<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                   FORM 10-K

   (Mark one)
    [x]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED 
           DECEMBER 31, 1997
                                       OR
    [ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
           _________ TO _________

COMMISSION FILE NUMBER: 0-21425

                              HEALTHCARE FINANCIAL
                                 PARTNERS, INC.

            (Exact name of registrant as specified in its charter)

              DELAWARE                                   52-1844418
   (State or other jurisdiction of          (I.R.S. Employer Identification No.)
    incorporation or organization)     

   2 Wisconsin Circle, Fourth Floor
         Chevy Chase, Maryland                             20815
(Address of principal executive offices)                 (Zip Code)

      Registrant's telephone number, including area code:  (301) 961-1640

                                 ______________

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

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                          Common Stock, $.01 par value

                                 _____________

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to filed 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 the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [_]
                                 _____________

As of February 18, 1998, the aggregate market value of the Common Stock held by
non-affiliates of the Registrant was not less than $256,598,875 .

                                 _____________

As of February 18, 1998, there were 9,673,978 shares of Common Stock
outstanding.

                                  ____________

DOCUMENTS INCORPORATED BY REFERENCE:  THE INFORMATION CALLED FOR BY PART III IS
   INCORPORATED BY REFERENCE TO THE DEFINITIVE PROXY STATEMENT FOR THE ANNUAL
 MEETING OF STOCKHOLDERS OF THE COMPANY TO BE HELD MAY 28, 1998, WHICH WILL BE
                       FILED ON OR BEFORE APRIL 24, 1998.
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.
 
                         1997 FORM 10-K ANNUAL REPORT
                         ----------------------------
                               TABLE OF CONTENTS
                               -----------------
 
                                    PART I
                                    ------
<TABLE> 
<CAPTION> 
<S>                                                               <C> 
ITEM 1     BUSINESS..............................................    1
 
ITEM 2     PROPERTIES............................................   17
 
ITEM 3     LEGAL PROCEEDINGS.....................................   17
 
ITEM 4     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...   17

                                    PART II
                                    -------

ITEM 5     MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
            RELATED STOCKHOLDER MATTERS..........................   18
 
ITEM 6     SELECTED FINANCIAL DATA...............................   19
 
ITEM 7     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 
            CONDITION AND RESULTS OF OPERATIONS..................   21
 
ITEM 8     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........   34
 
ITEM 9     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON 
            ACCOUNTING AND FINANCIAL DISCLOSURE..................   56

                                    PART III
                                    --------
PART III   ......................................................   57

                                    PART IV
                                    -------

ITEM 14   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
           ON FORM 8-K...........................................   57
</TABLE> 
                                  ____________

THIS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997, AT THE
TIME OF FILING WITH THE SECURITIES AND EXCHANGE COMMISSION, MODIFIES AND
SUPERSEDES ALL PRIOR DOCUMENTS FILED PURSUANT TO SECTIONS 13, 14 AND 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR PURPOSES OF ANY OFFERS OR SALES OF ANY
SECURITIES AFTER THE DATE OF SUCH FILING PURSUANT TO ANY REGISTRATION STATEMENT
OR PROSPECTUS FILED PURSUANT TO THE SECURITIES ACT OF 1933 WHICH INCORPORATES BY
REFERENCE THIS ANNUAL REPORT.
<PAGE>
 
                                     PART I
                                     ------
 
ITEM 1.   BUSINESS

          This Report contains certain statements that are "forward-looking
statements."  Those statements include, among other things, the discussions of
the Company's business strategy and expectations concerning the Company's market
position, future operations, margins, profitability, funding sources, liquidity
and capital resources.  Reliance on any forward-looking statement involves risks
and uncertainties, and although the Company believes that the assumptions on
which the forward-looking statements contained herein are based are reasonable,
any of the assumptions could prove to be inaccurate, and as a result, the
forward-looking statements based on those assumptions also could be incorrect.
In light of these and other uncertainties, the inclusion of a forward-looking
statement herein should not be regarded as a representation by the Company that
the Company's plans and objectives will be achieved.

GENERAL
 
  HealthCare Financial Partners, Inc. (the "Company") is a specialty finance
company offering asset-based financing to healthcare service providers, with a
primary focus on clients operating in sub-markets of the healthcare industry,
including long-term care, home healthcare and physician practice. The Company
also provides asset-based financing to clients in other sub-markets of the
healthcare industry, including pharmacies, durable medical equipment suppliers,
hospitals, mental health providers, rehabilitation companies, disease state
management companies and other providers of finance and management services to
the healthcare industry. The Company targets small and middle market healthcare
service providers with financing needs in the $100,000 to $10 million range in
healthcare sub-markets which have favorable characteristics for working capital
financing, such as those where growth, consolidation or restructuring appear
likely in the near to medium term. Management believes, based on its industry
experience, that the Company's healthcare industry expertise and specialized
information systems, combined with its responsiveness to clients, willingness
to finance relatively small transactions, and flexibility in structuring
transactions, give it a competitive advantage in its target markets over
commercial banks, diversified finance companies and traditional asset-based
lenders. 
 
  From its inception in 1993 through December 31, 1997, the Company has
advanced $1.9 billion to its clients in over 560 transactions, including $1.2
billion advanced during the year ended December 31, 1997. The Company had 174
clients as of December 31, 1997, of which 60 were affiliates of one or more
other clients. The average amount outstanding per client or affiliated client
group at December 31, 1997 was approximately $1.5 million. For the years ended
December 31, 1995 and 1996, the Company's pro forma net income was $1.5 million
and $3.0 million, respectively. For the year ended December 31, 1997, the
Company's consolidated net income was $8.0 million. For the year ended December
31, 1997, the Company's yield on finance receivables (total interest and fee
income divided by average finance receivables for the period) was 16.8%. 
 
  At December 31, 1997, 69.2% of the Company's portfolio consisted of finance
receivables from businesses in the long-term care, home healthcare and
physician practice sub-markets. Estimated expenditures in 1997 for the long-
term care, home healthcare and physician practice sub-markets, which the
Company currently emphasizes, collectively constituted approximately $399.9
billion of the over $1.3 trillion U.S. healthcare market. These sub-markets are
highly fragmented, and companies operating in these sub-markets generally have
significant working capital finance requirements. The Company's clients
operating in these sub-markets tend to be smaller, growing companies with
limited access to traditional sources of working capital financing from
commercial

                                       1
<PAGE>
 
banks, diversified finance companies and asset-based lenders because many such
lenders have not developed the healthcare industry expertise needed to
underwrite smaller healthcare service companies or the specialized systems
necessary to track and monitor healthcare accounts receivable transactions.
Some of the Company's clients are also constrained from obtaining financing
from more traditional working capital sources due to their inadequate equity
capitalization, limited operating history, lack of profitability, or financing
needs below commercial bank size requirements. 
 
  The Company currently provides financing to its clients through (i) revolving
lines of credit secured by, and advances against, accounts receivable (the
"Accounts Receivable Program"), and (ii) term loans (accompanied, in certain
cases, by warrants) secured by first or second liens on real estate, accounts
receivable or other assets (the "STL Program"). Loans under the STL Program are
often made in conjunction with financing provided under the Accounts Receivable
Program. To date, the Company has not incurred any credit losses in either
program, although it periodically makes provisions for possible future losses
in the ordinary course of its business. 

