<PAGE>   1

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                                   FORM 10-K
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                                       OR

[ ]         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                       COMMISSION FILE NUMBER: 000-21505

                        INTENSIVA HEALTHCARE CORPORATION
             (Exact name of Registrant as specified in its charter)

<TABLE>
<S>                                                <C>
                  DELAWARE                                          43-1690769
      (State or other jurisdiction of                            (I.R.S. Employer
       incorporation or organization)                          Identification No.)

       7733 FORSYTH BLVD., 8TH FLOOR                                  63105
            ST. LOUIS, MISSOURI                                     (Zip Code)
  (Address of principal executive offices)
</TABLE>

       Registrant's telephone number, including area code: (800) 724-0112

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

          Securities registered pursuant to Section 12(g) of the Act:
                    COMMON STOCK, PAR VALUE $0.001 PER SHARE

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

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

     On February 28, 1998 the aggregate market value of the Registrant's voting
stock held by non-affiliates was $25,501,581.

     On February 28, 1998 there were 9,905,062 shares of Common Stock
outstanding.

     Part III incorporates information by reference from the definitive Proxy
Statements to be used in connection with the Registrant's Annual Meeting of
Shareholders to be held on May 22, 1998, and to be filed no later than 120 days
after Registrant's fiscal year end.
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                                     PART I

ITEM 1. BUSINESS

FORWARD LOOKING STATEMENTS

     Certain statements in this Form 10-K, in press releases of Intensiva
HealthCare Corporation ("Intensiva" or the "Company"), and in oral statements
made by or with the approval of an authorized executive officer of the Company,
constitute "forward-looking statements", as that term is defined under the
Private Securities Litigation Reform Act of 1995 (the "Act") and releases issued
by the Securities and Exchange Commission. Words such as "believe", "expect",
"anticipate", "intend", "estimate", and other expressions which are predictions
of or indicate future events and trends and which do not relate to historical
matters identify forward-looking statements. Reliance should not be placed on
forward-looking statements because they involve known and unknown risks,
uncertainties and other factors, which may cause the actual results, performance
or achievements of the Company to differ materially from anticipated future
results, performance or achievements expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
from anticipated results include, but are not limited to, changes in health care
regulation and/or health care reform, changes in the regulation of relationships
among health care providers, difficulty in obtaining necessary licenses or
certifications, ability to collect accounts receivable, changes in reimbursement
policies or procedures, changes in payor mix, changes in referral source
practices, changes in relationships with general acute care hospitals from which
the Company is leasing space, changes in such leases, competition, and the
adequacy of professional liability insurance. The Company undertakes no
obligation to publicly update or revise any forward looking statement, whether
as a result of new information, future events or otherwise.

OVERVIEW

     Intensiva provides highly specialized, acute long-term care for critically
ill or injured patients who require intensive medical monitoring and treatment,
and who often have multiple medical conditions and are medically unstable. The
Company provides high quality, cost effective, specialized care for its
patients, who typically require an average length of stay of greater than 25
days in an intensive inpatient setting. Intensiva's medical staffs provide
specialized medical services, as well as nursing and respiratory care, and the
Company is expanding disease-specific pathways to treat pulmonary, cancer, renal
and cardiac conditions, among others. The Company's clinical programs utilize
specialized staff, equipment and protocols for the treatment of its patients.

     Intensiva leases underutilized space from general acute care hospitals
("Host Hospitals") in underserved markets, creating a separate "hospital within
a hospital." By leasing space from the Host Hospital, Intensiva is able to
minimize capital and overhead costs, including the costs to purchase and operate
the physical plant and expensive medical and diagnostic equipment. The Company
is able to purchase certain services from its Host Hospitals, such as laboratory
and radiology (MRI, CAT Scan, X-Ray), as well as hotel services such as laundry,
housekeeping, dietary and property management. The Company's business model
contemplates for each of its specialized hospitals to become certified by
Medicare as "long-term care hospitals" exempt from the Prospective Payment
System ("PPS") after approximately seven months of operations. This exemption
will enable the hospitals to receive cost-based reimbursement (subject to
certain caps), which the Company believes is more appropriate given the medical
condition of its patients.

     As of February 28, 1998, the Company operated seventeen hospitals in seven
states (586 beds), had executed six additional lease agreements to open acute
long-term care hospitals (202 beds), and had entered into four letters of intent
to open additional hospitals (approximately 140 beds).

     On October 10, 1996, the Company completed an initial public offering of
2.5 million shares of common stock, the net proceeds from which aggregated
approximately $13.2 million. On November 7, 1996, the underwriters exercised the
over-allotment option, resulting in the sale of 375,000 additional shares of
common stock, the net proceeds from which aggregated approximately $2.1 million.
The Company has used substantially all the proceeds for development and
operation of additional facilities, and the balance for working capital and
other general corporate purposes.
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     In November 1997, the Company entered into a revolving credit facility
agreement with a third-party which provides the Company with access to up to
$20.0 million in borrowing capacity. The credit facility is backed by a first
security interest in the Company's accounts receivable and other assets.

RISK FACTORS

     THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE
COMPANY AND ITS BUSINESS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE DESCRIBED IN THIS REPORT AS A RESULT OF CERTAIN FACTORS, INCLUDING
THOSE SET FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS REPORT.

     HEALTH CARE REFORM; RELIANCE UPON GOVERNMENT PROGRAMS; POSSIBLE REDUCTION
IN REIMBURSEMENT. Approximately 77% and 73% of the Company's net revenues in
1997 and 1996, respectively, were derived from payments made by Medicare. The
Company's hospitals operate under an exemption from PPS pursuant to which
non-exempt hospitals are reimbursed based upon diagnosis-related groups
("DRGs"). This exemption, created in 1983, was intended to be temporary. Efforts
to eliminate this exemption, coupled with increasing budgetary pressures may
lead to substantial changes in government-sponsored health care programs.
Recently the Balanced Budget Act of 1997 ("BBA") effected significant changes in
Medicare and Medicaid reimbursement for long-term hospital services. Certain
provisions of the BBA which may affect the business of the Company are referred
to in this Report under the heading "Business -- Government Regulation -- Health
Care Reform." Certain provisions of the BBA may reduce Medicare reimbursement to
the Company's hospitals. In particular, the BBA provides for: (i) a 15%
reduction in capital cost reimbursement for long-term care hospitals; (ii) a
statutory reimbursement cap for long-term care hospitals opened after October 1,
1997; (iii) a cap on reimbursement amounts for existing hospitals; and (iv) a
reduction in incentive payments by Medicare to hospitals that operate at cost
levels that are less than their previously established cost-per-discharge
ceilings. Additional proposals to reform Medicare reimbursement continue to be
considered. The Company cannot predict what or when legislation, if any, may be
enacted. Any such legislation may have a material adverse affect on the
Company's business, financial condition or result of operations. Although the
Company believes that its current structure puts it in a good position to deal
with the reimbursement caps which have been imposed by the BBA, there can be no
assurance that the limitations of the Act or of future laws or regulations will
not have a material adverse effect on the Company's business, financial
condition or results of operations.

     START-UP COSTS; LICENSURE AND CERTIFICATION RISKS. The Company incurs
substantial costs in opening and initially operating new hospitals, including
leasing costs, renovation and equipment costs and working capital needs. The
Company seeks to have its hospitals certified by Medicare as long-term care
hospitals, which are exempt from the PPS limitations and thus eligible to
receive cost-based reimbursement, subject to certain caps, for services rendered
to Medicare patients. The certification process to qualify for cost-based
reimbursement takes a minimum of six months (the "qualification period"). In
order to successfully complete the certification process, the Company's patients
must have an average length of stay of at least 25 days. Failure to maintain an
average length of stay of at least 25 days would result in the loss of
certification and qualification to receive cost-based reimbursement.
Reimbursement under PPS results in lower payments to the hospital than under
cost-based reimbursement and is not received until after a patient is
discharged, rather than periodically as costs are incurred. If the Company is
unable to receive Medicare certification as a long-term care hospital on a
timely basis for one or more of its facilities and other exemptions from PPS are
not available, the Company's business, financial condition or results of
operations may be adversely affected. In addition, the Company expects to incur
substantial losses with respect to each of its hospitals during the
certification process. Depending on the rate at which the Company opens new
hospitals, such losses could have a material adverse effect on the Company's
business, financial condition or results of operations.

     The Company's plans to expand its business are dependent in part upon its
ability to obtain requisite licenses, certifications, permits, approvals and
certificates of need. In some states, for example, health care providers have
experienced delays in obtaining Medicare certification or certification as a
long-term care

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hospital. No assurance can be given that the requisite licenses and
certifications will be granted by the applicable regulatory agencies for all, or
even any, of the Company's future hospitals or those currently under
development. Failure to obtain requisite licenses, certifications, permits,
approvals or certificates of need for any hospital or the delay in issuance of
any such licenses, certifications, permits, approvals or certificates of need
could have a material adverse effect on the Company's business, financial
condition or results of operations.

     COLLECTION AND REIMBURSEMENT RISKS. The Company assumes the financial risk
related to collection of its accounts receivable, including the potential
uncollectibility of accounts and delays and adjustments attendant to
reimbursement by third party payors, such as government programs, private
insurance plans and managed care plans. In addition, the nature of the services
rendered by the Company can result in the incurrence of significant charges with
respect to individual patients, which can be difficult to collect from patients
and/or payors. Failure to adequately manage the collection risks and working
capital demands could have a material adverse effect on the Company's business,
financial condition or results of operations.

     PAYOR MIX. For services provided to patients covered by Medicare, the
Company receives reimbursement that is either limited by PPS, or, if the
applicable Company hospital is exempt from PPS, is based upon the Company's
reasonable costs, subject to certain caps. The Company has or anticipates
entering into contracts with managed care organizations that provide for per
diem, per discharge or other forms of payment. Most of the Company's agreements
with managed care organizations also provide for significant discounts from the
Company's routine charges. The Company receives payment for other patients based
upon fee for service arrangements or negotiated rates. The Company's success
depends in part upon its ability to achieve and maintain the anticipated mix of
payors and to enter into contractual arrangements with managed care
organizations and other payors that will allow the Company to be paid in excess
of the costs incurred in rendering services. Failure to achieve and maintain the
anticipated payor mix could have a material adverse effect on the Company's
business, financial condition or results of operations.

     RELIANCE UPON REFERRAL SOURCES. The Company's patient admissions are
dependent upon establishing and maintaining relationships with unrelated third
parties who refer patients to the Company. The Company believes that its ability
to obtain referrals is based upon demonstrating high quality of care,
convenience to referral sources and cost effective outcomes. The Company
believes it will continue to receive a large number of referrals from its Host
Hospitals. To the extent that a Host Hospital's census, reputation or general
acceptance in the community declines, or to the extent the Company does not
adequately manage its relationships with referral sources, there could be a
material adverse effect on the Company's business, financial condition or
results of operations.

     DEPENDENCE ON HOST HOSPITALS. The Company relies upon its Host Hospitals to
provide a variety of necessary services and amenities. Typically, each Intensiva
facility will contract with a Host Hospital to provide diagnostic and other
support, hotel and ancillary services such as laundry and linen, dietary and
waste disposal, as well as for access to certain medical services, such as
laboratory and radiology (MRI, CAT Scan, X-Ray). Should the Host Hospital fail
to adequately provide these services, it is uncertain whether another cost
effective source could be found or effectively utilized. Further, should the
Host Hospital cease or significantly reduce operations, it is unlikely the
Intensiva facility could continue operations at that location.

     NON-RENEWAL OR TERMINATION OF LEASES.  The Company's facilities have leases
that have an initial term of five or more years. Intensiva has been operating
for approximately three years. Accordingly, none of its leases have come up for
renewal. It is unknown whether the Host Hospitals will renew such leases upon
expiration of their initial terms, or what new payments or other lease terms the
Host Hospital will negotiate upon renewal. In addition, a lease could be
terminated because of a breach of a lease by either the Company or the Host
Hospital. Failure to renew leases with adequate financial terms upon expiration
or early termination of a lease could have a material adverse effect on the
Company's business, financial condition or results of operation.

     REGULATION OF RELATIONSHIPS AMONG HEALTH CARE PROVIDERS.  Federal and state
laws regulate the relationships among providers of health care services,
physicians and other clinicians. These laws include the fraud and abuse
provisions of the Medicare and Medicaid statues, which prohibit the
solicitation, payment, receipt or offering of any direct or indirect
remuneration for the referral of Medicare or Medicaid patients or
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for recommendation, leasing, arranging, ordering or purchasing of Medicare or
Medicaid covered services, as well as laws that impose significant penalties for
false or improper restrictions on physician referrals for designated health
services to entities with which they have financial relationships. While the
Company believes it has complied with all applicable requirements in its leases
with Host Hospitals and contracts and relationships with its medical staff,
other entities and individuals, there can be no assurance that, if reviewed, the
arrangements would be found to be in compliance. Violations of these laws may
result in substantial civil or criminal penalties for individuals or entities,
including large civil money penalties and exclusion from participation in
Medicare and Medicaid programs. Such exclusion and penalties, if applied to the
Company, could result in significant loss of reimbursement, and could have a
materially adverse effect on the Company's business, financial condition or
results of operations.

