)
                   Diluted:
                     As reported                                                    0.42           (0.64)
                     Pro forma                                                      0.30           (1.15)
</TABLE>

      The fair value of the Company's stock options used to compute pro forma
      net income(loss) and earnings(loss) per share disclosures is the estimated
      present value at grant date using the Black-Scholes option pricing model
      with the following weighted average assumptions for 1997 and 1996:
      dividend yield of 0%, expected volatility of 44%, and a risk-free interest
      rate range of 6%-6.9%, and an expected holding period of seven years.

      1997 EMPLOYEE STOCK PURCHASE PLAN

      The Company's 1997 Employee Stock Purchase Plan (the "Stock Purchase
      Plan") was approved by the Board of Directors in November 1997, subject to
      stockholder approval at the Company's 1997 Annual Meeting of Stockholders.
      The Stock Purchase Plan is intended to qualify as an "employee stock
      purchase plan" under Section 423 of the Internal Revenue Code of 1986, as
      amended, in order to provide employees of the Company with an opportunity
      to purchase common stock through payroll deductions. An aggregate of
      250,000 shares of the Company's common stock have been reserved for
      issuance under the Stock Purchase Plan and are available for purchase
      thereunder.

11.   COMMITMENTS AND CONTINGENCIES

      LITIGATION

      The Company and its affiliated physician groups are insured with respect
      to medical malpractice risks on a claims-made basis. In the opinion of
      management, the amount of potential liability with respect to these
      claims will not materially affect the Company's financial position or
      results of operations.

      No legal proceedings are currently pending against the Company, and the
      Company is not aware of any outstanding claims against any of its
      affiliated practices that would have a material adverse effect on the
      Company's business, financial condition, or results of operations. The
      Company and its affiliated practices may be involved from time to time in
      litigation incidental to their respective businesses.


                                      F-17
<PAGE>   87


      EMPLOYMENT AGREEMENTS

      The Company has entered into employment agreements with certain executive
      officers of the Company. The agreements, which are substantially similar,
      provide for compensation to the officers in the form of annual base
      salaries. The employment agreements also provide for severance benefits
      upon the occurrence of certain events, including a change in control, as
      defined.

      LEASES

      The Company leases equipment and certain medical office facilities under
      noncancelable operating lease agreements which expire in various years
      through 2010. Rental expenses under these leases amounted to
      approximately $1,157,000 and $0 in 1997 and 1996, respectively.

      Future minimum rental commitments under all noncancelable operating lease
      agreements, excluding lease agreements that expire within one year, are
      as follows as of December 31, 1997:

<TABLE>
                                  <S>                          <C>
                                  1998                         $  2,113,431
                                  1999                            1,943,142
                                  2000                            1,596,943
                                  2001                            1,173,892
                                  2002                              971,281
                                  Thereafter                      5,671,620
                                                               ------------
                                                Total          $ 13,470,309
                                                               ============
</TABLE>

12.   RELATED-PARTY TRANSACTIONS

      In May 1997, the Company entered into an agreement with Premier
      HealthCare, an affiliate of the Company's Vice Chairman and Secretary,
      pursuant to which Premier HealthCare will assist the Company as a
      financial adviser in connection with acquisitions and similar
      transactions. In the event that the Company completes any transaction in
      which Premier HealthCare performed advisory services, Premier HealthCare
      will receive a fee equal to (i) its out-of-pocket expenses and (ii) 5% of
      the initial $1.0 million of Transaction Value, as defined, 4% of the next
      $1 million of Transaction Value, 3% of the next $1 million of Transaction
      Value, 2% of the next $1 million of Transaction Value, and 1% of the
      amount of Transaction Value in excess of $4 million. Pursuant to the
      agreement, the fee to be paid to Premier HealthCare for a particular
      transaction will be reduced by any finder's fee payable by the Company,
      which has been approved by Premier HealthCare, and the aggregate fee to be
      paid to Premier Healthcare in any given year will be reduced by the
      product of (i) $5,000 and (ii) the number of months in any year in which
      the Company's Vice Chairman and Secretary is employed by the Company. So
      long as the Company's Vice Chairman and Secretary is employed by the
      Company at his current salary, the aggregate fee to be paid to Premier
      HealthCare in any given year will be reduced by $60,000. The agreement
      may be terminated by either party upon 90 days written notice to the
      other.


                                      F-18
<PAGE>   88


      During the year ended December 31, 1997, the Company paid an aggregate of
      $647,000 to Premier HealthCare consisting of (i) $250,000 for consulting
      services in connection with the formation of the Company and the
      reorganization and (ii) $397,000 for consulting services in connection
      with the acquisition of assets or equity of the additional practices
      which were acquired during 1997.

      LEASES

      The Company leases one clinical location from the Company's chairman. The
      lease is for approximately 23,200 square feet and provides for monthly
      rental payments of approximately $47,000, subject to annual increases.
      The Company also leases one clinical location from Eastside Physicians
      Center, L.P., a Georgia limited partnership, of which Company's chairman
      is a limited partner. The lease is for approximately 3,500 square feet
      and provides for monthly rental payments of approximately $5,750, subject
      to annual increases. The future minimum rental commitments related to
      these two leases is included in Note 11. During 1996, the Company
      utilized office space of a related party for which no rent or other
      consideration was charged.


13.   QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>

                                                                                1997
                                                            FIRST      SECOND        THIRD       FOURTH
                                                            -----      ------        -----       -------
                                                                        (In Thousands,
                                                                     Except Per Share Amounts)

                <S>                                         <C>        <C>          <C>          <C>
                Revenue                                     $ 239      $4,264       $4,938       $6,119
                Operating income                               20         720          962        1,291
                Net income                                     20         512          664          864
                Basic net income per share                  $0.02      $ 0.09       $ 0.11       $ 0.14
                Diluted net income per share                 0.02        0.09         0.11         0.13
                Weighted average shares outstanding
                  Basic                                       836       5,905        6,207        6,329
                  Diluted                                     865       5,905        6,275        6,658
</TABLE>

14.   SUBSEQUENT EVENTS (UNAUDITED)

      On February 1, 1998 the Company acquired the nonmedical practice assets
      of an office located in DelRay Beach, Florida. This transaction will be
      accounted for under the purchase method of accounting.

      In March 1998, the Board of Directors adopted an amendment to the 1996
      Plan to increase the number of shares of common stock authorized under
      the 1996 Plan to 1,100,000 shares of the Company's authorized but
      unissued common stock authorized for issuance pursuant to the grant by
      the Company of options to officers, directors, employees, consultants,
      and independent contractors of the Company.


                                      F-19