  Under the Accounts Receivable Program, the accounts receivable are
obligations of third-party payors, such as federal and state Medicare and
Medicaid programs and other government financed programs ("Government
Programs"), commercial insurance companies, health maintenance organizations
and other managed healthcare concerns, self-insured corporations and, to a
limited extent, other healthcare service providers. The Company generally
advances only 65% to 85% of the Company's estimate of the net collectible value
of client receivables from third-party payors. The Company's credit risk is
mitigated by the Company's ownership of or security interest in the remaining
balance of such receivables ("Excess Collateral"). Clients continue to bill and
collect the accounts receivable, subject to lockbox collection and sweep
arrangements established for the benefit of the Company. The Company uses its
proprietary information systems to monitor its clients' accounts receivable
base on a daily basis and to assist its clients in improving and streamlining
their billing and collection efforts with respect to such receivables. The
Company conducts extensive due diligence on potential clients for all its
financing programs and follows written underwriting and credit policies in
providing financing to clients.
 
  During 1997, the Company expanded the STL Program to increase its penetration
of targeted healthcare sub-markets. Through the STL Program, the Company serves
clients that have more diverse and complex financing needs, such as healthcare
facility acquisitions and expansions. In addition to the collateral securing
the loans, the Company generally has recourse to the borrower. STL Program
loans generally have terms of one to three years. As a result of the Company's
expansion of the STL Program, loans under that program comprised 25.9% of
finance receivables at December 31, 1997. While yields on STL Program loans are
generally lower than the yields generated from the Accounts Receivable Program,
some STL Program loans also include warrants and other fees that may enhance
their effective yields.
 
  In order to enhance its underwriting capabilities, reduce its reliance on
third parties and increase its fee revenue, the Company established a new
subsidiary, HealthCare Analysis Corporation ("HCAC"), in March 1997. HCAC
specializes in due diligence, reimbursement consulting and audit services for
businesses in the healthcare industry. As of January 31, 1998, HCAC employed 17
healthcare auditors and had offices in Maryland, California, Georgia,
Massachusetts and New York. Prior to establishing HCAC, the Company used third
parties for the due diligence and audit work necessary in connection with
financings provided to its clients. By using HCAC to provide all of such
services, the Company has become more responsive to its
 

                                       2
<PAGE>
 
clients while benefitting from HCAC's high quality due diligence and consistent
audit documentation. Fees charged by HCAC for its services are passed on to
such clients and prospective clients.
 
  The Company has developed low cost means of marketing its services on a
nationwide basis to selected healthcare sub-markets. The Company primarily
markets its services by telemarketing to prospective clients identified by the
Company, advertising in industry specific periodicals and participating in
industry trade shows. The Company also markets its services by developing
referral relationships with accountants, lawyers, venture capital firms,
billing and collection companies and investment banks. The Company's clients
also assist the Company's marketing efforts by providing referrals and
references.
 
  The Company currently funds its operations through: (i) a $50 million
revolving line of credit (the "Bank Facility") with Fleet Capital Corporation
("Fleet"); (ii) an investment-grade asset-based commercial paper program (the
"CP Program") with ING Baring (U.S.) Capital Markets, Inc. ("ING") which
enables the Company to borrow up to $200 million; and (iii) a $100 million
revolving warehouse line of credit (the "Warehouse Facility") with Credit
Suisse First Boston ("First Boston").

RECENT DEVELOPMENTS
 
  The Company's assets increased 168.9% from $101.3 million at January 1, 1997
to $272.4 million at December 31, 1997, and growth continued in early 1998 as
the Company's assets increased to $296.2 million at January 31, 1998.
 
  On February 9, 1998, the Company announced that it had formed HealthCare
Financial Partners REIT, Inc., an entity that will elect to be taxed as a real
estate investment trust (the "HCFP REIT"). The HCFP REIT will be managed by a
newly formed subsidiary of the Company that will be compensated on a fee basis
for its management services. The Company's management believes that the HCFP
REIT represents an effective means for the Company to enhance its client
relationships by referring such clients' long-term real estate financing needs
to the HCFP REIT.
 
  It is anticipated that the HCFP REIT will fund its operations with the
proceeds of an initial public offering (the "REIT Offering") (estimated to be
approximately $200 million, less underwriting discounts and commissions), and
that the Company will purchase up to a 9.9% ownership position in the HCFP REIT
in the REIT Offering. The Company's management anticipates that the HCFP REIT
will invest in financing products not offered by the Company, which include
permanent (long-term) mortgage loans, real estate, purchase-leaseback
transactions and other income-producing real estate-related assets in the
healthcare industry. The Company's management expects that the REIT Offering
will be consummated in the second quarter of 1998.
 
 
HEALTHCARE INDUSTRY
 
  According to Healthcare Financing Administration ("HCFA") estimates, total
domestic healthcare expenditures for 1997 exceeded $1.2 trillion, or 14.8% of
gross domestic product, compared to expenditures of $428.2 billion or 10.2% of
gross domestic product in 1985. The annual compound growth rate of healthcare
expenditures from 1985 to 1997 was 9.5%. The breakdown of estimated healthcare
expenditures for 1997 is as follows (dollars in billions):
 
<TABLE>
<CAPTION>
                                                                  ESTIMATED 1997
   HEALTHCARE INDUSTRY SEGMENT                                     EXPENDITURES
   ---------------------------                                    --------------
   <S>                                                            <C>
   Acute-Care (hospitals)........................................    $  449.0
   Physician Services............................................       258.9
   Other Medical Non-Durables....................................       105.5
   Long-Term Care (nursing homes)................................       102.6
   Other Professional Services...................................        85.2
   Insurance-net healthcare costs................................        64.7
   Dental Services...............................................        52.2
   Home Healthcare...............................................        38.4
   Government Public Health......................................        33.5
   Other Personal Care...........................................        30.1
   Research......................................................        17.9
   Vision Products and Other Medical Durables....................        16.2
   Construction..................................................        15.2
                                                                     --------
   Total.........................................................    $1,269.4
                                                                     ========
</TABLE>
--------
Source: HCFA, Office of the Actuary.
 
                                       3
<PAGE>
 
  The Company believes that there are several distinct trends that will
continue to fuel the demand for and the dollar value of healthcare services in
the United States and the demand for the Company's services, including: (i)
dramatic change driven by governmental and market forces which have put
pressure on healthcare service providers to reduce healthcare delivery costs
and increase efficiency, often resulting in short-term working capital needs
by such providers as their businesses grow; (ii) favorable demographic trends,
including both the general increase in the U.S. population and the aging of
the U.S. population, which should increase the size of the Company's principal
target markets; (iii) growth, consolidation and restructuring of fragmented
sub-markets of healthcare, including long-term care, home healthcare and
physician services; and (iv) advances in medical technology, which have
increased demand for healthcare services by expanding the types of diseases
that can be effectively treated and by extending the population's life
expectancy.
 
  According to HCFA, total annual expenditures in the long-term care market
grew from $30.7 billion in 1985 to an estimated $102.6 billion in 1997, and
are projected to grow to $121.2 billion by the year 2000. The Company's long-
term care clients include single nursing home operators (1-2 homes), small
nursing home chains (3-10 homes) and regional nursing home chains (11-50
homes). According to the Guide to the Nursing Home Industry published in 1996
by HCIA, Inc., a healthcare information services company, the long-term care
industry remains widely diversified and fragmented, with all nursing home
chains controlling only 34.5% of the market, and the largest 20 chains
constituting only 18.0% of the market.
 
  According to HCFA, total annual home healthcare expenditures grew from $5.6
billion in 1985 to an estimated $38.4 billion in 1997, and are projected to
grow to $45.9 billion by the year 2000. According to the National Association
of Health Care, the number of Medicare certified home health agencies has
grown from 5,983 in 1985 to 10,027 in 1996. The home healthcare business
remains highly fragmented, with only a small percentage of such companies
having any significant market share.
 
  According to HCFA, total annual physician services expenditures, grew from
$83.6 billion in 1985 to an estimated $258.9 billion in 1997, and are
projected to grow to $309.8 billion by the year 2000. The American Medical
Association ("AMA") reports that, as of December 31, 1995, approximately
642,000 physicians were actively involved in patient care in the U.S., with a
growing number participating in multispecialty or single-specialty groups.
According to the AMA, as of December 31, 1995, there were 19,787 physician
groups with three or more physicians, while over two-thirds of all physicians
still work in practices of one or two persons.
 