     MANAGEMENT SYSTEMS.  The Company's success will depend in part on its
ability to develop, implement, protect and maintain its management systems,
particularly as they relate to the growth of the Company. There can be no
assurance that the Company's management systems will be adequate to support the
Company's anticipated growth or meet future patient care, reimbursement or
outcome reporting requirements. In addition, some of the Company's management
systems are licensed from third parties and there can be no assurance that such
systems will be maintained and updated so as to meet the Company's ongoing
requirements. There can be no assurance that the Company's systems do not
infringe upon the proprietary rights of others.

     COMPETITION.  The services provided by the Company are subject to
substantial competition. Competition exists from several sources, including
regional and local hospitals and other health care organizations providing
competitive services. Certain of the Company's competitors are larger and better
capitalized, have greater experience in providing acute long-term care hospital
services and may have longer established relationships with the referral sources
and payors for such services. While general acute care hospitals cannot
currently qualify for cost-based reimbursement as long-term care hospitals on
their existing campuses, in certain urban markets rapid consolidation of general
acute care hospitals is occurring and hospital operators could apply for PPS
exemption for long-term care hospitals that are not located on the same campus
as their general acute care hospitals, and thereby compete with the Company on a
similar basis. The regulations could also change to permit general acute care
hospitals to operate exempt long-term care hospitals located on their campuses.
This competition may adversely affect the Company's ability to maintain or
increase its market share and profitability or to continue its operations.

     PROFESSIONAL LIABILITY AND UNCERTAINTY OF ADEQUATE INSURANCE.  The
Company's medical staffs provide care to critically ill and injured patients. A
certain percentage of these patients are expected to deteriorate in condition,
and some will die. The Company may be subject to professional liability claims
and costs. In addition, the Company's leases with Host Hospitals generally
require the Company to indemnify the Host Hospitals for losses resulting from
the negligence of the Company, its employees and those affiliated with the
Company. The Company maintains professional and general liability insurance.
While the Company believes it has adequate professional and general liability
coverage, there can be no assurance that the insurance maintained by the Company
would be sufficient to fully cover the Company in the event of a claim.
Furthermore, there can be no assurance that the Company will be able to obtain
liability insurance in the future with adequate coverages or at acceptable
costs. Any claim against the Company could have a material adverse effect on the
Company's reputation, patient referrals, business, financial conditions or
results of operations.

     EXPANSION; CAPITAL REQUIREMENTS.  The Company's expansion plans depend in
part on its ability to lease excess capacity from general acute care hospitals
and to develop long-term care hospitals in such space. There can be no assurance
that the Company will be able to successfully select new geographic markets and
Host Hospitals or otherwise develop new hospital facilities. The Company's
expansion strategy may also divert management's attention from the operation of
the Company's existing hospitals. In addition, the Company's growth strategy
requires substantial capital for the development of additional long-term care
hospitals. Development of additional new long-term care hospitals requires
capital for renovation, expansion and working capital. The Company believes that
its existing cash resources will be sufficient to meet the Company's

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anticipated expansion and working capital needs through year end 1998. However,
there can be no assurance that additional capital will not be needed.

     DEPENDENCE ON KEY PERSONNEL; RECRUITMENT.  The Company is highly dependent
on the principal members of its management and development team, the loss of
whose services might impede the achievement of the Company's business
objectives. The loss of David W. Cross, President and Chief Executive Officer,
John R. Lewis, Executive Vice President and Chief Operating Officer, or other
key personnel, could have a material adverse effect on the Company. The Company
has employment agreements with Messrs. Cross and Lewis and other key personnel.
Among other things, these agreements prohibit such executive employees from
competing with the Company under certain conditions for a specific period
following termination, subject to certain exceptions. There can be no assurance
that these non-competition agreements are enforceable under all circumstances.
Currently the Company has key person life insurance in the amount of $1.0
million on the lives of each of Messrs. Cross and Lewis. In addition, as the
Company grows, recruiting and retaining additional qualified personnel to
supervise and manage the Company's development and operations will be important
to the Company's success. Competition exists for qualified personnel, and there
can be no assurance that the Company will be able to attract and retain skilled
and experienced management, development and operations, personnel on acceptable
terms.

     CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS.  The directors and executive
officers of the Company, and their affiliates, as a group beneficially own
greater than 40% of the outstanding shares of Common Stock (including those
exercisable under the Company's stock option plans at December 31, 1997) of the
Company. As a result, these stockholders acting together would be able to exert
considerable influence over the election of the Company's directors and the
outcome of most corporate actions requiring stockholder approval, such as
certain amendments to the Certificate of Incorporation. Additionally, such
directors and executive officers will have significant influence over the
policies and operations of the Company's management and the conduct of the
Company's business. Such concentration of ownership may have the effect of
delaying, deferring or preventing a change of control of the Company and
consequently could affect the market price of the Common Stock.

     ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER, BY-LAW AND DELAWARE LAW
PROVISIONS; POSSIBLE ISSUANCE OF PREFERRED STOCK.  Certain provisions of the
Company's Certificate of Incorporation, Amended and Restated By-laws
("By-laws"), and Delaware law could, together or separately, discourage
potential acquisition proposals, delay or prevent a change in control of the
Company and limit the price that certain investors might be willing to pay in
the future for shares of the Common Stock. These provisions, among other things,
provide for advance notice requirements and other limitations on the right to
call a special meeting of stockholders, to nominate directors and to submit
proposals to be considered at stockholders' meetings. The Certificate of
Incorporation provides for a staggered Board of Directors, with one-third of the
board members being elected each year to a three-year term. Directors may be
removed only for "cause," as defined in the Certificate of Incorporation. The
Company is also subject to Section 203 of the Delaware General Corporation Law
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in a broad range of business combinations with any "interested
stockholder" for a period of three years following the date that such
stockholder became an interested stockholder. In addition, the Company's
Certificate of Incorporation authorizes the Board of Directors to issue
preferred stock with no par value ("Undesignated Preferred Stock") without
stockholder approval and upon such terms as the Board of Directors may
determine. While no shares of Undesignated Preferred Stock are now outstanding,
and the Company has no present plans to issue any shares of Undesignated
Preferred Stock, the rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of any holders of Undesignated
Preferred Stock that may be issued in the future.

     POSSIBLE VOLATILITY OF STOCK PRICE.  Factors such as continued market
acceptance of the Company's services, development of additional hospitals,
physician referrals, regulatory reform as well as other government regulations,
investor perception of the Company, fluctuations in the Company's operating
results and general market conditions in the industry may cause the market price
of the Common Stock to fluctuate significantly. In addition, the stock market in
general has recently experienced extreme price and volume volatility. These
broad market fluctuations may have a material adverse effect on the market price
of the Common Stock.
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INDUSTRY BACKGROUND

     The health care system in the United States continues to undergo
significant change. As the elderly population grows more rapidly than the
overall population and as advances in medicine and technology continue to
increase life expectancies, national health care costs are expected to outstrip
the availability of resources from government sponsored health care programs.
Accordingly, health care reform has increased its focus on cost containment.
Payors, led by managed care networks, are demanding higher quality patient care
at lower cost tied to predictable outcomes. These demographic changes,
technological advances and cost containment pressures are changing medical
practice patterns, resulting in an increasing proportion of complex medical care
being delivered outside of the general acute care hospital, in more cost
effective settings. As a result, the patient population has become increasingly
segmented.

     Long stay critically ill or injured patients are difficult and expensive to
treat and, as a result, are in danger of becoming disenfranchised by the current
health care system. These patients generally require an interdisciplinary team
of specialists due to their multiple system deficits and the critical nature of
their illnesses or injuries. Traditional acute care hospitals serve a general
population which consists primarily of short-stay patients. These hospitals are
not well positioned to provide the most cost effective services to critically
ill and injured extended stay patients because of their focus and lack of
critical mass with respect to these patients. Traditional hospitals have an
incentive to discharge these patients to other specialty care providers as soon
as practicable. In addition, payors are seeking specialized clinical services
that provide high quality, predictable outcomes at reduced cost for this
disenfranchised, expensive patient population. The Company estimates that the
cost of treatment for this discrete patient population exceeds $2 billion
annually.

PATIENTS SERVED

     The Company provides acute care services for critically ill or injured
patients suffering from multiple medical conditions and requiring an extended
length of stay of typically 25 to 50 days. Extended hospital stays are medically
necessary due to a combination of conditions, including:

     - Respiratory conditions resulting from chronic obstructive pulmonary
       disease and cancer. Many of the Company's patients require a tracheostomy
       or ventilator care and/or weaning.

     - Cancer conditions, including the management of patients undergoing
       radiation therapy or chemotherapy. Many patients also require specialized
       pain management.

     - Cardiac conditions, including complicated myocardial infarction with or
       without congestive heart failure, cardiac dysrhythmias requiring
       intravenous drug therapy, post operative coronary bypass and aortic
       aneurysm surgery.

     - Renal conditions, ranging from acute kidney and urinary tract infections
       to acute and/or chronic renal failure. These include management of renal
       transplant patients.

     - Neurological conditions, including cerebral vascular accidents,
       craniotomies and other post-surgical conditions, brain and spinal cord
       injuries and Guillain Barre and other degenerative syndromes.

     Many of the Company's patients suffer from combinations of these conditions
and often require long-term intravenous antibiotic therapy, nutritional therapy,
pain control and wound management. In addition, the Company's patients are often
dependent on sophisticated technology for continued life support.

FACILITIES

     In each market in which Intensiva operates, the Company establishes a fully
licensed hospital to be certified as a long-term care hospital by Medicare.
Intensiva's hospitals have an average of approximately 35 licensed beds and
generally are located on one or two floors of the Host Hospital. The initial
lease term is five or more years and may be renewed or extended under varying
renewal/extension terms.

     As of February 28, 1998, Intensiva operates ten PPS-exempt long-term care
hospitals, has four hospitals that are awaiting final notification of PPS-exempt
long-term care status, three hospitals that are in the

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qualification period to obtain PPS-exempt status as long-term care hospitals,
has entered into six additional leases to open acute long-term care hospitals
and has four letters of intent with Host Hospitals to open acute long-term care
hospitals. Once a lease has been signed (and a Certificate of Need is approved,
if necessary), it takes approximately four to five months to open the hospital
and a minimum additional six to seven months to receive Medicare certification
as a long-term care hospital. All of the Company's hospitals are located within
general acute care hospitals.

     The following table presents summarized information on the Company's
facilities as of February 28, 1998:

<TABLE>
<CAPTION>
                                                                                                AVERAGE DAILY
                                                                                                  CENSUS IN
                   TYPE OF FACILITY                       NO. OF FACILITIES    LICENSED BEDS    FEB. 1998(4)
                   ----------------                       -----------------    -------------    -------------
<S>                                                       <C>                  <C>              <C>
PPS-exempt long-term care hospitals...................           10                 353(1)          238.3
Hospitals awaiting notification of Medicare long-term
  certification.......................................            4                 131(2)           55.9
Hospitals in qualification period for Medicare
  long-term certification.............................            3                 102(3)           15.2
</TABLE>

-------------------------
(1) The number of beds shown includes beds not being utilized as of February 28,
    1998, but for which the Company has contractual rights to operate at its
    option. At February 28, 1998, the Company utilized 20 beds out of 34
    licensed beds at one facility, and 27 beds out of 35 licensed beds at
    another facility.

(2) The number of beds shown includes beds not being utilized as of February 28,
    1998, but for which the Company has contractual rights to operate at its
    option. At February 28, 1998, the Company utilized 73 beds at these four
    facilities.

(3) The number of beds shown includes beds not being utilized as of February 28,
    1998, but for which the Company has contractual rights to operate at its
    option. At February 28, 1998, the Company utilized 22 beds at these three
    facilities.

(4) Average Daily Census ("ADC") is computed by dividing total patient days
    during the month for all facilities within a group by the number of calendar
    days in the applicable month that each facility group was open. ADC at any
    one facility for any particular month will vary based upon a variety of
    factors, however, the February 1998 ADC figures are consistent with the
    Company's expectations that hospitals in the qualification period for
    Medicare long-term certification will have a lower ADC than PPS-exempt
    long-term care hospitals. The Company does not believe that month-by-month
    ADC figures would provide additional meaningful information.

     The Company has entered into a lease agreement with St. Joseph's Hospital,
located in Ann Arbor, Michigan, to open an acute long-term care hospital within
that hospital. The lease provides for 36 beds.

     The Company has entered into a lease agreement with St. Mary's Health
System, located in Knoxville, Tennessee, to open an acute long-term care
hospital within that hospital. A certificate of need has been received to
operate 30 beds at this location.

     The Company has entered into a lease agreement with St. Joseph's Hospital,
located in Pontiac, Michigan, to open an acute long-term care hospital within
that hospital. The lease provides for 34 beds.

     The Company has entered into a lease agreement with St. Mary's Hospital,
located in Reno, Nevada, to open an acute long-term care hospital within that
hospital. The lease provides for 35 beds.

     The Company has entered into a lease agreement with Albert Einstein Medical
Center, located in Philadelphia, Pennsylvania, to open an acute long-term care
hospital within that hospital. The lease provides for 37 beds.

     The Company has entered into a lease agreement with St. Joseph's Hospital,
located in Tacoma, Washington, to open an acute long-term care hospital within
that hospital. A certificate of need is pending which would allow the Company to
operate 30 beds.

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     Most of the Company's hospital leases contain non-competition provisions
pursuant to which the Host Hospital will not operate another long-term care
facility within a certain radius of the Host Hospital. In return, the Company
agrees not to own or operate another acute long-term care program or competitive
business within a certain radius of the Host Hospital.