MARKET FOR HEALTHCARE ASSET-BASED FINANCING
 
  Businesses generally utilize working capital or accounts receivable
financing to bridge the shortfall between the turnover of current assets and
the maturity of current liabilities. A business will often experience this
shortfall during periods of revenue growth because cash flow from new revenues
lags behind cash outlays required to produce new revenues. For example, a
growing labor intensive business will often need to fund payroll obligations
before payments are received on new services provided or products produced.
Many of the Company's clients are labor intensive and growing and therefore
require accounts receivable financing to fund their growth.
 
  In addition to the Company, working capital financing for small and middle
market healthcare service providers is currently provided by several different
sources. Some commercial banks and diversified finance companies have formed
groups or divisions to provide working capital financing for healthcare
service providers. Such groups or divisions generally focus on providing
financing to companies with borrowing needs in excess of $5 million, and often
require more extensive collateral in addition to accounts receivable to secure
such financing. As a general
 
                                       4
<PAGE>
 
matter, these lenders typically have been less willing to provide financing to
healthcare service providers of the types served by the Company because such
lenders have not developed the healthcare industry expertise needed to
underwrite smaller healthcare service companies or the specialized systems
necessary for tracking and monitoring healthcare receivables transactions,
which are different from traditional accounts receivable finance transactions.
Several independent healthcare finance companies that have raised funds
through securitization programs also provide financing to healthcare service
providers. However, many of the financing programs offered by such
securitization companies are often rigid and cumbersome for healthcare service
providers to implement because, among other things, securitization programs
typically impose more stringent and inflexible qualification requirements on
borrowers and also impose concentration and other limitations on the asset
portfolio, as a result of rating agencies and other requirements.
 
  In addition to working capital, small to middle market healthcare service
providers often require additional sources of financing, including term loans
to facilitate the growth or restructuring of their businesses. A majority of
the Company's clients are facility-based health care service providers, such
as nursing homes, that grow through the acquisition of additional facilities.
Facility-based healthcare service providers can often acquire additional
facilities at attractive valuations if, after identifying an opportunity, such
providers can obtain the necessary financing to quickly close on the
acquisition. Many of the Company's clients also have a need for term loans as
their businesses grow in order to support expanding infrastructure
requirements such as information systems, enhanced professional management and
marketing and business development costs. To address this market need, the
Company introduced the STL Program in late 1996.
 
  Management believes that the growth in healthcare expenditures, the
consolidation of certain segments of the healthcare market, and the
reorganization of the healthcare delivery system (caused by both cost
containment pressures and the introduction of new products and services) will
have positive effects on the demand for the Company's services since they in
many cases will increase the working capital needs of the Company's clients.
Historically, these trends have affected different sub-markets of the
healthcare industry at different times. The Company expects these trends to
continue, thereby providing the Company with long-term growth opportunities.
 
STRATEGY
 
  The Company's goal is to be the leading finance company in its targeted sub-
markets of the healthcare services industry and to become the primary source
for all of the financing needs of its clients. The Company's strategy for
growth is based on the following key elements:
 
  Target sub-markets within the healthcare industry that have favorable
characteristics for working capital financing, such as fragmented sub-markets
experiencing growth, consolidation or restructuring. At December 31, 1997,
69.2% of the Company's portfolio consisted of finance receivables from
businesses in the long-term care, home healthcare and physician practice sub-
markets, and management believes that growth, consolidation and restructuring
in these sub-markets will continue to provide opportunities for the Company to
expand. By continuing to focus on these sub-markets, the Company seeks to
achieve attractive returns while controlling overall credit risk. In the
future different healthcare sub-markets may experience increased demand for
working capital and the Company intends to be in a position to move into these
new markets as opportunities arise.
 
  Focus on healthcare service providers with financing needs of between
$100,000 and $10 million, a market that has been underserved by commercial
banks, diversified finance companies, traditional asset-based lenders and
other competitors of the Company. Most commercial banks, diversified finance
companies and traditional asset-based lenders have typically focused on
providing
 
                                       5

<PAGE>
 
financing to companies with borrowing needs in excess of $5 million. The
Company believes that its target market for transactions between $100,000 and
$10 million is much larger, in terms of the number of available financing
opportunities, and is less competitive than the market servicing larger
borrowing needs, thereby producing growth opportunities at attractive rates.
 
  Become the primary source for all of the financing needs of clients by
introducing new financial products to leverage the Company's existing
expertise in healthcare finance and its origination, underwriting and
servicing capabilities within its target sub-markets. The Company employs
significant resources in the origination, underwriting and servicing of
clients in its target sub-markets. To further deepen its penetration of these
sub-markets and to meet the changing financial needs of new and existing
clients with a broader array of financial products, the Company began in late
1996 to offer additional financing products through the STL Program. The
Company expects to continue to selectively introduce new products to existing
and new clients, depending upon the needs of its clients, general economic
conditions, the Company's resources and other relevant factors. In some cases,
the Company anticipates that new products may be introduced as part of
cooperative arrangements with other lenders where the origination and
servicing relationship will remain with the Company.
 
  Increase the Company's offering of fee-based and value-added services to
clients such as the reimbursement consulting and clinical auditing services
provided by HCAC. The Company constantly seeks to increase the range of fee-
based services which it offers its clients in order to (i) reduce its
dependence on profits derived from the difference between the yield on finance
receivables and its cost of funds, (ii) supplement its total revenues by the
amount of such fees, and (iii) offer a broader range of services to its
clients. The fee-generating capabilities of HCAC and the HCFP REIT (via the
management agreement, if the REIT Offering is consummated) are expected to
increase fee income of the Company.
 
  Seek to make strategic acquisitions of and investments in businesses that
are engaged in the same or similar business as the Company or that are engaged
in lines of business complementary to the Company's business. Because of the
growth of the Company's core finance receivables business, the Company
increasingly is offered opportunities to invest in, or acquire interests in,
healthcare service businesses that are involved in financial services,
receivables management, outsourcing, or financial and administrative
infrastructure development activities. The Company believes that businesses in
these areas are synergistic with the Company's core lending business and could
allow the Company to leverage its expertise in healthcare to meet the needs of
the Company's customer base. See "--Recent Developments." The Company will also
seek to take advantage of appropriate opportunities to acquire portfolios of
loans backed by healthcare receivables and to invest in or acquire companies
in the same or similar lines of business as the Company.
 
  Enhance the Company's credit risk management and improve servicing
capabilities through continued development of information management systems.
The Company has developed proprietary information systems that effectively
monitor its assets and which also serve as valuable tools to the Company's
smaller less sophisticated clients in managing their working capital resources
and streamlining their billing and collection efforts. The Company believes
that this "servicing" capability provides a competitive advantage by
strengthening relationships with clients, providing early identification of
dilution of client accounts receivable and increasing the Company's
understanding of its clients' operational needs.
 
FINANCING PROGRAMS
 
  The Company provides asset-based financing to healthcare service providers
through the Accounts Receivable Program and the STL Program.
 
                                       6
<PAGE>
 
  Accounts Receivable Program. Under the Accounts Receivable Program, the
Company offers healthcare service providers revolving lines of credit secured
by, and advances against, accounts receivable. Revolving lines of credit
offered through the Accounts Receivable Program permit a client to borrow, on
a revolving basis, 65% to 85% of the estimated net collectible value of the
client's accounts receivable due from third-party payors, which are pledged to
the Company. The Company charges its clients a base floating interest rate
ranging from one to three percent above the then applicable prime rate and a
variety of other fees, which may include a loan management fee, a commitment
fee, a set-up fee and an unused line fee, which fees collectively range from
one to four percent. The Company targets larger healthcare service providers
for revolving lines of credit secured by accounts receivable, for which the
minimum commitment amount is generally $1 million and the maximum commitment
amount is generally $10 million. Such financings are recourse to the client
and generally have a term of one to three years.
 