SOURCES OF REVENUE

     The Company receives payment for health care services primarily from
non-governmental payors such as managed care organizations (PPOs, HMOs and
similar organizations) and other commercial health insurance carriers (e.g.,
traditional indemnity insurance plans) and the federal government and state
governments under Medicare, Medicaid and other governmental programs. Consistent
with initiatives to control health care costs, the Company generally negotiates
payments with non-governmental payors based upon the type and extent of services
to be provided to individual patients. As of February 28, 1998, the Company has
approximately 70 managed care contracts to provide services to participating
members. These managed care agreements are composed primarily of per diem/per
discharge contracts, fee for service contracts, and contracts with negotiated
discounts from established charges. The following table sets forth the
approximate percentages of the Company's net revenues derived from the specified
payor sources indicated:

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                        ---------------------------
                                                        1997       1996       1995
                                                        ----       ----       ----
<S>                                                     <C>        <C>        <C>
Medicare............................................     76.9%      73.2%      44.4%
Medicaid............................................      3.2        0.9        2.3
HMO.................................................      0.8        1.4        2.5
PPO.................................................      4.9        6.5        2.7
All other payors(1).................................     14.2       18.0       48.1
                                                        -----      -----      -----
                                                        100.0%     100.0%     100.0%
                                                        =====      =====      =====
</TABLE>

-------------------------
(1) Includes traditional indemnity insurers and all other third-party payors
    (primarily those for which services are negotiated on a case by case basis).

COMPETITION

     A number of health care providers compete with the Company for the
admission and treatment of critically ill or injured patients. In each of the
Company's geographic markets, general acute care hospitals provide services
comparable to those offered by the Company. In addition, other health care
providers certified by Medicare as long-term care hospitals and located in the
Company's geographic markets provide similar services to those provided by the
Company. Many of these general acute care hospitals and long-term care hospitals
are larger and more established than the Company's operations. Certain hospitals
that compete with the Company are operated by not-for-profit, non-taxpaying or
governmental agencies, which can finance capital expenditures on a tax-exempt
basis and which receive funds and charitable contributions unavailable to the
Company.

     Cost containment efforts by federal and state governments and other
third-party payors designed to encourage more efficient utilization of acute
care services have generally resulted in lower hospital occupancy rates in
recent years. As a result of these efforts, a number of acute care hospitals
have converted to specialized care facilities. The Company may experience
increased competition from existing general acute care hospitals and converted
facilities.

     Competition for patients covered by non-governmental reimbursement sources
is intense. The primary competitive factors among acute long-term care providers
include quality of services, charges for services, outcomes and responsiveness
to the needs of patients, families, payors and physicians. Other companies have
entered into the acute long-term care market with licensed hospitals that
compete with the Company, and in many cases are larger and have greater
financial resources than the Company.

                                        8
<PAGE>   10

PROFESSIONAL STAFF

     Each of the Company's facilities is staffed with an interdisciplinary team
of health care professionals including physicians, nurses and therapists, who
specialize in areas needed for the treatment of the critically ill or injured.
Each Company facility has its own Medical Director and its own Vice President of
Patient Care Services. A professional nursing staff trained to care for the
extended stay acute patient is on duty 24 hours each day in each of the
Company's facilities. Other professional staff include respiratory therapists,
physical therapists, occupational therapists, speech/language pathologists,
pharmacists, clinical dietitians, case managers, social services and
psychological services. Each Company facility has a Chief Executive Officer who
supervises and is responsible for day-to-day operations, and an Organizational
Improvement Coordinator to direct an integrated quality assurance and
improvement program. The Company's corporate headquarters provides services in
the areas of system design, development, training, human resource management,
reimbursement expertise, financial control, legal advice, technical accounting
support, purchasing, facilities management, and information systems support.

GOVERNMENT REGULATION

     The health care industry is subject to regulation by a number of
governmental agencies. The regulatory environment affects the Company's business
activities, requires licensure and certification of its hospitals, regulates
relationships between health care providers, and controls reimbursement to the
Company for services provided.

     Each Company hospital is a fully licensed hospital and each has a separate
Medicare provider agreement, with the exception of one hospital opened as a
satellite location of an existing hospital which operates under the existing
hospital's provider agreement. Under the Medicare program, after a hospital has
been in operation for a minimum of six months, it is certified as a long-term
care hospital if its patients have an average length of stay of at least 25
days. As of February 28, 1998, fourteen of the Company's seventeen hospitals
have completed their qualification period and each have had patients with an
average length of stay in excess of 25 days. All of these hospitals have either
been certified or are awaiting notification of certification as a long-term care
hospital.

     Additional Medicare rules and regulations regulate the Company's "hospitals
within hospitals" ("HIH") operating model. The rules and regulations are
intended to ensure organizational and functional independence between the host
hospital and the HIH. The rules and regulations require that the HIH must have a
separate governing body, a separate chief medical officer, a separate medical
staff, and a separate chief executive officer. In addition, either no more that
15% of the HIH's total impatient operating costs may be purchased from the host
hospital, or no more than 25% of the HIH's total admissions may be referred from
the host hospital.

     The Company intends to operate all of its hospitals to achieve an average
length of stay of greater than 25 days and to comply with the organizational and
functional independence criteria. Currently, the average length of stay for all
Intensiva hospitals is in excess of 28 days.

     HEALTH CARE REFORM. The Balanced Budget Act of 1997 was enacted into law on
August 5, 1997. The Act contained a number of provisions affecting long-term
acute care hospitals. Key provisions of the Act as it applied to the Company
include:

     - Cap on Target Amount for Existing Hospitals -- Hospitals that have
       obtained certification as long-term care hospitals before October 1, 1997
       are subject to a reimbursement cap of $37,688 per discharge.

     - Cap on Target Amount for New Hospitals -- Hospitals that have obtained
       certification as long-term care hospitals on or after October 1, 1997 are
       subject to a reimbursement cap of $18,947 per discharge.

     - Reduction in Reimbursement for Capital Costs -- Effective October 1,
       1997, reimbursement for capital costs have been reduced by 15%.

                                        9
<PAGE>   11

     - Reduction in Incentive Payments -- The Medicare program makes incentive
       payments to hospitals that operate at cost levels that are less than
       their previously established cost per discharge ceilings. These payments
       had been calculated as the lesser of (i) 50% of the difference between
       actual costs and the cost ceiling, or (ii) 5% of the cost ceiling.
       Effective for cost reporting periods beginning on or after October 1,
       1997, payments will be calculated as the lesser of (i) 15% of the
       difference between actual costs and the cost ceiling, or (ii) 2% of the
       cost ceiling.

     - Requires the Secretary of the Department of Health and Human Services
       ("HHS") to develop, establish, administer and evaluate a case-mix
       adjusted prospective payment system for long-term care hospitals. The
       Secretary is required to develop a legislative proposal for establishing
       and administering a payment system that would include an adequate patient
       classification system that reflects differences in patient resource use,
       and submit such proposal to Congress by no later than October 1, 1999.

     Although there is no assurance that the Company's new hospitals will be
able to operate profitably under these new provisions, the Company believes that
it will be able to respond to these changes in Medicare reimbursement.

     CERTIFICATE OF NEED AND STATE LICENSING. Certificate of Need ("CON")
regulations control the development and expansion of health care services and
facilities in certain states. CON laws generally provide that approval must be
obtained from the designated state health planning agency prior to expansion of
existing facilities, construction of new facilities, addition of beds,
acquisition of major items of equipment or introduction of new services. The
Company has one signed agreement to open a hospital in a state that requires a
CON that has not yet received CON approval. There can be no assurance that the
Company will be able to obtain the required CON.

     State licensing of hospitals is a prerequisite to the operation of each
hospital and participation in government programs. Once a hospital becomes
licensed and operational, it must continue to comply with federal, state and
local licensing requirements in addition to local building and life-safety
codes. Management believes that all of the Intensiva hospitals in operation have
obtained the necessary licenses to conduct business. Failure to obtain a
necessary license or loss of such a license would necessitate not opening or
halting operations of the hospital. See "Business -- Legal Proceedings."

     MEDICARE AND MEDICAID. A substantial portion of Intensiva's net revenues
are derived from patients covered by the Medicare program. For the year ended
December 31, 1997, only 3.2% of Intensiva's net patient revenues were derived
from state Medicaid programs. Payments received by a health care provider under
Medicare and Medicaid are heavily regulated.

     For example, in order to receive Medicare reimbursement, a hospital must
meet the applicable Conditions of Participation set forth by HHS relating to the
type of hospital, its equipment, personnel and standards of medical care, as
well as comply with state and local laws and regulations. Hospitals undergo
periodic on-sight Medicare certification surveys, which are generally limited if
the hospital is accredited by JCAHO. All of Intensiva's operating hospitals are
participating in the Medicare program and are in various stages of the
certification process as described above. A loss of or failure to obtain
certification could adversely affect Intensiva's ability to receive payments
under the Medicare program.

     Prior to 1983, Medicare reimbursed hospitals for the reasonable direct and
indirect costs of the services provided to beneficiaries. The Social Security
Act Amendments of 1983 implemented PPS as a means of controlling health care
costs. Under PPS, Medicare inpatient costs are reimbursed based upon a fixed
payment amount per discharge based upon diagnosis-related groups ("DRGs").
Although the average length of stay varies for each DRG, the average stay for
all Medicare patients subject to PPS is approximately six days. An additional
outlier payment is made for patients with unusually extended lengths of stay or
higher treatment costs. Outlier payments are designed to cover only marginal
costs.

     The Social Security Act Amendments of 1983 exempted psychiatric,
rehabilitation, cancer, children and long-term hospitals from PPS. A long-term
hospital is defined as a hospital which has an average length of stay of greater
than 25 days. Inpatient operating costs for hospitals certified as long-term
hospitals are exempt from PPS and are reimbursed by Medicare under a cost-based
reimbursement system (subject to certain
                                       10
<PAGE>   12

ceilings). Hospitals that receive cost-based reimbursement establish a hospital
specific cost per discharge ceiling in their second full cost report year, which
serves as a ceiling for future reimbursable costs. As described previously, this
ceiling cannot exceed $37,688 per discharge for hospitals certified as long-term
hospitals before October 1, 1997, or $18,947 per discharge for hospitals
certified as long-term hospitals on or after October 1, 1997. This ceiling
amount is subject to annual cost increases. Prior to setting that ceiling, a
hospital is reimbursed based on its reasonable allowable costs, limited to the
amounts per discharge for new and existing hospitals described above. Hospitals
may not be certified as long-term hospitals until they have operated for at
least six months. Prior to such time, reimbursement is based upon PPS (unless
another exemption from PPS is available).

     Unlike the situation in the rehabilitation industry, general acute care
hospitals that open acute long-term care hospital facilities within their
hospital or on the same physical campus as their hospital are severely
restricted in terms of reimbursement. Current Medicare regulations establish a
more favorable reimbursement mechanism for hospitals within hospitals that have
a separate governing body, separate medical staff, separate chief medical
officer and separate chief executive officer, and that are not under the control
of their host facility. General acute care hospitals attempting to operate their
own hospitals within hospitals (including hospitals on the same physical campus)
cannot meet the independence criteria to be exempt from PPS.

     Federal regulations provide that admission to and utilization of hospitals
by Medicare and Medicaid patients are subject to review by Peer Review
Organizations ("PRO") consisting of groups of practicing physicians and other
health care professionals, in order to insure efficient utilization of hospitals
and services. A PRO may conduct such a review either prospectively or
retroactively and may, as appropriate, recommend denial of payments for services
provided to a patient. Such review is subject to administrative and judicial
appeal.

     ANTI-FRAUD LEGISLATION. Medicare and Medicaid Anti-Fraud and Abuse
Amendments codified under Section 1128B(b) of the Social Security Act (the
"Anti-Fraud Amendments") prohibit certain business practices and relationships
that might affect provision and cost of health care services reimbursable under
Medicare and Medicaid. In addition, the Medicare and Medicaid Anti-Kickback
statute and the Medicare and Medicaid Patient and Program Protection Act of 1987
(the "Anti-Kickback Laws") prohibit the payment of remuneration to any person in
return for the referral of Medicare or Medicaid patients. Sanctions for
violating the Anti-Fraud Amendments and the Anti-Kickback Laws include criminal
and civil penalties and exclusion from Medicare and Medicaid programs.

     The Omnibus Reconciliation Act of 1989 and the Omnibus Budget
Reconciliation Act of 1993 provide that a physician who has a financial
relationship with providers of certain designated health services, including
inpatient and outpatient hospital services, is generally prohibited from
referring patients to them. If any such financial relationship exists, the
entity is generally prohibited from receiving reimbursement payments for
services under the Medicare or Medicaid programs. Intensiva believes it is in
compliance with these laws and regulations.

     GRAMM-RUDMAN-HOLLINGS ACT. The Company's Medicare revenues may be adversely
effected by the Balanced Budget and Emergency Deficit Control Act of 1985, as
amended (the "Gramm-Rudman-Hollings Act") which would reduce federal spending in
order to remove the excess deficit. Under the Gramm-Rudman-Hollings Act, the
Medicare program may be reduced by up to four percent. If reductions are made in
the Medicare program, payments to providers who are paid on a reasonable cost
basis may be reduced.

     STATE REGULATORY ENVIRONMENT. Certain states regulate hospital rates. At
this time, the Company does not operate any hospitals in any states that
regulate rates. However, the adoption of such legislation or other cost
containment measures in states in which the Company operates could have a
material adverse effect on the Company's hospitals and revenues and operating
income. The Company is unable to predict whether and in what form any such
legislation might be adopted. The Company's business, financial condition or
results of operations could be affected by other state rate setting laws.
Certain states in which the Company operates require hospitals to disclose
specified financial information. In addition to federal anti-fraud and
anti-kickback statutes, many states have enacted statewide limitations on
physician referrals to entities providing services

                                       11
<PAGE>   13

reimbursed by Medicare, Medicaid or other third-party payors. State laws
governing physician referrals vary from notice requirements to absolute
prohibitions. Intensiva believes it is in compliance with such regulations.

ACCREDITATION

     Hospitals may receive accreditation from JCAHO, a nationwide
non-governmental commission which establishes standards relating to the physical
plant, administration, quality of patient care and operation of medical staffs
of hospitals. The purpose of this accreditation is to (i) promote ongoing
compliance with industry recognized standards for hospitals, (ii) assist
management in analyzing each hospital to identify opportunities to improve
patient care, and (iii) assist in patient attraction. Generally, hospitals and
certain other health care facilities are required to have been in operation for
at least six months in order to be eligible for accreditation by JCAHO. After
conducting on-site surveys, JCAHO awards accreditation for up to three years to
hospitals found to be in substantial compliance with JCAHO standards. Accredited
hospitals are periodically resurveyed, at the option of JCAHO, upon a major
change in facilities or organizations and after merger or consolidation. Through
February 28, 1998, 15 of the Company's hospitals have received JCAHO
accreditation. In March 1998, one of the remaining two hospitals received JCAHO
accreditation; the other is scheduled for a survey in mid-1998.

INSURANCE

     The Company maintains professional liability coverage on each of its
facilities in addition to coverage for the customary risks inherent in the
operation of health care facilities and business in general. The current
policies provide coverage on an occurrence basis. The Company's management
believes that it has adequate professional liability coverage. The Company also
currently maintains a directors' and officers' liability insurance policy. The
Company believes that it will be able to continue to maintain adequate
insurance; however, there can be no assurance that adequate insurance will be
available on terms acceptable to the Company.

EMPLOYEES

     The Company had approximately 890 full-time employees and approximately 585
part-time employees as of February 28, 1998. The Company believes its
relationship with its employees is good.

EXECUTIVE OFFICERS OF THE COMPANY

     As of February 28, 1998, the executive officers of the Company were as
follows:

     David W. Cross is a founder of the Company and has served as President and
Chief Executive Officer and as a Director since the Company's inception in 1994.
Prior to founding the Company, Mr. Cross was a founder, the President and Chief
Executive Officer, and a director of Advanced Rehabilitation Resources, Inc.,
serving in each of these capacities from 1990 to 1993. From 1987 to 1990, he was
Senior Vice President of Business Development for RehabCare Group, Inc., a
publicly traded rehabilitation care company, and in 1993 and 1994 served as
Executive Vice President and Chief Development Officer of RehabCare Group, Inc.
Mr. Cross currently serves on the board of directors of Odyssey Healthcare,
Inc., a hospice health care company, and he is a Trustee and President of the
Long-Term Acute Care Hospital Association of America, a trade association. Mr.
Cross holds a B.A. from the University of California at Fullerton.

     John R. Lewis is a founder of the Company and has served as Executive Vice
President and Chief Operating Officer since its inception in 1994. Prior to
joining the Company, Mr. Lewis was a co-founder of Advanced Rehabilitation
Resources, Inc. and served as its Chief Operating Officer from 1990 to 1993.
From 1984 until 1990, he served as the Chief Operating Officer of RehabCare
Group, Inc. and in 1993 and 1994 served in various senior executive positions
including Chief Operating Officer with RehabCare Group, Inc. Mr. Lewis holds an
M.A. from Ohio University.

     John P. Keefe has served as Chief Financial Officer for the Company since
June 1995. From 1993 to 1995, Mr. Keefe served as Northwestern Region Area
Manager for Sons of Norway, a fraternal insurance

                                       12
<PAGE>   14

company, and from 1988 to 1993, he served as Chief Financial Officer and Senior
Vice President for Safecare Health Services, a hospital management company. From
1980 until 1988, he held senior level financial positions with American Medical
International, a hospital management company. He also served as the Chief
Financial Officer for the George Washington University Health Plan. Mr. Keefe is
a certified public accountant and holds a B.A. in business administration from
Georgia State University.

ITEM 2. PROPERTIES

     As of December 31, 1997, the Company leased approximately 15,000 square
feet for each of its 17 hospital facilities. The Company considers all of its
physical properties to be in good operating condition and suitable for the
purposes for which they are being used. The Company leases approximately 12,000
square feet for its corporate headquarters in St. Louis, Missouri.

ITEM 3. LEGAL PROCEEDINGS

     As is typical in the healthcare industry, the Company is subject to claims
and legal actions by patients and others in the ordinary course of business. The
Company believes that all such claims and actions currently pending against it
either are adequately covered by insurance or would not have a material adverse
effect on the Company if decided in a manner unfavorable to the Company.

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

     Not applicable.

                                       13
<PAGE>   15

                                    PART II

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

     As of February 28, 1998, the Company had 32 shareholders of record.

     The Company's Common Stock is listed and traded on the NASDAQ National
Market ("NNM") under the symbol "IHCC". The Company began trading on the NNM on
October 10, 1996. The high and low sale prices as reported on the NNM during the
first, second, third and fourth quarters of 1997 and the fourth quarter of 1996
(period from October 10, 1996 through December 31, 1996) were as follows:

<TABLE>
<CAPTION>
                                                                 PRICE RANGE
                                                                --------------
                            1997                                 HIGH    LOW
                            ----                                ------  ------
<S>                                                             <C>     <C>
Fourth Quarter..............................................    $8 5/8  $6 1/8
Third Quarter...............................................    11 1/4   6
Second Quarter..............................................     8 7/8   6 1/8
First Quarter...............................................    11 1/4   6 1/4
</TABLE>

<TABLE>
<CAPTION>
                            1996
                            ----
<S>                                                             <C>     <C>
Fourth Quarter (from October 10 to December 31, 1996).......    11 3/8   6
</TABLE>

     The Company has never declared or paid dividends on its common stock from
July 18, 1994 (inception) through December 31, 1997, and does not anticipate
paying dividends for the foreseeable future.

                                       14
<PAGE>   16

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                                             PERIOD FROM
                                                                                            JULY 18, 1994
                                                                                             (INCEPTION)
                                                          YEAR ENDED DECEMBER 31,              THROUGH
                                                    ------------------------------------    DECEMBER 31,
                                                       1997         1996         1995           1994
                                                       ----         ----         ----       -------------
                                                            (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                 <C>           <C>          <C>          <C>
  Statement of Operations Data:
  Net revenue...................................       $69,589     $ 18,748      $ 1,488            --
  Operating expenses............................        59,913       18,863        2,521            --
  General and administrative....................         4,606        3,247        1,884       $   214
  Provision for doubtful accounts...............         1,952        1,176          139            --
  Depreciation and amortization.................         1,565          817           29            --
                                                    ----------    ---------    ---------       -------
  Operating income (loss).......................         1,553       (5,355)      (3,085)         (214)
  Interest income (expense), net................           178          369          238            (1)
                                                    ----------    ---------    ---------       -------
  Income (loss) before income taxes.............         1,731       (4,986)      (2,847)         (215)
  Provision for income taxes....................            94           --           --            --
                                                    ----------    ---------    ---------       -------
  Net income (loss).............................        $1,637      $(4,986)     $(2,847)      $ (215)
                                                    ==========    =========    =========       =======
  Basic and diluted income (loss)
  per share.....................................         $0.16       $(1.54)      $(2.14)      $(0.27)
                                                    ==========    =========    =========       =======
  Weighted average shares outstanding used in
     calculation of per share amounts:
     Basic......................................     9,929,598    3,229,313    1,332,100       786,397
                                                    ==========    =========    =========       =======
     Diluted....................................    10,463,800    3,229,313    1,332,100       786,397
                                                    ==========    =========    =========       =======
</TABLE>

<TABLE>
<CAPTION>
                                                                          DECEMBER 31,
                                                             ---------------------------------------
                                                              1997       1996       1995       1994
                                                              ----       ----       ----       ----
                                                                         (IN THOUSANDS)
<S>                                                          <C>        <C>        <C>        <C>
  Balance Sheet Data:
  Cash and cash equivalents..............................    $ 1,434    $ 2,885    $11,261    $  190
  Working capital........................................     20,029     19,691     11,207     4,173
  Total assets...........................................     43,260     29,368     13,698     4,560
  Long-term obligations and revolving credit facility,
     less current portion................................      3,248        635        291        --
  Stockholders' equity...................................     23,792     22,146     11,790     4,238
</TABLE>

     The Company completed an initial public offering of its common stock during
1996, netting $15.3 million for 2,875,000 shares (including the underwriters
over-allotment option).

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

     Intensiva provides highly specialized, acute long-term care for critically
ill or injured patients who require intensive medical monitoring and treatment,
and who often have multiple medical conditions and are medically unstable. The
Company provides high quality, cost effective, specialized care for its
patients, who typically require an average length of stay of greater than 25
days in an intensive inpatient setting. Intensiva's medical staffs provide
specialized medical services, as well as nursing and respiratory care, and the
Company is expanding disease-specific pathways to treat pulmonary, cancer, renal
and cardiac conditions, among others. The Company's clinical programs utilize
specialized staff, equipment and protocols for the treatment of its patients.

     Intensiva leases underutilized space from Host Hospitals in underserved
markets, creating a separate "hospital within a hospital." By leasing space from
the Host Hospital, Intensiva is able to minimize capital

                                       15
<PAGE>   17

and overhead costs, including the costs to purchase and operate the physical
plant and expensive medical and diagnostic equipment. The Company is able to
purchase certain services from its Host Hospitals, such as laboratory and
radiology (MRI, CAT Scan, X-Ray), as well as hotel services such as laundry,
housekeeping, dietary and property management. The Company's business model
contemplates for each of its specialized hospitals to become certified by
Medicare as "long-term care hospitals" exempt from PPS after approximately seven
months of operations. This exemption will enable the hospitals to receive
cost-based reimbursement (subject to certain caps), which the Company believes
is more appropriate given the medical condition of its patients. In addition,
the Company's business model seeks to maintain the anticipated payor mix which
includes both non-governmental and governmental payors. The Company is
reimbursed by non-governmental payors on a per diem or per discharge basis,
through fee for service arrangements, or through negotiated discounts from
established charges.

     Operations begin approximately four to five months after an agreement is
executed (and a CON is approved, if necessary) with a Host Hospital. During the
qualification period, the Company spends approximately one million dollars per
facility on renovation costs, equipment purchases, pre-opening costs and working
capital before the facility becomes eligible for certification as a long-term
care hospital. Patient volumes are lower during the qualification phase while
physicians, case managers, and payors are educated as to the benefits of the
Company's clinical services.

     During 1995, the Company's first certified long-term care hospital
generated net revenues of $690,000 and had an operating loss of $13,000 in its
first two months of PPS-exempt operations. In contrast, the Company generated
net revenues of $800,000 and direct operating losses (exclusive of general and
administrative expenses) of $1.2 million from all other facilities during fiscal
1995.

     During 1996, four additional hospitals obtained Medicare certification as
long-term care hospitals. The five Medicare certified long-term care hospitals
generated net revenues of $12.9 million and an operating margin (exclusive of
general and administrative expenses) of $1.1 million, or 8.5%, from long-term
care operations during 1996. In contrast, all other clinical operations
generated net revenues of $5.8 million and had operating losses (exclusive of
general and administrative expenses) of $3.1 million during the same period.

     During 1997, four additional hospitals obtained certification as long-term
care hospitals. In addition, the Company opened a satellite location at one of
its existing long-term care hospitals. The satellite location operates under the
existing hospital's certification and therefore was opened as a long-term care
hospital. The ten locations that are certified as long-term care hospitals at
December 31, 1997 generated net revenues of $59.8 million and an operating
margin (exclusive of general and administrative expenses) of $6.3 million, or
10.5%, from long-term care operations during 1997. In contrast, all other
clinical operations generated net revenues of $9.8 million and had operating
losses (exclusive of general and administrative expenses) of $.3 million during
the same period. The Company continues to believe that it will realize operating
losses during at least the first seven months of operations at each location.

     As of February 28, 1998, the Company operates 17 facilities in seven
states. In addition, the Company has two other facilities under development, has
entered into four additional lease agreements, and has signed four letters of
intent to open new hospitals. The Company anticipates opening four facilities in
the second quarter of 1998.

                                       16
<PAGE>   18

RESULTS OF OPERATIONS

     The following table sets forth for the periods indicated, the percentages
of net revenues represented by certain items reflected in the Company's
consolidated statements of operations:

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                         ---------------------------
                                                         1997     1996         1995
                                                         ----     ----         ----
<S>                                                      <C>      <C>         <C>
Net revenues.........................................    100.0%   100.0%       100.0%
Expenses:
  Operating expenses.................................     86.1    100.6        169.4
  General and administrative.........................      6.6     17.3        126.6
  Provision for doubtful accounts....................      2.8      6.3          9.4
  Depreciation and amortization......................      2.3      4.4          1.9
                                                         -----    -----       ------
     Total costs and expenses........................     97.8    128.6        307.3
                                                         -----    -----       ------
Operating income (loss)..............................      2.2    (28.6)      (207.3)
Interest income, net.................................      0.3      2.0         16.0
                                                         -----    -----       ------
Income (loss) before income taxes....................      2.5    (26.6)      (191.3)
Provision for income taxes...........................      0.1       --           --
                                                         -----    -----       ------
Net income (loss)....................................      2.4%   (26.6)%     (191.3)%
                                                         =====    =====       ======
</TABLE>

     As indicated in the above table, operating expenses, general and
administrative expenses, and the provision for doubtful accounts as a percentage
of net revenues have declined over time as the Company has developed additional
facilities and existing facilities have matured.