  In connection with advances against receivables, the Company purchases, on a
revolving basis, a specified batch of a client's accounts receivable owed to
such client from third-party payors. The purchase price for each batch of
receivables is the estimated net collectible value of such batch less a
purchase discount, comprised of funding and servicing fees. The purchase
discount can be either a onetime fee for each batch of receivables purchased
or a periodic fee based on the average outstanding balance of a batch of
receivables ranging from one to five percent of the net collectible value of
such batch. With each purchase of a batch of receivables, the Company advances
to the client 65% to 85% of the purchase price (which is equal to aggregate
net collectible value minus a purchase discount) of such batch. The Company
assigns a collection period to batches of receivables purchased, which period
generally ranges from 60 to 120 days from the purchase date depending on the
type of receivables purchased. The excess of the purchase price for a batch of
receivables over the amount advanced with respect to such batch (a "client
holdback") is treated as a reserve and provides additional security to the
Company. The Company targets smaller healthcare service providers for
financings involving advances against receivables. Commitments for such
financings are generally less than $1 million and terms are generally for one
year with renewal options.
 
  As of December 31, 1997, the Company was financing 161 clients in its
Accounts Receivable Program, and the finance receivables originated through
the Accounts Receivable Program constituted 74.1% of total finance
receivables. The yield on finance receivables generated under the Accounts
Receivable Program for the year ended December 31, 1997 was 17.0%. Of the
Company's finance receivables in its Accounts Receivables Program at December
31, 1997, 32.6% represented payables by commercial insurers or other non-
governmental third-party payors, 25.9% represented payables from Medicare and
41.5% represented payables from Medicaid.
 
  STL Program. Under the STL Program, the Company provides its clients with
term loans for up to three years secured by first or second liens on real
estate, accounts receivable or other assets, such as equipment, inventory and
stock. The Company introduced the STL Program in late 1996, in an effort to
service clients' financing needs which the Company could not provide through
its Accounts Receivable Program. Such loans have been made to clients to
finance acquisitions and expansions of existing healthcare facilities, as well
as to provide working capital, and are often provided to clients in
conjunction with financing under the Accounts Receivable Program. Such loans
are generally recourse to the borrower.
 
  At December 31, 1997, the Company had $65.0 million in STL Program loans
outstanding. The yield on finance receivables generated under the STL Program
for the year ended December 31, 1997, was 16.3%. At December 31, 1997, STL
Program loans comprised 25.9% of the Company's total finance receivables.
While yields on such loans are generally lower than the
 
                                       7

<PAGE>
 
yields generated by the Accounts Receivable Program, some term loans under the
STL Program also include warrants or success fees that may enhance the
effective yield on such loans.
 
  The following table sets forth the Company's portfolio activity at or for
the periods indicated:
 
                              PORTFOLIO ACTIVITY
                            (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                AS OF AND FOR THE QUARTERS ENDED
                          ----------------------------------------------------------------------------
                          MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 31, DEC. 31,
                            1996      1996     1996      1996     1997      1997     1997      1997
                          --------- -------- --------- -------- --------- -------- --------- ---------
<S>                       <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>
Balance Outstanding:
 AR Program.............   $57,448  $65,914   $79,567  $86,876  $104,865  $118,960 $172,171  $185,728
 STL Program............       --       --        --     2,453    11,923    33,420   46,331    64,961
Total AR Program
 Clients................        90       98       112      129       137       145      171       161
New AR Program Clients..        23       14        15       35        26        29       27        28
Total STL Program
 Clients................       --       --        --         8        20        25       32        39
New STL Program
 Clients................       --       --        --       --         14         8        9        10
Avg. Finance
 Receivables/ Client:
 AR Program.............   $   638  $   673   $   710  $   673  $    765  $    820 $  1,007  $  1,154
 STL Program............       --       --        --       307       596     1,337    1,448     1,666
</TABLE>
-------
* "AR" means Accounts Receivable
 
OPERATIONS
 
  Portfolio Development. The Company has established a portfolio development
group which is primarily responsible for new business generation, including
both marketing and underwriting.
 
  Marketing. The Company has developed low cost means of marketing its
services on a nationwide basis to selected healthcare sub-markets. The Company
primarily markets its services by telemarketing to prospective clients
identified by the Company, advertising in industry specific periodicals and
participating in industry trade shows. The Company's clients also assist the
Company's marketing efforts by providing referrals and references. The Company
has and will continue to rely primarily on direct marketing efforts to
generate new clients for its services.
 
  The Company also markets its services by developing referral relationships
with accountants, lawyers, venture capital firms, billing and collection
companies and investment banks (which typically are professionals focusing on
the healthcare industry and who have a pre-existing relationship with a
prospective client). The Company usually does not pay a fee for referrals from
professional firms. However, the Company has closed transactions with clients
through referrals from independent brokers that generally specialize in the
healthcare industry, which brokers have been paid a one-time brokerage
commission upon the closing of a transaction. While not a primary focus of its
marketing efforts, the Company expects to continue to generate referrals
through independent brokers.
 
  At January 31, 1998, the Company employed a staff of 11 sales and marketing
representatives at its headquarters in Chevy Chase, Maryland. In November
1997, the Company opened an office for marketing in Dallas, Texas, and
currently has one employee in its Dallas office. Marketing personnel are
compensated with a base salary plus performance bonuses.
 
  Underwriting. The Company follows written underwriting and credit policies,
and its credit committee, consisting of senior officers of the Company, must
unanimously approve each transaction
 
                                       8
<PAGE>
 
which is proposed for the Accounts Receivable Program or STL Program with a
prospective client. The Company's underwriting policies require a due
diligence review of the prospective client, its principals, its financial
condition and strategic position, including a review of all available
financial statements and other financial information, legal documentation and
operational matters. The Company's due diligence review also includes a
detailed examination of a prospective client's accounts receivable, accounts
payable, billing and collection systems and procedures, management information
systems and real and personal property and other collateral. Such a review is
conducted after the Company and the prospective client execute a non-binding
term sheet, which requires the prospective client to pay a due diligence
deposit to defray the Company's expenses. The Company's due diligence review
is organized by the Company's underwriters and supervised by the sponsoring
member of the credit committee. At January 31, 1998, the Company employed four
underwriters at its headquarters in Maryland. HCAC independently confirms
certain matters with respect to the prospective client's business and the
collectibility of its accounts receivable and any other collateral by
conducting public record searches, and, where appropriate, by contacting
third-party payors about the prospective client's receivables. For loans
primarily secured by real property, the Company requires third-party
appraisals and Phase I environmental surveys prior to making such loans.
 
  In order to determine its estimate of the net collectible value of a
prospective client's accounts receivable, HCAC conducts extensive due
diligence to evaluate the receivables likely to be paid within a defined
collection period. This evaluation typically includes: (i) a review of
historical collections by type of third-party payor; (ii) a review of
remittance advice and information relating to claim denials (including
explanations of benefits); (iii) a review of claims files and related medical
records; and (iv) an analysis of billing and collections staff and procedures.
HCAC may also periodically employ third-party claim verifiers to assist it in
determining the net collectible value of a client's accounts receivable. Claim
verifiers include healthcare billing and collection companies, healthcare
accounting firms with expertise in reviewing cost reports filed with Medicaid
and Medicare, and specialized consultants with expertise in certain sub-
markets of the healthcare industry. Claim verifiers are pre-approved by the
Company's credit committee. When deemed necessary by the Company for credit
approval, the Company may obtain corporate or personal guaranties or other
collateral in connection with the closing of a transaction.
 
  Loan Administration. The Company has established a loan administration group
which is primarily responsible for monitoring the performance of its loans, as
well as its collection procedures.
 
  Monitoring. The Company monitors the collections of client accounts
receivable and its finance receivables on a daily basis. Each client is
assigned an account manager, who receives draw and advance requests, posts
collections and serves as the primary contact between the Company and the
client. Each client is also assigned to a loan officer who is primarily
responsible for monitoring that client's financial condition and the adequacy
of the Company's collateral with respect to loans to such client. All draw or
advance requests must be approved by the client's loan officer and by the
Company's senior credit officer or a portfolio manager. At January 31, 1998,
the Company employed ten account managers and four loan officers in its
Maryland headquarters. The Company's proprietary information system enables
the Company to monitor each client's account, as well as permit management to
evaluate and mitigate against risks on a portfolio basis. See "--Information
Systems." In addition, the Company conducts audits of its clients' billing and
collection procedures, financial condition and operating strategies at least
annually, and more frequently if warranted, particularly with respect to the
loans with outstanding balances of more than $1.5 million, where audits are
usually conducted on a quarterly basis. Such audits are conducted by HCAC.
 
  The Company grades performing STL Program loans on a scale of 1 to 4, with
grade 1 assigned to those loans involving the least amount of risk. The
grading system is intended to
 
                                       9
<PAGE>
 
reflect the performance of a borrower's business, the collateral coverage of
the loan and other factors considered relevant. Each loan is initially graded
based on the financial performance of the borrower and other specific risk
factors associated with the borrower, including growth, collateral coverage,
capitalization, quality of management, value of intangible assets and
availability of working capital. All new loans are assigned a grade 3 for a
period of six months in the absence of an extraordinary event during that
period. After the initial six months, loans are assigned a grade of 1 to 4.
Thereafter, all loans are reviewed and graded on at least a quarterly basis.
Performing loans are generally serviced by the Company's account managers,
with loans in grade 4 being serviced in some cases by a member of the
Company's loan workout group, which currently consists of a loan officer and
the Company's Senior Credit Officer.
 
  Non-performing loans are graded on a scale of N1 or N2. Grade N1 is assigned
to a non-performing loan which the Company believes may be brought back into
compliance by the borrower's current management. Non-performing loans are
placed on the Company's watch list and are serviced by a member of the loan
workout group. Grade N2 is assigned to a loan that the Company believes cannot
be brought back into compliance. Such loans are liquidated either informally
or through legal proceedings.
 
  Collection Procedures. The Company's cash collection procedures vary by (i)
the type of program provided by the Company and (ii) the type of accounts
receivable due and owing to clients from either insurance companies and health
maintenance organizations ("Commercial Insurers"), Government Programs, or in
certain limited circumstances, other healthcare service providers.
 
  Receivables due and owing from Government Programs are subject to certain
laws and regulations not applicable to Commercial Insurers. Except in certain
limited cases, Medicare and Medicaid laws and regulations provide that
payments for services rendered under Government Programs can only be made to
the healthcare service provider that has rendered the services.
 
  With respect to the Accounts Receivable Program, clients continue to bill
and collect accounts receivable in the ordinary course of business; provided,
however, that subject to certain limitations applicable to Government Program-
related receivables, the Company retains the right to assume the billing and
collection process upon notice to the client. The Company maintains a general
lockbox in the Company's name into which payments with respect to all
receivables purchased from clients in the Accounts Receivable Program, other
than Government Program-related receivables, are required to be remitted. If a
client in the Accounts Receivable Program generates Government Program-related
receivables, the client is required to establish a lockbox in the client's
name into which payments on such receivables are to be directed. Balances from
all lockboxes maintained in connection with the Accounts Receivable Program
are swept on a daily basis to the Company.
 
  With respect to the STL Program, clients make periodic interest and/or
principal payments, generally monthly. The Company will undertake collection
efforts if such payments are not made on a timely basis. Such efforts may
include acceleration of amounts due under the loan and institution of
foreclosure proceedings with respect to any property securing the loan. In
addition, if the loan is secured by personal guaranties, the Company may
pursue remedies to collect amounts owed by the guarantors.
 
  Documentation. The Company's documentation for the Accounts Receivable and
STL Programs is described below.
 
  Accounts Receivable Program. Revolving lines of credit secured by accounts
receivable are made pursuant to a loan and security agreement (the "AR Loan
Agreement"), a note, and ancillary
 
                                      10
<PAGE>
 
documents. The AR Loan Agreements generally have stated terms of one to three
years, with automatic one-year extensions, and provide for payment of
liquidated damages to the Company in the event of early termination by the
client. The Company generally advances only 65% to 85% of the Company's
estimate of the net collectible value of client receivables from third-party
payors. As security for such advances, the Company is granted a first priority
security interest in all of the client's then-existing and future accounts
receivable, and frequently obtains a security interest in inventory, goods,
general intangibles, equipment, deposit accounts, cash, other assets and
proceeds.
 
  The AR Loan Agreement contains a number of negative covenants, including
covenants limiting additional borrowings, prohibiting the client's ability to
pledge assets, restricting payment by the client of dividends or management
fees or returning capital to investors, and imposing minimum net worth and, if
applicable, minimum census requirements. In the event of a client default, all
debt owing under the AR Loan Agreement may be accelerated and the Company may
exercise its rights, including foreclosing on the collateral.
 
  Advances against accounts receivable under the Accounts Receivable Program
are made pursuant to a Receivables Purchase and Sale Agreement (the "AR
Agreement") and are structured as purchases of eligible accounts receivable
designated from time to time on a "batch" basis. AR Agreements provide for the
Company's purchase of eligible accounts receivable offered by the client from
time to time to the Company. AR Agreements generally have stated terms of one
to three years, with automatic one-year extensions. The client is required to
sell to the Company a minimum amount of eligible accounts receivable each
month during the term of an AR Agreement; however, the Company's total
investment in eligible accounts receivable under an AR Agreement is limited to
a specified "commitment" amount. The Company may accept or reject in its
discretion any portion of eligible accounts receivable offered for sale by the
client to the Company. Although accounts receivable purchased by the Company
under the Accounts Receivable Program are assigned to the Company pursuant to
the AR Agreement, the client retains its rights to receive payment and to make
claims with respect to Government Program-related receivables.
 
  The purchase price for each batch of eligible accounts receivable under the
AR Agreements is the estimated net collectible value of such receivables less
a purchase discount, comprised of funding and servicing fees. An amount equal
to 65% to 85% of the purchase price is paid to the client; the Company retains
the balance of the purchase price as a client holdback, held as additional
security for the client's obligations under the AR Agreement. The client
holdback is released to the client (i) upon receipt by the Company of payments
relating to the receivables in an amount equal to the estimated net
collectible value of the receivables or (ii) upon expiration of the collection
period assigned to the respective batch of receivables, except that if the
Company has not received payments at least equal to the purchase price for the
receivables, then the Company may at its option either (x) offset any
shortfall against client holdbacks relating to other batches or from amounts
due to the client from the sale of other batches, or (v) require the client to
replace the uncollected receivables with substitute eligible accounts
receivable.
 
  The AR Agreement also contemplates that the client may grant to the Company
a security interest in other assets of the client as may be mutually agreed.
In addition, pursuant to the AR Agreement, the client agrees to indemnify the
Company for all losses arising out of or relating to the AR Agreement.
 
  Under the AR Agreement, the client covenants to notify payors of the sale of
accounts receivable to the Company and to assist the Company in collecting
payments on the purchased receivables and causing such payments to be remitted
to the Company. The client agrees to instruct all payors that payments are to
be made to such lockbox or other account as the Company may direct.
 