SOURCES OF REVENUES

     The Company receives payment for health care services primarily from
non-governmental payors such as managed care organizations (e.g. preferred
provider and health maintenance organizations) and other commercial health
insurance carriers (e.g. traditional indemnity insurance plans), and the federal
government and state governments under the Medicare, Medicaid and other
governmental programs. Consistent with initiatives to control health care costs,
the Company generally negotiates payments with non-governmental payors based
upon the type and extent of services to be provided to individual patients. As
of December 31, 1997, the Company had approximately 70 managed care contracts to
provide services to participating members. These managed care agreements consist
primarily of negotiated discounts from established charges, although a small
percentage of patients are treated under per diem contracts. The following table
sets forth the approximate percentages of the Company's net patient service
revenues derived from the specified payor sources indicated:

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                       ------------------------------
                                                       1997        1996         1995
                                                       ----        ----         ----
<S>                                                    <C>         <C>         <C>
Medicare...........................................     76.9%       73.2%        44.4%
Medicaid...........................................      3.2         0.9          2.3
HMO................................................      0.8         1.4          2.5
PPO................................................      4.9         6.5          2.7
Other..............................................     14.2        18.0         48.1
                                                       -----       -----       ------
                                                       100.0%      100.0%       100.0%
                                                       =====       =====       ======
</TABLE>

     The level of Medicare net revenues as a percentage of total net revenues is
a reflection of the maturation of a number of the Company hospitals, as the
Medicare percentage is beginning to settle into the range originally estimated
for mature hospitals. Other consists of traditional indemnity insurance and all
other arrangements with third-party payors (primarily those negotiated on a case
by case basis) with the trend toward negotiated arrangements and away from
traditional indemnity insurance.

                                       17
<PAGE>   19

YEARS ENDED DECEMBER 31, 1997 AND 1996

     Net Revenues. Net revenues for the year ended December 31, 1997 were $69.6
million compared to $18.7 million for the comparable period in 1996. This growth
of $50.9 million is primarily a result of the increase in the number of
operational facilities, as the Company had 17 operational facilities at December
31, 1997 as compared to ten operational facilities at December 31, 1996. In
addition, increased census at maturing facilities has been a significant factor
in the increase in net patient service revenues. The ten facilities in operation
at December 31, 1996 had patient days of 59,002 in 1997 and 17,319 in 1996.

     Operating Expenses. Operating expenses for the year ended December 31, 1997
increased $41.1 million (218%) from the comparable period in 1996. This increase
is attributable to the same factors as those relating to the net revenues
growth. As a percentage of net revenues, operating expenses decreased from 101%
to 86%. The Company expects this percentage to continue to decline as more of
its facilities mature, although at a slower rate.

     General and Administrative. General and administrative expenses for the
year ended December 31, 1997 increased $1.4 million, or 42%, from the comparable
period in 1996. The increase in expenses was primarily attributable to salaries,
related payroll taxes, and employee benefits relating to additional personnel
retained to support the Company's growth strategy. As a percentage of net
revenues, general and administrative expenses decreased from 17% to 7%. The
Company expects that its general and administrative expenses will continue to
decrease as a percentage of net revenues as the Company continues to grow and
achieve certain economies of scale, although at a slower rate.

     Provision for Doubtful Accounts. The provision for doubtful accounts for
the year ended December 31, 1997 increased $776,000 (66%) from the comparable
period in 1996. Again, the increase is primarily attributable to the growth in
net revenues. As a percentage of net revenues, the provision for doubtful
accounts decreased from 6.3% to 2.8%. The Company expects this percentage to
continue to decrease as a percentage of net revenues as the Company matures,
although at a slower rate.

     Depreciation and Amortization. Depreciation and amortization for the year
ended December 31, 1997 increased $748,000 (92%) from the comparable period in
1996. The increase primarily relates to the depreciation and amortization
related to the property and equipment acquired for the seven facilities opened
in 1997.

     Income Taxes. Substantially all of the Company's $94,000 income tax
provision for the year ended December 31, 1997 relates to state tax obligations.
Net operating loss carryforwards offset substantially all of the Company's 1997
taxable income for federal tax purposes. The Company recorded no income tax
provision in 1996 due to the taxable loss incurred during that year. As of
December 31, 1997, the Company has approximately $2.8 million of net operating
loss carryforwards for income tax purposes, which, subject to limitations on
use, if unused, will begin to expire in the year 2009.

YEARS ENDED DECEMBER 31, 1996 AND 1995

     Net Revenues. Net revenues for the year ended December 31, 1996 were $18.7
million compared to $1.5 million for the comparable period in 1995. The Company
had ten operational sites at December 31, 1996 as compared to two operational
sites at December 31, 1995. Prior to March 1995 the Company was a development
stage company.

     Operating Expenses. Operating expenses for the year ended December 31, 1996
increased $16.3 million from the comparable period in 1995. This increase is
attributable to the new facilities opened during 1996. As a percentage of net
revenues, operating expenses decreased from 169% to 101%.

     General and Administrative. General and administrative expenses for the
year ended December 31, 1996 increased $1.4 million, or 72%, to $3.2 million
from the comparable period in 1995. The increase in expenses was primarily
attributable to salaries, related payroll taxes, and employee benefits relating
to additional personnel retained to support the Company's growth strategy. As a
percentage of net revenues, general and administrative expenses decreased from
127% to 17%.

                                       18
<PAGE>   20

     Provision for Doubtful Accounts. The provision for doubtful accounts for
the year ended December 31, 1996 increased $1.0 million to $1.2 million from the
comparable period in 1995. The increase is attributable to the growth in net
revenues. As a percentage of net revenues, the provision for doubtful accounts
decreased from 9.4% to 6.3%.

     Depreciation and Amortization. Depreciation and amortization for the year
ended December 31, 1996 increased $787,000 to $816,000 from the comparable
period in 1995. The increase relates to the acquisition of additional property
and equipment and the amortization of a computer software license, and
organizational and pre-opening costs associated with the ten open hospitals at
December 31, 1996. Property and equipment increased from $588,000 at December
31, 1995 to $3.4 million at December 31, 1996. A computer software license was
obtained in December 1995 for $500,000 with an addendum in September 1996 for
$52,000 and is being amortized over the three-year license period.
Organizational and preopening costs totaled $234,000 and $163,000 during 1996
and 1995, respectively, with an unamortized balance of $147,000 at December 31,
1996.

     Income Taxes. The Company has paid minimal income taxes to date and has
approximately $5.8 million of net operating loss carryforwards for income tax
purposes, which, subject to limitations on use, if unused, will begin to expire
in the year 2009.

YEAR ENDED DECEMBER 31, 1995 AND PERIOD (SINCE INCEPTION -- JULY 18, 1994) ENDED
DECEMBER 31, 1994

     The Company began providing patient services in late March 1995. Prior to
that time, the Company was a development stage company. Activities in 1994
consisted primarily of raising capital, organizing administrative functions and
initial development activities. The Company's focus during 1995 was directed
toward market selection and the opening and operation of its first facility. In
addition, considerable effort was concentrated on preparations for opening its
Hammond, Indiana (December 1995) and Beech Grove, Indiana (January 1996)
facilities.

LIQUIDITY AND CAPITAL RESOURCES

     Through October 1997, the Company had financed its operations primarily
through proceeds from the sale of the Company's equity securities. In November
1997, the Company entered into a Loan and Security Agreement to obtain a $20
million revolving credit facility that is secured by the Company's accounts
receivable and other assets. The Loan and Security Agreement, which will mature
on October 31, 2000, provides for maximum borrowings up to the lesser of the
activated loan amount ($10 million at December 31, 1997) or the Borrowing Base,
as defined, and bears interest at either the higher of (i) the prime rate or
federal funds rate (whichever is greater) plus .25%, or (ii) the 30 day LIBOR
rate plus 2.5%. Since November 1997, the Company has financed its operations
primarily through borrowings under this revolving credit facility. Although the
Company has begun to generate positive cash flows from certain of its mature
facilities, overall cash flows from operations have not been sufficient to
support ongoing operations primarily due to the time lag that is required to
obtain Medicare provider numbers at new facilities and the continuing
development of new facilities in accordance with the Company's growth strategy.

     Cash flows used in investing activities have consisted primarily of capital
renovations, equipment purchases, and organizational and preopening costs
incurred prior to providing patient services at each new facility. Such
investing activities were funded by maturities of investments that were
purchased with the proceeds from the sale of the Company's equity securities and
by borrowings under the revolving credit facility.

     The Company made capital expenditures of approximately $3.3 million, $2.7
million and $600,000 during the years ended December 31, 1997, 1996 and 1995,
respectively. Additional equipment was acquired through capital leases,
amounting to approximately $1.2 million, $898,000 and $55,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.

     During March 1996, the Company entered into a sale-leaseback agreement with
a third-party to take advantage of favorable borrowing rates and maintain
liquidity. This third-party received warrants to purchase 15,950 shares of
common stock as a part of this transaction. The net book value of assets sold
and

                                       19
<PAGE>   21

subsequently leased under this agreement totaled $342,244. Net proceeds were
$337,792, resulting in a net loss of $4,452. As part of this agreement, the
Company obtained a $1 million commitment from the third-party to finance
additional capital expenditures. In May 1997, this agreement was amended to
extend an additional commitment of $500,000 through January 1998. Unutilized
borrowing capacity under the line of credit was approximately $413,000 at
December 31, 1997.

     The accounts receivable balance at December 31, 1997 increased $25.3
million from December 31, 1996. The majority of the increase is a result of
increased census at the Company's facilities and the time lag required in
obtaining new Medicare provider numbers from the Medicare fiscal intermediaries
once a facility opens and upon completion of the qualification period. The time
lag can result in initial Medicare payments being received in excess of six
months after a facility opens. Of the seventeen facilities operating as of
December 31, 1997, ten have received certification as long-term care hospitals
and have received long-term care provider numbers. Three of the ten received the
provider numbers in the latter half of 1997 and therefore did not begin to
receive a significant level of payments until the last quarter of 1997. Such
facilities therefore were still in the process of collecting backlogged accounts
receivable as of December 31, 1997. Of the remaining seven facilities, four had
received initial provider numbers by December 31, 1997 and two of those had
begun to receive payments by the end of 1997. The Company anticipates that it
will ultimately receive long-term care certification and provider numbers for
all existing facilities.

     At December 31, 1997, the Company's working capital was $20.0 million,
which is comparable to the level of working capital at December 31, 1996 of
$19.7 million. Working capital at December 31, 1996 represents an increase of
$8.5 million from December 31, 1995, which was primarily attributable to the
initial public offering of the Company's stock offset by support of ongoing
operations, investments in new facilities and development activities. The
Company expects to invest approximately $1 million per facility to fund capital
renovations, preopening costs and working capital requirements before a facility
achieves profitability.

     The Company estimates that borrowings under the revolving credit facility
will be sufficient to fund its continued development and meet anticipated cash
needs of the Company for at least the next 12 months.

HEALTH CARE LEGISLATION

     A discussion of the impact of recent health care legislation on the
Company's future operations is included in this Report under the heading
"Business -- Government Regulation -- Health Care Reform."

IMPACT OF INFLATION

     To date, inflation has not had a significant impact on the business,
financial condition or results of operations of the Company. Inflation could,
however, affect the Company's future net revenues and results of operation. As a
result, the Company may not be able to increase revenues to account fully for
increased operating expenses. In structuring its charges, the Company attempts
to anticipate inflation levels, but there can be no assurance that the Company
will be able to anticipate fully or otherwise respond to any future inflationary
pressures.

OTHER INFORMATION

     Currently, many computer systems and software products are coded to accept
only two digit entries in the date code field. These date code fields will need
to accept four digit entries to distinguish 21st century dates from 20th century
dates. As a result, many companies' software and computer systems may need to be
upgraded or replaced in order to comply with such "Year 2000" requirements. The
Company and third parties with which the Company does business rely on numerous
computer programs in their day to day operations. Because the Company was
recently organized and relies primarily on recently developed programs provided
by third parties, the Company does not anticipate that it will incur material
expense in this regard. However, the Company intends to review this issue with
its vendors over the next year to determine whether any actions need to be
taken. However, there can be no assurance that Year 2000 issues, if any, will be
resolved in 1998 or 1999. If not resolved, the issues could have a material
adverse impact on the Company's operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Not applicable

                                       20
<PAGE>   22

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

               INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES

                       CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 1997 AND 1996

                  (WITH INDEPENDENT AUDITORS' REPORT THEREON)

                                       21
<PAGE>   23

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Intensiva HealthCare Corporation:

     We have audited the accompanying consolidated balance sheets of Intensiva
HealthCare Corporation and subsidiaries (the Company) as of December 31, 1997
and 1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Intensiva
HealthCare Corporation and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.

/s/ KPMG Peat Marwick LLP

St. Louis, Missouri
March 2, 1998

                                       22
<PAGE>   24

               INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                   1997           1996
                                                                   ----           ----
<S>                                                             <C>            <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................    $ 1,433,812     2,884,977
  Short-term investments....................................             --    12,987,220
  Accounts receivable, less allowance for doubtful accounts
     of $1,736,367 and $1,270,478, respectively.............     31,876,315     8,483,635
  Inventories...............................................        781,317       254,177
  Prepaid expenses..........................................        855,429       583,204
                                                                -----------    ----------
       Total current assets.................................     34,946,873    25,193,213
Property and equipment, net.................................      6,882,957     3,434,560
Organizational and preopening costs, net....................        382,777       147,117
Other assets................................................      1,047,842       593,185
                                                                -----------    ----------
                                                                $43,260,449    29,368,075
                                                                ===========    ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current portion of long-term obligations..................        781,315       484,966
  Current portion of revolving credit facility..............      1,649,394            --
  Accounts payable and accrued expenses.....................      7,589,180     3,077,326
  Accrued salaries, wages, and benefits.....................      2,245,741     1,036,071
  Accrued third-party payor settlements.....................      2,652,585       903,713
                                                                -----------    ----------
       Total current liabilities............................     14,918,215     5,502,076
                                                                -----------    ----------
Long-term obligations, less current portion.................      1,312,234       634,781
Revolving credit facility, less current portion.............      1,935,575            --
Deferred rent expense.......................................      1,301,984     1,085,300
Stockholders' equity:
  Series A convertible preferred stock, $0.001 par value,
     3,465,000 shares authorized, none outstanding in 1997
     and 1996...............................................             --            --
  Series B convertible preferred stock, $0.001 par value,
     2,232,962 shares authorized, none outstanding in 1997
     and 1996...............................................             --            --
  Common stock, $0.001 par value, 70,000,000 shares
     authorized, 9,969,045 and 9,905,062 shares issued and
     outstanding, respectively..............................          9,969         9,905
  Additional paid-in capital................................     30,193,647    30,184,544
  Accumulated deficit.......................................     (6,411,175)   (8,048,531)
                                                                -----------    ----------
       Total stockholders' equity...........................     23,792,441    22,145,918
                                                                -----------    ----------
                                                                $43,260,449    29,368,075
                                                                ===========    ==========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       23
<PAGE>   25

               INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                 YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

<TABLE>
<CAPTION>
                                                              1997           1996           1995
                                                              ----           ----           ----
<S>                                                        <C>            <C>            <C>
Net patient service revenues...........................    $69,589,496     18,748,042     1,488,389
Costs and expenses:
  Operating expenses...................................     59,913,263     18,863,038     2,520,873
  General and administrative...........................      4,605,961      3,246,989     1,884,063
  Provision for doubtful accounts......................      1,951,890      1,176,308       139,508
  Depreciation and amortization........................      1,565,004        816,389        29,494
                                                           -----------    -----------    ----------
       Total costs and expenses........................     68,036,118     24,102,724     4,573,938
                                                           -----------    -----------    ----------
       Operating income (loss).........................      1,553,378     (5,354,682)   (3,085,549)
Interest income........................................        412,706        450,449       266,668
Interest expense.......................................       (235,171)       (81,393)      (28,604)
                                                           -----------    -----------    ----------
       Income (loss) before income taxes...............      1,730,913     (4,985,626)   (2,847,485)
Provision for income taxes.............................         93,557             --            --
                                                           -----------    -----------    ----------
       Net income (loss)...............................    $ 1,637,356     (4,985,626)   (2,847,485)
                                                           ===========    ===========    ==========
       Basic and diluted income (loss) per share.......          $0.16          (1.54)        (2.14)
                                                           ===========    ===========    ==========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       24
<PAGE>   26

               INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                 YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

<TABLE>
<CAPTION>
                                                   COMMON STOCK
                            PREFERRED STOCK     ------------------   ADDITIONAL                      TOTAL
                          -------------------   NUMBER OF              PAID-IN     ACCUMULATED   STOCKHOLDERS'
                          SERIES A   SERIES B    SHARES     AMOUNT     CAPITAL       DEFICIT        EQUITY
                          --------   --------   ---------   ------   ----------    -----------   -------------
<S>                       <C>        <C>        <C>         <C>      <C>           <C>           <C>
Balance, January 1,
  1995..................  $ 2,365    $    --    1,332,100   $1,332   $ 4,449,384   $  (215,420)   $ 4,237,661
Issuance of Series A
  convertible preferred
  stock, 1,100,000
  shares................    1,100         --           --       --     1,998,900            --      2,000,000
Issuance of Series B
  convertible preferred
  stock, 2,232,967
  shares................       --      2,233           --       --     8,397,767            --      8,400,000
     Net loss...........       --         --           --       --            --    (2,847,485)    (2,847,485)
                          -------    -------    ---------   ------   -----------   -----------    -----------
Balance, December 31,
  1995..................    3,465      2,233    1,332,100    1,332    14,846,051    (3,062,905)    11,790,176
Conversion of preferred
  stock.................   (3,465)    (2,233)   5,697,962    5,698            --            --             --
Issuance of 2,875,000
  shares of common
  stock, net of issuance
  costs.................       --         --    2,875,000    2,875    15,338,493            --     15,341,368
     Net loss...........       --         --           --       --            --    (4,985,626)    (4,985,626)
                          -------    -------    ---------   ------   -----------   -----------    -----------
Balance, December 31,
  1996..................       --         --    9,905,062    9,905    30,184,544    (8,048,531)    22,145,918
Issuance of 63,983
  shares of common stock
  in connection with
  exercise of stock
  options...............       --         --       63,983       64         9,103            --          9,167
     Net income.........       --         --           --       --            --     1,637,356      1,637,356
                          -------    -------    ---------   ------   -----------   -----------    -----------
Balance, December 31,
  1997..................  $    --    $    --    9,969,045   $9,969   $30,193,647   $(6,411,175)   $23,792,441
                          =======    =======    =========   ======   ===========   ===========    ===========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       25
<PAGE>   27

               INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                 YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

<TABLE>
<CAPTION>
                                                             1997           1996           1995
                                                             ----           ----           ----
<S>                                                      <C>             <C>            <C>
Cash flows from operating activities:
  Net income (loss)....................................  $  1,637,356     (4,985,626)    (2,847,485)
  Adjustments to reconcile net income (loss) to net
     cash used in operating activities:
     Depreciation and amortization.....................     1,565,004        816,389         29,494
     Provision for doubtful accounts...................     1,951,890      1,176,308        139,508
     Increase in accounts receivable...................   (25,344,570)    (8,674,246)    (1,125,205)
     Increase in inventories, prepaid expenses, and
       other assets....................................      (784,274)      (796,458)      (130,665)
     Increase in accounts payable and accrued
       expenses........................................     4,511,854      2,593,619        438,320
     Increase in accrued salaries, wages, and
       benefits........................................     1,209,670        811,932        212,871
     Increase in accrued third-party payor
       settlements.....................................     1,748,872        903,713             --
     Increase in accrued rent differential.............       216,684        651,967        433,333
                                                         ------------    -----------    -----------
       Net cash used in operating activities...........   (13,287,514)    (7,502,402)    (2,849,829)
                                                         ------------    -----------    -----------
Cash flows from investing activities:
  Additions to property and equipment..................    (3,323,707)    (2,670,071)      (555,171)
  Proceeds from sale of equipment......................            --        337,792             --
  Organizational and preopening costs..................      (542,742)      (233,655)      (162,881)
  Purchase of short-term investments...................            --    (13,725,125)            --
  Maturities of short-term investments.................    12,987,220        737,905             --
                                                         ------------    -----------    -----------
       Net cash provided by (used in) investing
          activities...................................     9,120,771    (15,553,154)      (718,052)
                                                         ------------    -----------    -----------
Cash flows from financing activities:
  Proceeds from issuance of preferred stock............            --     15,341,368     14,704,900
  Proceeds from exercise of stock options..............         9,167             --             --
  Net borrowings under revolving credit facility.......     3,584,969             --             --
  Debt issuance costs incurred.........................      (140,322)            --             --
  Payments on long-term obligations....................      (738,236)      (397,057)       (65,881)
  Repayment of note payable -- stockholder.............            --       (265,200)            --
                                                         ------------    -----------    -----------
       Net cash provided by financing activities.......     2,715,578     14,679,111     14,639,019
       Increase (decrease) in cash and cash
          equivalents..................................    (1,451,165)    (8,376,445)    11,071,138
Cash and cash equivalents, beginning of year...........     2,884,977     11,261,422        190,284
                                                         ------------    -----------    -----------
Cash and cash equivalents, end of year.................  $  1,433,812      2,884,977     11,261,422
                                                         ============    ===========    ===========
Supplemental cash flow information:
  Cash paid for interest...............................  $    235,171         81,393         28,604
  Cash paid for income taxes...........................        43,000             --             --
Supplemental information -- noncash investing and
  financing activity:
  Acquisition of software license through long-term
     obligation........................................       555,034         52,250        512,500
  Acquisition of equipment through capital leases......     1,156,824        897,960         54,609
                                                         ============    ===========    ===========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       26
<PAGE>   28

               INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996

(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

     (a) Description of Business

     Intensiva HealthCare Corporation and subsidiaries (the Company) was
incorporated in Delaware on July 18, 1994. The Company is developing and
operating a network of long-term care hospitals in certain health care markets
across the United States. Prior to 1996, activities primarily consisted of
raising capital, obtaining financing, and organizing administrative functions.

     (b) Principles of Consolidation

     The consolidated financial statements of the Company include all of its
wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

     (c) Cash and Cash Equivalents

     Cash and cash equivalents consist of interest-bearing money market accounts
and debt instruments with original maturities of three months or less.

     (d) Financial Instruments

     Financial instruments, consisting of cash and cash equivalents, short-term
investments, accounts receivable, current liabilities, long-term obligations,
and revolving credit facility, are reported at amounts in the accompanying
consolidated balance sheets that approximate fair value at the balance sheet
dates.

     (e) Short-Term Investments

     Short-term investments consisted of U.S. Treasury notes, mortgage-backed
securities, and commercial paper with maturities of less than one year. These
investments were classified as held-to-maturity and were recorded at cost.

     (f) Inventories

     Inventories, which consist principally of medical supplies, are stated at
the lower of cost or market. Cost is determined using the first-in, first-out
method.

     (g) Property and Equipment

     Property and equipment are stated at cost. Equipment under capital leases
is stated at the present value of minimum lease payments. Property and equipment
of the Company are reviewed for impairment whenever events or circumstances
indicate that the asset's undiscounted expected cash flows are not sufficient to
recover its carrying amount. The Company measures an impairment loss by
comparing the fair value of the asset to its carrying amount. Fair value of an
asset is calculated as the present value of expected future cash flows.

     Depreciation and amortization is calculated using the straight-line method
over the estimated useful lives of the assets. Useful lives for equipment range
from 3-15 years. Leasehold improvements are amortized over the shorter of the
lease term or estimated useful life of the asset, approximately five years.

     (h) Organizational and Preopening Costs

     Organizational and preopening costs consist of legal, consulting, and other
costs incurred by the Company during the development phase of a new hospital.
These costs are capitalized and amortized to expense over a period of twelve
months beginning when the new hospital is opened and begins to admit patients.
Costs related to marketing and development of new hospitals at the corporate
level are expensed as incurred.

                                       27
<PAGE>   29
               INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     (i) Other Assets

     Other assets primarily consist of software license agreements with a book
value of approximately $879,000 and $490,000 at December 31, 1997 and 1996,
respectively. The software licenses are being amortized into expense over the
three-year estimated useful lives of the licenses.

     (j) Deferred Rent Expense

     Certain of the leases on the Company's health care facilities include
scheduled base rent increases over the terms of the leases. The total base rent
payments are being charged to expense on the straight-line method over the term
of the leases. Deferred rent expense represents the excess of rent expense over
cash payments since inception of the leases.

     (k) Income Taxes

     Deferred taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in which
those differences are expected to be recovered or settled.

     (l) Revenue Recognition

     The Company recognizes revenue as services are provided to patients.

     The Company has agreements with third-party payors that provide for patient
care reimbursement at rates that may differ from the customary charges for such
care. During the qualification period to become certified as a long-term care
hospital (which historically has been approximately six to seven months from the
opening of the facility for the Company), the Medicare program reimburses the
Company under either the Prospective Payment System, which provides for payment
at predetermined amounts based on the discharge diagnosis, or under a cost-based
methodology. Upon obtaining certification as a long-term care hospital, the
Company's hospitals receive cost-based reimbursement, subject to certain
limitations specific to long-term care hospitals, from the Medicare program.
Payment for patient services covered by certain commercial insurance carriers,
health maintenance organizations, and preferred provider organizations are based
upon reimbursement agreements which include negotiated rates for specific
services, discounts from established charges, and prospectively determined per
diem rates.

     Net patient service revenues and related accounts receivable are reported
at the estimated net realizable amounts from patients, third-party payors, and
others for services rendered. Retroactive adjustments are accrued on an
estimated basis in the period the related services are rendered and adjusted in
future periods as final settlements are determined. Final settlements are
determined after submission of annual cost reports by the Company and audits
thereof by the Medicare fiscal intermediary.

     (m) Medicare Credit Risk and Payor Concentration

     Approximately 77%, 73%, and 44% of the Company's net patient service
revenues for 1997, 1996, and 1995, respectively, were derived from funds under
the Medicare program, and approximately 75% and 83% of the Company's net
accounts receivable at December 31, 1997 and 1996, respectively, are from this
payor source.