                                      11
<PAGE>
 
  STL Program. Because of the nature of the STL Program loans, which are made
to finance particular needs of clients such as acquisitions and expansions of
existing healthcare facilities, the Company's documentation for loans under
the STL Program is tailored to the needs of the particular borrower and the
type of available collateral. Such documentation generally includes a term
loan agreement and promissory note (the "STL Loan Agreement") and a mortgage
and security agreement with respect to the collateral for the loan. The STL
Loan Agreement contains financial and other covenants similar to those in the
AR Loan Agreement. In the event of a client default, all debt owed under the
STL Loan Agreement may be accelerated and the Company may exercise its rights,
including foreclosing on the collateral. The Company requires an appraisal and
a Phase I environmental survey for real property collateral securing an STL
Program Loan.
 
  STL Program loans often include provision for warrants or other equity
interests in the borrower. Documentation of the warrant or other equity
interest may include provisions relating to, among other things, anti-dilution
protection, registration rights, put and call features and representation of
the Company on the board of directors or similar body of the borrower in
certain circumstances.
 
                                      12


<PAGE>

CLIENTS
 
  The Company's client base is diversified. As of December 31, 1997, the
Company was servicing clients located in 37 states across the country, in a
number of different sub-markets of the healthcare industry, with a
concentration in the long-term care, home healthcare and physician practice
sub-markets.
 
                              PORTFOLIO ANALYSIS
 
<TABLE>
<CAPTION>
                                              AS OF DECEMBER 31, 1997
                                    -------------------------------------------
                                    NUMBER
                                      OF    PERCENT OF    FINANCE    PERCENT OF
INDUSTRY GROUP                      CLIENTS  CLIENTS    RECEIVABLES  PORTFOLIO
--------------                      ------- ---------- ------------- ----------
<S>                                 <C>     <C>        <C>           <C>
Long Term Care.....................    62      35.6%   $ 104,992,876    41.9%
Home Healthcare....................    42      24.1       42,616,475    17.0
Physician Practice.................    25      14.4       25,773,842    10.3
Mental Health......................    12       6.9       23,931,715     9.5
Hospital...........................     7       4.0       16,331,760     6.5
Rehabilitation.....................    11       6.3       14,013,363     5.6
Other..............................     6       3.4        9,483,990     3.8
Disease State Management...........     2       1.2        6,213,990     2.5
Ambulatory Services................     3       1.7        4,270,334     1.7
Diagnostic.........................     2       1.2        2,112,557     0.8
Durable Medical Equipment..........     2       1.2          947,236     0.4
                                      ---     -----    -------------   -----
  Total............................   174     100.0%   $ 250,688,138   100.0%
                                      ===     =====    =============   =====
PROGRAM BREAKDOWN(1)
--------------------
Accounts Receivable Program........   161      80.5%   $ 185,727,628    74.1%
STL Program........................    39      19.5       64,960,510    25.9
                                      ---     -----    -------------   -----
  Total............................   200     100.0%   $ 250,688,138   100.0%
                                      ===     =====    =============   =====
</TABLE>
--------
(1) At December 31, 1997, 26 clients were in both the Accounts Receivable and
    STL Programs.
 
CAPITAL RESOURCES
 
  Sources of capital available to the Company to fund finance receivables
under the Accounts Receivable and STL Programs include the Bank Facility, the
CP Facility, the Warehouse Facility and stockholders' equity.
 
  Bank Facility. The Bank Facility is a revolving line of credit for up to $50
million. The interest rates payable by the Company under the Bank Facility
adjust, based on Fleet's prime rate; however, the Company has the option to
borrow any portion of the Bank Facility in an integral multiple of $500,000
based on the one-month, two-month, three-month or six-month LIBOR plus 2.75%.
The Bank Facility contains certain financial covenants which must be
maintained by the Company in order to obtain funds. The expiration date for
the Bank Facility is March 29, 2002, subject to automatic renewal for one-year
periods thereafter unless terminated by either party. 
 
  CP Facility. Under the terms of the CP Facility, the Company may borrow up
to $200 million. The Company formed a bankruptcy remote, special purpose
corporation to which the Company has transferred loans and receivables which
meet certain conditions required by the CP
 
                                      13

<PAGE>
 
Facility. The special purpose corporation pledges the loans and receivables to
a commercial paper conduit, which lends against such assets through the
issuance of commercial paper. The maturity date for the CP Facility is
December 5, 2001. However, the program may be terminated by the Company at any
time after December 5, 1999, without penalty. 
 
  Warehouse Facility. Under the terms of the Warehouse Facility, the Company
may borrow up to $100 million. The Company formed a bankruptcy remote, special
purpose corporation to which the Company has transferred loans under the STL
Program which meet certain conditions required by the Warehouse Facility. The
amount outstanding under the Warehouse Facility may not exceed 88% of the
principal amount of the loans transferred, subject to a $100 million maximum.
Interest accrues under the Warehouse Facility at a rate equal to LIBOR plus
3.75% on the first $50 million of amounts outstanding under the Warehouse
Facility and LIBOR plus 3.0% on amounts over $50 million. The Warehouse
Facility expires on June 27, 1999, as to new loans. However, previous loans
securitized under the Warehouse Facility remain outstanding following such
expiration until such loans are fully repaid or expire by their terms. 
 
CREDIT LOSS POLICY AND EXPERIENCE
 
  The Company regularly reviews its outstanding finance receivables to
determine the adequacy of its allowance for losses on receivables. To date,
the Company has not experienced any credit losses. The allowance for losses on
receivables is maintained at an amount estimated to be sufficient to absorb
future losses, net of recoveries, inherent in the finance receivables. In
evaluating the adequacy of the allowance, management of the Company considers
trends in healthcare sub-markets, past-due accounts, historical charge-off and
recovery rates, credit risk indicators, economic conditions, on-going credit
evaluations, overall portfolio size, average client balances, Excess
Collateral, real estate collateral valuations and underwriting policies, among
other items. As of December 31, 1996, the Company's general reserve was $1.1
million or 1.2% of finance receivables; at December 31, 1997, it was $2.7
million or 1.1% of finance receivables. To the extent that management deems
specific finance receivable advances to be wholly or partially uncollectible,
the Company establishes a specific loss reserve equal to such amount. At
December 31, 1996 and 1997, the Company had no specific reserves. In the
opinion of management, based on a review of the Company's portfolio, the
allowance for losses on receivables is adequate at this time, although there
can be no assurance that such reserve will be adequate in the future.
 
INFORMATION SYSTEMS
 
  The Company owns a proprietary information system to monitor the Account
Receivable and STL Programs, which it refers to as the Receivables Tracking
System (the "RTS"). The RTS was developed by Creative Information Systems,
Inc., a stockholder of the Company. The RTS gives the Company the ability to
track and reconcile receivables that the Company loans or advances against
under the Accounts Receivable Program and loans made under the STL Program.
 
  With respect to the loans under the Accounts Receivable and STL Programs,
the amount of any advances, collections and adjustments are entered manually
into the RTS by the Company's account managers on a daily basis. With respect
to advances against client receivables under the Accounts Receivable Program,
certain client parameters are entered manually into the RTS, and more detailed
information on each batch of receivables is generally entered electronically
based on pre-established formats tailored to the client's software systems.
Upon the collection of funds advanced, information about such collections are
entered into the RTS by the Company's account managers who then apply the
funds by directing the RTS to search its data base to locate the receivable
and batch that has received a payment.
 
                                      14 

<PAGE>
 
  The RTS generates daily, weekly and monthly reports summarizing the current
status of each batch of receivables in the Accounts Receivable Program, and
indicating draws and collections, trend analysis, and interest and fee charges
for management's review. The RTS is also able to generate reports for the
Company's lenders with respect to pledged loans and batches of receivables,
along with concentrations in the Accounts Receivable Program portfolios by
client and third-party payor type.
 
  Certain reports generated through the RTS, including cash application
detail, batch summary and trend analysis reports, can also be used to assist
the Company's clients in monitoring changes in their cash flow and managing
the growth of their businesses. These reports are provided to all of the
Company's clients on a weekly basis, and are generally relied upon as a
management tool more frequently by smaller clients in the Accounts Receivable
Program, which tend to have less sophisticated management information systems.
 
COMPETITION
 
  The Company encounters significant competition in its healthcare finance
business from numerous commercial banks, diversified finance companies, asset-
based lenders and specialty healthcare finance companies. Additionally,
healthcare service providers often seek alternative sources of financing from
a number of sources, including venture capital firms, small business
investment companies, suppliers and individuals. As a result, the Company
competes with a significant number of local and regional sources of financing
and several large national competitors. Many of these competitors have greater
financial and other resources than the Company and may have significantly
lower cost of funds. Competition can take many forms, including, among others,
the pricing of financing, transaction structuring (e.g., securitization vs.
portfolio lending), timeliness and responsiveness in processing a client's
financing application, and customer service.
 
GOVERNMENT REGULATION
 
  The Company's healthcare finance business is subject to federal and state
regulation and supervision and is required to be licensed or registered in
various states. In addition, the Company is subject to applicable usury and
other similar laws in the jurisdictions where the Company operates. These laws
generally limit the amount of interest and other fees and charges that a
lender may contract for, charge or receive in connection with a loan.
Applicable local law typically establishes penalties for violations of these
laws in that jurisdiction. These penalties could include the forfeiture to the
lender of usurious interest contracted for, charged or received and, in some
cases, all principal as well as all interest and other charges that the lender
has charged or received.
 
  Government at both the federal and state levels has continued in its efforts
to reduce, or at least limit the growth of, spending for healthcare services.
On August 5, 1997, President Clinton signed into law The Balanced Budget Act
of 1997 (the "BBA") which contains numerous Medicare and Medicaid cost-saving
measures. The BBA has been projected to save $115 billion in Medicare spending
over the next five years, and $13 billion in the Medicaid program. Section
4711 of the BBA, entitled "Flexibility in Payment Methods for Hospital,
Nursing Facility, ICF/MR, and Home Health Services", repealed the Boren
Amendment, which had required that state Medicaid programs pay to nursing home
providers amounts reasonable and adequate to meet the costs which must be
incurred by efficiently and economically operated facilities in order to
provide care and services in conformity with applicable state and federal
laws, regulations and quality and safety standards and to assure access to
hospital services. The Boren Amendment was previously
 
                                      15
<PAGE>
 
the foundation of litigation by healthcare facilities seeking rate increases.
In place of the Boren Amendment, the BBA requires only that, for services and
items furnished on or after October 1, 1997, a state Medicaid program must
provide for a public process for determination of Medicaid rates of payment
for nursing facility services, under which proposed rates, the methodologies
underlying the establishment of such rates, and justification for the proposed
rates are published, and which gives providers, beneficiaries and other
concerned state residents a reasonable opportunity for review and comment on
the proposed rates, methodologies and justifications. States are actively
seeking ways to reduce Medicaid spending for healthcare by such methods as
capitated payments and substantial reductions in reimbursement rates. The BBA
also requires that nursing homes transition to a prospective payment system
under the Medicare program during a three-year "transition period" commencing
with the first cost reporting period beginning on or after July 1, 1998. The
BBA also contains several new antifraud provisions. Given the recent enactment
of the BBA, the Company is unable to predict the impact of the BBA and
potential changes in state Medicaid reimbursement methodologies on the
revenues of its clients.
 
  In addition to the inability of the Company to directly collect receivables
under Government Programs and the right of payors under such programs to
offset against unrelated receivables, the Company's healthcare finance
business is indirectly affected by healthcare regulation to the extent that
any of its clients' failure to comply with such regulation affects such
clients' ability to collect receivables or repay loans made by the Company. The
most significant healthcare regulations that could potentially affect the
Company are: (i) certificate of need regulation, which many states require upon
the provision of new health services, particularly for long-term care and home
healthcare companies; (ii) Medicare--Medicaid fraud and abuse statutes, which
prohibit, among other things, the offering, payment, solicitation, or receipt of
remuneration, directly or indirectly, as an inducement to refer patients to
facilities owned by physicians if such facilities receive reimbursement from
Medicare or Medicaid; and (iii) other prohibitions of physician self-referral
that have been promulgated by the states.
 
  Certificate of Need Regulation. Many states regulate the provision of new
healthcare service or acquisition of healthcare equipment through Certificate
of Need or similar programs. The Company believes these requirements have had
a limited effect on its business, although there can be no assurance that
future changes in those laws will not adversely affect the Company.
Additionally, repeal of existing regulations of this type in jurisdictions
where the Company's customers have met the specific requirements could
adversely affect the Company since such customers could face increased
competition. In addition, there is no assurance that expansion of the
Company's health care financing business within the nursing home and home care
industries will not be increasingly affected by regulations of this type.
 
  Medicare--Medicaid Fraud and Abuse Statutes. The Department of Health and
Human Services ("HHS") has increased its enforcement efforts under the
Medicare--Medicaid fraud and abuse statutes in cases where physicians own an
interest in a facility to which they refer their patients for treatment or
diagnosis. These statutes prohibit the offering, payment, solicitation or
receipt of remuneration, directly or indirectly, as an inducement to refer
patients for services reimbursable in whole or in part by the Medicare--
Medicaid programs. HHS has taken the position that distributions of profits
from corporations or partnerships to physician investors who refer patients to
the entity for a procedure which is reimbursable under Medicare or Medicaid
may be prohibited by the statute. Since the Company's clients often rely on
prompt payment from the Government Program to satisfy their obligations to the
Company, reduced or denied payments under the Government Programs could have
an adverse effect on the Company's business. 
 
                                      16
<PAGE>
 
  Further Regulation of Physician Self-Referral. Additional regulatory
attention has been directed toward physician-owned healthcare facilities and
other arrangements whereby physicians are compensated, directly or indirectly,
for referring patients to such healthcare facilities. In 1988, legislation
entitled the "Ethics in Patient Referrals Act" (H.R. 5198) was introduced
which would have prohibited Medicare payments for all patient services
performed by an entity which a patient's referring physician had an investment
interest. As enacted, the law prohibited only Medicare payments for patient
services per-formed by a clinical laboratory. The Comprehensive Physician
Ownership and Referral Act (H.R. 345), which was enacted by Congress in 1993
as part of the Deficit Reduction Package, is more comprehensive than H.R. 5198
and covers additional medical services including medical imaging radiation
therapy, physical rehabilitation and others. A variety of existing and pending
state laws prohibit or limit a physician from referring patients to a facility
in which that physician has a proprietary or ownership interest. Many states
also have laws similar to the Medicare fraud and abuse statute which are
designed to prevent the receipt or payment of consideration in connection with
the referral of a patient. Accounts receivable resulting from a referral in
violation of these laws could be denied from payment which could adversely
affect the Company's clients and the Company. 

 
EMPLOYEES
 
          As of January 31, 1998, the Company employed 71 people on a full-time
basis.  The Company believes that its relations with employees are good.

 
ITEM 2.   PROPERTIES

          The Company's headquarters occupy approximately 15,600 square feet at
2 Wisconsin Circle, Chevy Chase, Maryland.  This space is provided under the
terms of a lease that expires in January, 2003, with a five-year renewal option.
The current cost is approximately $40,000 per month.  In addition, as of
December 31, 1997, the Company leased a small marketing office in Dallas, Texas
at a monthly rental of approximately $870.  HCAC rents approximately 1,000
square feet in its Orchard Park, New York office paying $700 per month.  The
Company believes that its current facilities are adequate for its existing needs
and that additional suitable space will be available as required.