     Ten of the Company's facilities which have been certified by Medicare as
long-term care hospitals at December 31, 1997 accounted for approximately $59.8
million of net patient service revenues in 1997. Significant reductions in the
level of revenues attributable to these facilities may occur if the Company is
unable to maintain the certification of these facilities as long-term care
hospitals in accordance with Medicare

                                       28
<PAGE>   30
               INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

rules and regulations, including the maintenance of an average length of stay of
at least 25 days at each individual facility. Also, the Company's facilities
operate in space leased from general acute care hospitals (host hospitals), and
consequently, all of its seventeen facilities in operation at December 31, 1997
are subject to Medicare "hospitals within hospitals" (HIH) rules and
regulations. These rules and regulation are designed to insure that the
Company's facilities are organizationally and functionally independent of their
host hospitals. For purposes of measuring independence, the Medicare rules and
regulations include requirements that the Company's facilities either purchase
no more than 15% of their total operating expenses from the host hospitals or
receive no more than 25% of patient referrals from the host hospitals.
Significant reductions in the Company's level of revenues attributable to its
facilities may occur if the Company is unable to maintain its facilities' status
as HIH's in accordance with Medicare rules and regulations.

     Management believes that all its facilities are in compliance with the
Medicare rules and regulations covering long-term care hospitals and HIH
facilities. However, in light of the lack of regulatory guidance and scarcity of
case law interpreting these regulations, there can be no assurance that the
Company's facilities will have been found to be in compliance with these
regulations and, if so, whether any sanctions imposed would have a material
adverse effect on the financial position or results of operations of the
Company.

     (n) Use of Estimates

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

     (o) Net Income (Loss) Per Share

     In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, (SFAS 128).
SFAS 128 replaces the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented to conform to SFAS 128
requirements.

     Basic and diluted income (loss) per share was computed using net income
(loss) and the weighted average number of shares of common stock and common
stock equivalents. The weighted average numbers of shares of common stock and
common stock equivalents used in the computation of basic and diluted income per
share for the year ended December 31, 1997 were 9,929,598 and 10,463,800,
respectively. The difference between the two amounts relates to the effect of
dilutive stock options and warrants. The weighted average numbers of shares of
common stock and common stock equivalents used in the computation of both basic
and diluted income per share for the years ended December 31, 1996 and 1995 were
3,229,313 and 1,332,100, respectively.

     (p) Stock-Based Compensation

     The Company uses the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25), and related interpretations in accounting for its stock options. The
Company has adopted the pro forma disclosures-only provisions of SFAS 123,
Accounting for Stock-Based Compensation.

     (q) Reclassifications

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

                                       29
<PAGE>   31
               INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(2) ALLOWANCE FOR DOUBTFUL ACCOUNTS

     Activity in the allowance for doubtful accounts is as follows:

<TABLE>
<CAPTION>
                                                    1997          1996         1995
                                                    ----          ----         ----
<S>                                              <C>           <C>           <C>
Balance at beginning of year.................    $1,270,478    $  139,508    $     --
Provision for doubtful accounts..............     1,951,890     1,176,308     139,508
Accounts written off.........................    (1,486,001)      (45,338)         --
                                                 ----------    ----------    --------
Balance at end of year.......................    $1,736,367    $1,270,478    $139,508
                                                 ==========    ==========    ========
</TABLE>

(3) PROPERTY AND EQUIPMENT

     Property and equipment are as follows:

<TABLE>
<CAPTION>
                                                          DECEMBER 31,    DECEMBER 31,
                                                              1997            1996
                                                          ------------    ------------
<S>                                                       <C>             <C>
Leasehold improvements................................     $4,329,372       2,195,080
Equipment.............................................      1,954,120         764,525
Equipment under capital leases........................      2,109,393         952,569
                                                           ----------      ----------
                                                            8,392,885       3,912,174
Less accumulated depreciation and amortization........      1,509,928         477,614
                                                           ----------      ----------
  Property and equipment, net.........................     $6,882,957       3,434,560
                                                           ==========      ==========
</TABLE>

(4) SALE LEASEBACK AGREEMENT

     During March 1996, the Company entered into a sale leaseback agreement with
a third party to take advantage of favorable borrowing rates and maintain
liquidity. This third party received warrants to purchase 15,950 shares of the
Company's common stock. The warrants are exercisable for up to seven years at a
price of $3.76 per share. As of December 31, 1997, the warrants have not been
exercised. The net book value of assets sold and subsequently leased back under
this agreement totaled $342,244. Net proceeds were $337,792, resulting in a net
loss of $4,452 which was charged to operations in 1996. As part of this
agreement, the Company obtained a $1 million commitment from the third party to
finance additional capital expenditures. In May 1997, this agreement was amended
to extend an additional commitment of $500,000 through January 1998. The
long-term obligations under this arrangement are secured by certain equipment,
bear interest at 8%, and are repayable monthly through September 2001.
Borrowings outstanding of approximately $820,000 and $458,700 are included in
capital lease obligations at December 31, 1997 and 1996, respectively. The
unutilized borrowing capacity under the additional commitment was approximately
$413,000 at December 31, 1997.

                                       30
<PAGE>   32
               INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(5) LONG-TERM OBLIGATIONS

     Long-term obligations consist of the following:

<TABLE>
<CAPTION>
                                                               1997         1996
                                                               ----         ----
<S>                                                         <C>           <C>
Capital lease obligations, interest ranging from 8% to
  15%, payable monthly through 2002.....................    $1,645,218     820,886
Notes payable, interest at 6.5%, payable monthly through
  June 1999.............................................       448,331     298,861
                                                            ----------    --------
                                                             2,093,549   1,119,747
Less current portion....................................       781,315     484,966
                                                            ----------    --------
                                                            $1,312,234     634,781
                                                            ==========    ========
</TABLE>

     Capital lease obligations are secured by various medical equipment at each
facility such as ventilators, x-ray machines, IV pumps, and cardiac monitors.
The net book value of equipment under capital leases was $1,719,254 at December
31, 1997. The notes payable relate to software license agreements.

     The aggregate maturities of long-term obligations at December 31, 1997 are
as follows:

<TABLE>
<S>                                                             <C>
1998........................................................    $  971,658
1999........................................................       741,560
2000........................................................       481,889
2001........................................................       235,331
2002 and thereafter.........................................        66,177
                                                                ----------
                                                                 2,496,615
Less interest on capital lease obligations..................       403,066
                                                                ----------
                                                                $2,093,549
                                                                ==========
</TABLE>

(6) REVOLVING CREDIT FACILITY

     In November 1997, the Company entered into a Loan and Security Agreement
(Agreement) to obtain a $20 million revolving credit facility that is secured by
a first security interest in the Company's accounts receivable and other assets.
The Agreement, which will mature on October 31, 2000, provides for maximum
borrowings up to the lesser of the activated loan amount ($10 million at
December 31, 1997) or the Borrowing Base, as defined, and bears interest at
either the higher of (i) the prime rate or federal funds rate (whichever is
greater) plus .25%, or (ii) the 30-day LIBOR rate plus 2.5%. The remaining $10
million in borrowing capacity can be activated by the Company at any time with
the payment of an activation fee of $75,000 so long as no event of default has
occurred under the Agreement. Had the additional borrowing capacity been
activated at December 31, 1997, unused availability on that date would have
totaled $8,212,063. The Agreement includes restrictive covenants involving
limitations on capital expenditures and other borrowings, adherence to certain
financial measurements, and restrictions on the payment of dividends. The
Company pays annual fees on the unused and unactivated portions of the revolving
credit facility of .5% and .125%, respectively. The Company paid interest in
1997 at a weighted average interest rate of 8.75%.

(7) STOCKHOLDERS' EQUITY

     On October 10, 1996, the Company completed its Initial Public Offering
(IPO) and sold 2.5 million shares of common stock, the net proceeds from which
aggregated approximately $13.2 million. On

                                       31
<PAGE>   33
               INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

November 7, 1996, the underwriters' exercised the over-allotment option,
resulting in the sale of 375,000 additional shares of common stock, the net
proceeds from which aggregated approximately $2.1 million.

     Prior to the Company's IPO, the Company had two series of convertible
preferred stock outstanding. Series A and B convertible preferred stock required
a cumulative dividend of 8% per annum. Each share of preferred stock was
convertible into one share of common, or under certain circumstances, the
Company could have redeemed the shares for cash or forced conversion into common
shares. In connection with the Company's IPO, all preferred stock then
outstanding was converted into 5,697,962 shares of common stock.

     The Company has two stock option plans which provide for the issuance of
options to key employees and directors. Under the Intensiva HealthCare
Corporation Stock Option Plan (1995 Plan) established in 1995, up to 785,400
options to purchase common shares may be issued to employees and directors.
Under the Intensiva HealthCare Corporation Directors Stock Option Plan (1997
Plan), established in 1997, up to 60,000 options to purchase common shares may
be issued to directors. Both plans require that the exercise price of options
issued must be at least equal to the fair market value of the shares of stock at
the date of grant and the term of the options may not exceed ten years.

     Aggregate information relating to stock option activity under the 1995 Plan
and 1997 Plan is as follows:

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                              ----------------------------
                                                                1997      1996      1995
                                                                ----      ----      ----
<S>                                                           <C>        <C>       <C>
Number of shares under stock options:
  Outstanding at beginning of year..........................   575,850   536,800        --
  Granted...................................................   181,000    39,050   536,800
  Exercised.................................................   (63,983)       --        --
  Forfeited.................................................    (5,500)       --        --
                                                              --------   -------   -------
  Outstanding at end of year................................   687,367   575,850   536,800
  Exercisable at end of year................................   267,973   204,332    69,703
Weighted average exercise price:
  Granted...................................................  $   7.21      5.42       .08
  Exercised.................................................       .14        --        --
  Forfeited.................................................      6.00        --        --
  Outstanding at end of year................................      2.21       .44       .08
  Exercisable at end of year................................       .70       .26       .08
</TABLE>

     Aggregate information relating to stock options outstanding and stock
options exercisable at December 31, 1997 is as follows:

OPTIONS OUTSTANDING

<TABLE>
<CAPTION>
                                                                      WEIGHTED AVERAGE
                                                   OUTSTANDING AT        REMAINING       WEIGHTED AVERAGE
            RANGE OF EXERCISE PRICES              DECEMBER 31, 1997   CONTRACTUAL LIFE    EXERCISE PRICE
            ------------------------              -----------------   ----------------   ----------------
<S>                                               <C>                 <C>                <C>
$.08............................................       473,917              7.4               $ .08
$3.76...........................................         9,075              8.5                3.76
$6.00-$7.875....................................       204,375              9.3                7.07
                                                       -------
                                                       687,367
                                                       =======
</TABLE>

                                       32
<PAGE>   34
               INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

OPTIONS EXERCISABLE

<TABLE>
<CAPTION>
                                                               EXERCISABLE AT     WEIGHTED AVERAGE
                  RANGE OF EXERCISE PRICES                    DECEMBER 31, 1997    EXERCISE PRICE
                  ------------------------                    -----------------   ----------------
<S>                                                           <C>                 <C>
$.08........................................................       239,826             $ .08
$3.76.......................................................         9,075              3.76
$6.00-$7.875................................................        19,072              6.98
                                                                   -------
                                                                   267,973
                                                                   =======
</TABLE>

     No compensation expense relating to stock option grants was recorded in
1997, 1996, or 1995 as the option exercise prices were equal to fair value at
the dates of grant.

     Pro forma information regarding income (loss) and income (loss) per share
is required by SFAS 123, and has been determined as if the Company had accounted
for its stock options under the fair value method of SFAS 123. The fair value
was estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted average assumptions:

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                              ---------------------------
                                                               1997      1996      1995
                                                               ----      ----      ----
<S>                                                           <C>       <C>       <C>
Risk-free interest rate.....................................     5.8%      6.1%      5.5%
Dividend yield..............................................      0.0       0.0       0.0
Volatility factor...........................................     .765      .000      .000
Weighted average expected life..............................  5 years   5 years   5 years
</TABLE>

     The Company's pro forma income (loss) and income (loss) per share compared
to reported amounts are as follows:

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                             --------------------------------------
                                                                1997          1996          1995
                                                                ----          ----          ----
<S>                                                          <C>           <C>           <C>
Net income (loss):
  As reported............................................    $1,637,356    (4,985,626)   (2,847,485)
  Pro forma..............................................     1,509,944    (5,000,482)   (2,848,842)
Basic and diluted income (loss) per share:
  As reported............................................          0.16         (1.54)        (2.14)
  Pro forma:
     Basic...............................................          0.15         (1.55)        (2.14)
     Diluted.............................................          0.14         (1.55)        (2.14)
Weighted average fair value of options granted during the
  year...................................................          4.77          1.43           .02
</TABLE>

(8) EMPLOYEE BENEFITS

     The Company sponsors a voluntary defined contribution 401(k) plan (the
Plan) that is available to substantially all employees. Each participant may
make an annual contribution to their account of an amount not to exceed 15% of
their compensation, subject to certain limitations. The Company makes a matching
contribution of 25% of participant contributions, and may make additional annual
discretionary contributions to the Plan not to exceed 15% of the total
compensation of all plan participants. Participants vest in the Company's
matching portion at a rate of 20% per year. Expense for this Plan totaled
$106,500 and $48,600 for the years ended December 31, 1997 and 1996,
respectively. For the year ended December 31, 1995, no expense was incurred by
the Company related to the Plan.

                                       33
<PAGE>   35
               INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(9) INCOME TAXES

     The provision for income taxes for the year ended December 31, 1997
consisted of $93,557 in state income taxes. No income tax expense was incurred
by the Company for the years ended December 31, 1996 and 1995.

     The difference between the effective income tax rate for financial
statement purposes and the U.S. federal income tax rate of 34% for the years
ended December 31, 1997, 1996, and 1995 is as follows:

<TABLE>
<CAPTION>
                                                                  1997         1996         1995
                                                                  ----         ----         ----
<S>                                                             <C>         <C>           <C>
Expected provision (benefit) at statutory tax rate..........    $588,510    (1,695,113)   (968,145)
State taxes.................................................      93,557            --          --
Change in valuation allowance...............................    (623,050)    1,690,717     968,145
Other.......................................................      34,540         4,396          --
                                                                --------    ----------    --------
                                                                $ 93,557            --          --
                                                                ========    ==========    ========
</TABLE>

     The tax effects of temporary differences that give rise to significant
portions of deferred tax assets at December 31, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                             1996          1995
                                                             ----          ----
<S>                                                       <C>           <C>
Net operating loss carryforwards......................    $  936,032     1,968,010
Allowance for doubtful accounts.......................       590,365       435,385
Accrued expenses......................................       198,581        54,105
Differences between book and tax basis depreciation
  and amortization....................................       276,330       166,858
                                                          ----------    ----------
                                                           2,001,308     2,624,358
Less valuation allowance..............................     2,001,308     2,624,358
                                                          ----------    ----------
                                                          $       --            --
                                                          ==========    ==========
</TABLE>

     A valuation allowance is necessary for deferred tax assets if, based on the
weight of available evidence, it is more likely than not that some portion or
all of the deferred tax asset will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the period in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment. The Company has approximately $2,800,000 of net operating loss
carryforwards for income tax purposes, which, if unused, will begin to expire in
the year 2009.

(10) COMMITMENTS AND CONTINGENCIES

     The Company's health care facilities are located in space leased from acute
care health care providers (Host Hospitals) under operating lease agreements
with Host Hospitals of initial terms of five or more years, with varying renewal
terms. The Company leases corporate office space under a noncancellable
operating lease which expires in the year 2002.

     Minimum annual lease payments on noncancellable operating leases with
maturities in excess of one year are as follows: $6,705,545 in 1998, $7,034,296
in 1999, $7,045,672 in 2000, $6,780,487 in 2001, $5,012,300 in 2002, and
$1,943,450 thereafter. Total rent expense was approximately $7,381,000,
$2,983,000, and $965,000 in 1997, 1996, and 1995, respectively.

                                       34
<PAGE>   36

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

     Not Applicable

                                       35
<PAGE>   37

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

     Registrant hereby incorporates by reference the information to be set forth
under the heading "Information about the Directors" and "Stock Ownership and
Trading Reports" in the Registrant's definitive Proxy Statement to be filed
within 120 days of Registrant's fiscal year end (the "Proxy Statement").
Information respecting executive officers is set forth as a part of Item 1 of
this Report.

ITEM 11. EXECUTIVE COMPENSATION

     Registrant hereby incorporates by reference the information to be set forth
under the heading "Executive Compensation" in the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Registrant hereby incorporates by reference the information to be set forth
under the heading "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Registrant hereby incorporates by reference the information, if any, to be
set forth under the heading "Certain Transactions Involving Directors, Officers
and their Associates" in the Proxy Statement.

                                       36
<PAGE>   38

                                    PART IV

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

     (a) Those Financial Statements, Financial Statement Schedules, and Exhibits
required by Item 601 of Regulation S-K and by paragraph (a) of Item 14: The
following financial statements, financial statement schedules, notes thereto,
and auditor's report are set forth in Item 8 to this Form 10-K.

<TABLE>
<CAPTION>
                                                                PAGE(S)
                                                                -------
<S>                                                             <C>
Independent auditors' report................................      22
Consolidated balance sheets, as of December 31, 1997 and
  1996......................................................      23
Consolidated statements of operations for each of the years
  in the three-year period ended December 31, 1997..........      24
Consolidated statements of stockholders' equity for each of
  the years in the three-year period ended December 31,
  1997......................................................      25
Consolidated statements of cash flows for each of the years
  in the three-year period ended December 31, 1997..........      26
Notes to consolidated financial statements..................      27
</TABLE>

     (b) Reports on Form 8-K: The Company filed no reports on Form 8-K for the
three months ended December 31, 1997.

     (c) Exhibits: The exhibits to this Form 10-K are set forth on the Exhibit
Index filed herewith and are incorporated herein by this reference.

     (d) Not applicable.

                                       37
<PAGE>   39

                                   SIGNATURES

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

                                          Intensiva HealthCare Corporation

                                          By      /s/ DAVID W. CROSS

                                          --------------------------------------
                                                David W. Cross, President
                                               and Chief Executive Officer

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

<TABLE>
<CAPTION>
                   SIGNATURE                                       TITLE                        DATE
                   ---------                                       -----                        ----
<C>                                                 <S>                                    <C>

               /s/ DAVID W. CROSS                   Director and Chief Executive           March 26, 1998
------------------------------------------------    Officer
                 David W. Cross

            /s/ JEFFREY J. COLLINSON                Director                               March 26, 1998
------------------------------------------------
              Jeffrey J. Collinson

              /s/ MICHAEL R. HOGAN                  Director                               March 30, 1998
------------------------------------------------
                Michael R. Hogan

          /s/ WILFRED E. JAEGER, M.D.               Director                               March 26, 1998
------------------------------------------------
            Wilfred E. Jaeger, M.D.

               /s/ JOHN P. KEEFE                    Principal Financial Officer and        March 30, 1998
------------------------------------------------    Principal Accounting Officer
                 John P. Keefe

         /s/ PHILLIP M. NUDELMAN, PH.D.             Director                               March 30, 1998
------------------------------------------------
           Phillip M. Nudelman, Ph.D.

              /s/ DAVID L. STEFFY                   Director                               March 30, 1998
------------------------------------------------
                David L. Steffy

                                                    Director
------------------------------------------------
            James B. Tananbaum, M.D.
</TABLE>

                                       38
<PAGE>   40

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
 NUMBER                             DESCRIPTION
-------                             -----------
<S>         <C>
 3(i).1     The Company's Amended and Restated Certificate of
            Incorporation was previously filed as Exhibit 3(i).1 to the
            Company's Registration Statement on Form S-1 (Reg. No.
            333-08899) and is incorporated herein by this reference.
 3(i).2     The Company's Certificate of Amendment to Amended and
            Restated Certificate of Incorporation was previously filed
            as Exhibit 3(i).2 to the Company's Registration Statement on
            Form S-1 (Reg. No. 333-08899) and is incorporated herein by
            this reference.
 3(i).3     The Company's Third Amended and Restated Certificate of
            Incorporation was previously filed as Exhibit 3(i).1 to the
            Company's Form 10-Q for the quarter ended September 30, 1996
            and is incorporated herein by this reference.
 3(i).4     The Company's Certificate of Amendment to Amended and
            Restated Certificate of Incorporation was previously filed
            as Exhibit 3(i).4 to the Company's Registration Statement on
            Form S-1 (Reg. No. 333-08899) and is incorporated herein by
            this reference.
3(ii).1     The Company's By-Laws were previously filed as Exhibit
            3(ii).1 to the Company's Registration Statement on Form S-1
            (Reg. No. 333-08899) and are incorporated herein by this
            reference.
3(ii).2     The Company's Amended and Restated By-Laws were previously
            filed as Exhibit 3(ii).2 to the Company's Registration
            Statement on Form S-1 (Reg. No. 333-08899) and is
            incorporated herein by this reference.
    4.1     The Company's specimen Certificate of Shares of Common
            Stock, $0.001 par value, of the Company was previously filed
            as Exhibit 4.1 to the Company's Registration Statement on
            Form S-1 (Reg. No. 333-08899) and is incorporated herein by
            this reference.
    4.2     The Company's Amended and Restated Stockholders' Agreement,
            dated December 20, 1995 was previously filed as Exhibit 4.2
            to the Company's Registration Statement on Form S-1 (Reg.
            No. 333-08899) and is incorporated herein by this reference.
    4.3     The Company's Amended and Restated Registration Rights
            Agreement, dated December 20, 1995 was previously filed as
            Exhibit 4.3 to the Company's Registration Statement on Form
            S-1 (Reg. No. 333-08899) and is incorporated herein by this
            reference.
   10.1     The Company's form of Lease Agreement with Host Hospitals
            was previously filed as Exhibit 10.1 to the Company's
            Registration Statement on Form S-1 (Reg. o. 333-08899) and
            is incorporated herein by this reference.
   10.2     The Warrant Agreement to Purchase Shares of Series B
            Convertible Preferred Stock of Transitional Care of America,
            Inc., by and between the Company and Comdisco, Inc., dated
            as of February 15, 1996 was previously filed as Exhibit 10.2
            to the Company's Registration Statement on Form S-1 (Reg.
            No. 333-08899) and is incorporated herein by this reference.
   10.3     The Master Lease Agreement by and between the Company and
            Comdisco, Inc., dated December 11, 1995 was previously filed
            as Exhibit 10.3 to the Company's Registration Statement on
            Form S-1 (Reg. No. 333-08899) and is incorporated herein by
            this reference.
   10.4     The Agreement by and between the Company and Healthcare
            Management Systems, Inc., dated November 29, 1995 was
            previously filed as Exhibit 10.4 to the Company's
            Registration Statement on Form S-1 (Reg. No. 333-08899) and
            is incorporated herein by this reference.
   10.5     The Escrow Agreement by and among the Company, Healthcare
            Management Systems, Inc. and Wyatt, Tarrant & Combs, dated
            November 29, 1995 was previously filed as Exhibit 10.5 to
            the Company's Registration Statement on Form S-1 (Reg. No.
            333-08899) and is incorporated herein by this reference.
</TABLE>

                                       39
<PAGE>   41

<TABLE>
<CAPTION>
EXHIBIT
 NUMBER                             DESCRIPTION
-------                             -----------
<C>         <S>
   10.6     The Second Amended and Restated Employment Agreement of
            David W. Cross, by and between the Company and David W.
            Cross, dated June 12, 1996 was previously filed as Exhibit
            10.6 to the Company's Registration Statement on Form S-1
            (Reg. No. 333-08899) and is incorporated herein by this
            reference.*
   10.7     The Second Amended and Restated Employment Agreement of John
            R. Lewis, by and between the Company and John R. Lewis,
            dated June 12, 1996 was previously filed as Exhibit 10.7 to
            the Company's Registration Statement on Form S-1 (Reg. No.
            333-08899) and is incorporated herein by this reference.*
   10.8     The Employment Agreement of John P. Keefe, by and between
            the Company and John P. Keefe, dated June 1, 1995 was
            previously filed as Exhibit 10.8 to the Company's
            Registration Statement on Form S-1 (Reg. No. 333-08899) and
            is incorporated herein by this reference.*
   10.9     The Employment Agreement of Samuel A. Morse, by and between
            the Company and Samuel A. Morse, dated December 2, 1994 was
            previously filed as Exhibit 10.9 to the Company's
            Registration Statement on Form S-1 (Reg. No. 333-08899) and
            is incorporated herein by this reference.*
   10.11    The Employment Agreement of James D. Pomeroy, by and between
            the Company and James D. Pomeroy, dated December 28, 1994
            was previously filed as Exhibit 10.11 to the Company's
            Registration Statement on Form S1 (Reg. No. 333-08899) and
            is incorporated herein by this reference.*
   10.12    The Employment Agreement of Kathie Nohre, R.N., by and
            between the Company and Kathie Nohre, R.N., dated November
            6, 1995 was previously filed as Exhibit 10.12 to the
            Company's Registration Statement on Form S1 (Reg. No.
            333-08899) and is incorporated herein by this reference.*
   10.13    The Transitional Care of America, Inc. Stock Option Plan was
            previously filed as Exhibit 10.13 to the Company's
            Registration Statement on Form S-1 (Reg. No. 333-08899) and
            is incorporated herein by this reference.*
   10.26    The Employment Agreement of Tony J. Torrente, by and between
            the Company and Tony J. Torrente, dated December 2, 1996 was
            previously filed as Exhibit 10.26 to the Company's Form 10-K
            for the year ended December 31, 1996 and is incorporated
            herein by this reference.*
   10.27    Equipment Schedule VL-2 dated as of May 5, 1997 to Master
            Lease Agreement dated as of December 11, 1995 by and between
            the Company and Comdisco, Inc. was previously filed as
            Exhibit 10.27 to the Company's Form 10-Q for the quarter
            ended June 30, 1997 and is incorporated herein by this
            reference.
   10.28    The Loan and Security Agreement, dated as of November 7,
            1997, entered into among the Company, its Subsidiaries, and
            Heller Financial, Inc.
   10.29    The Amendment No. 1 and Waiver Agreement, dated as of
            January 15, 1998, by and among the Company, its
            Subsidiaries, and Heller Financial, Inc.
   10.30    The Intensiva HealthCare Corporation Directors Stock Option
            Plan.*
   21.1     Subsidiaries of the Company
   24.1     Consent of KPMG Peat Marwick LLP
   27.1     Financial Data Schedule
</TABLE>

-------------------------
* Management Contract or Compensatory Plan

                                       40