ITEM 3.   LEGAL PROCEEDINGS

          The Company is currently not a party to any material litigation
although it is involved from time to time in routine litigation incidental to
its business.

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

          None.


                                      17
<PAGE>
                                    PART II
                                    -------

ITEM 5.   MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
          MATTERS
    
          The Common Stock is listed for trading on the Nasdaq National Market 
under the trading symbol "HCFP." The following table sets forth the high and low
sales prices of the Common Stock as reported by the Nasdaq National Market for  
each of the calendar quarters indicated:

<TABLE>
<CAPTION>

          QUARTER                                        HIGH      LOW
          -------                                      -------   -------
          <S>                                          <C>       <C>
          1996
             Fourth (from November 21, 1996)........   $14.000   $12.125
          1997
             First..................................   $19.000   $12.375
             Second.................................   $20.500   $ 9.750
             Third..................................   $31.500   $19.000
             Fourth.................................   $37.375   $28.875
          1998
             First (through February 18, 1998)......   $42.375   $32.500
</TABLE>

          On February 18, 1998, the closing sale price of the Common Stock, as 
reported on the Nasdaq National Masrket, was $38.125.

          As of December 31, 1997, there were 9,670,291 shares outstanding.

          As of January 31, 1998 there were 33 record holders of the Company's
common stock and approximately 832 beneficiary owners.

                                DIVIDEND POLICY
 
  The Company intends to retain all future earnings for the operation and
expansion of its business, and does not anticipate paying cash dividends in
the foreseeable future. Any future determination as to the payment of cash
dividends will depend upon the Company's results of operations, financial
condition and capital requirements and any regulatory restrictions or
restrictions under credit agreements or other funding sources of the Company
existing from time to time, as well as other matters which the Company's Board
of Directors may consider. In addition, the Bank Facility and the CP Facility
currently, and financing arrangements in the future may, impose minimum net
worth covenants, debt-to-equity covenants and other limitations that could
restrict the Company's ability to pay dividends.

 

                                       18
<PAGE>
 
ITEM 6.   SELECTED FINANCIAL DATA

          The following table sets forth selected historical financial data.
The selected historical statements of operations and balance sheet data
presented below were derived from the combined financial statements of
HealthCare Financial Partners, Inc. and HealthPartners DEL, L.P. (a former
partnership, "DEL") as of and for the period from inception (April 22, 1993)
through December 31, 1993, and for the years ended December 31, 1994 and 1995,
and the consolidated financial statements of HealthCare Financial Partners, Inc.
as of and for the years ended December 31, 1996 and 1997.  The data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the combined financial
statements, including the notes thereto, of HealthCare Financial Partners, Inc.
and DEL and the consolidated financial statements of HealthCare Financial
Partners, Inc., including the notes thereto, appearing in Item 8.

                                       19

<PAGE>
 
HEALTHCARE FINANCIAL PARTNERS, INC.
(and DEL from inception through
 December 31, 1995)
 
<TABLE>    
<CAPTION>
                                         At or for Period
                                         From inception                           At or for the
                                         (April 22, 1993)                          Year Ended
                                             through                               December 31,
                                           December 31,      -----------------------------------------------------------
                                              1993              1994           1995    ||     1996             1997
                                           (Combined)        (Combined)     (Combined) || (Consolidated)   (Consolidated)
                                           ---------         ---------      ---------- || -------------    -------------
<S>                                        <C>               <C>            <C>        ||  <C>             <C>
STATEMENT OF OPERATIONS DATA                                                           ||
Fee and interest income...................  $    856         $  13,036      $  565,512 ||  $ 12,015,971     $ 27,745,077
Interest expense..........................                       3,975          79,671 ||     3,408,562        7,921,330
                                            --------         ---------      ---------- ||  ------------     ------------
     Net fee and interest income..........       856             9,061         485,841 ||     8,607,409       19,823,747
                                                                                       ||
Provision for losses on receivables.......    18,745             2,102          45,993 ||       656,116        1,315,122
                                            --------         ---------      ---------- ||  ------------     ------------
                                                                                       ||
     Net fee and interest income after                                                 ||
     provision for losses on receivables..   (17,889)            6,959         439,848 ||     7,951,293       18,508,625
Operating expenses........................    30,204           439,514       1,472,240 ||     3,326,994        7,219,372
Other income..............................    23,772           106,609       1,221,837 ||       233,982        1,582,852
                                            --------         ---------      ---------- ||  ------------     ------------
Income (loss) before deduction of                                                      ||
 preacquisition earnings and income                                                    ||
     taxes (benefit)......................   (24,321)         (325,946)        189,445 ||     4,858,281       12,872,105
Deduction of preacquisition earnings......                                             ||     4,289,859
Income taxes (benefit)....................                                      (5,892)||        38,860        4,877,257
                                            --------         ---------      ---------- ||  ------------     ------------
Net income (loss).........................  $(24,321)        $(325,946)     $  195,337 ||  $    529,562     $  7,994,848
                                            ========         =========      ========== ||  ============     ============
                                                                                       ||
Basic earnings per share (1)..............                                             ||          $.13             $.99
Weighted average shares outstanding (1)...                                             ||     4,030,416        8,087,857
                                                                                       ||
Diluted earnings per share (1)............                                             ||          $.13             $.96
Diluted weighted averages shares                                                       ||
     outstanding (1)......................                                             ||     4,055,572        8,310,111
                                                                                       ||
BALANCE SHEET DATA                                                                     ||
Finance receivables.......................  $115,454         $ 279,148      $2,552,441 ||  $ 89,328,928     $250,688,138
Allowance for losses on                                                                ||
     receivables..........................    18,475            20,847          66,840 ||     1,078,992        2,654,114
Total assets..............................   329,588           344,850       2,669,939 ||   101,273,089      272,354,946
Client holdbacks..........................    21,729           112,374         814,607 ||    11,739,326        6,173,260
Line of credit............................                                   1,433,542 ||    21,829,737       40,157,180
Commercial paper facility.................                                             ||    37,209,098      101,179,354
Warehouse facility........................                                             ||                     27,932,520
Total liabilities.........................   203,534           558,759       2,795,404 ||    74,552,113      184,524,758
Total stockholders' equity (deficit)......   126,054          (213,909)       (125,465)||    26,720,976       87,830,188
</TABLE>     

(1)  Historical earnings per share for periods prior to 1996 are not presented
     because it is not meaningful due to the partnership reporting basis for
     DEL. See "Management's Discussion and Analysis of Financial Condition and
     Results of Operations--Pro Forma Financial Information" for pro forma net
     income per share information.

                                       20
<PAGE>
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

    
          The Company is a specialty finance company offering asset-based
financing to healthcare providers, with a primary focus on clients operating in
sub-markets of the healthcare industry, including long-term care, home
healthcare and physician practices.      

    
          From its inception in September 1993, through the year ended December
31, 1995, the Company principally originated finance receivables through
advances against accounts receivable.  Advances against accounts receivable were
characterized by high and varying yields, as a result of the differing terms of
the transactions negotiated with individual clients.  The yield on finance
receivables generated through advances against accounts receivable was 26.9%
during the year ended December 31, 1995, and 19.2% during the year ended
December 31, 1996.  By December 31, 1997, the finance receivables originated
through revolving lines of credit secured by accounts receivable had grown to
89.5% of finance receivables in the Company's Accounts Receivable Program, as
the Company focused its marketing efforts on larger balance, prime rate based
revolving loans to more creditworthy borrowers.  Revolving lines of credit are
characterized by lower overall yields than advances against accounts receivable,
but provide the Company with the opportunity to expand its range of potential
clients while reducing costs as a percentage of finance receivables.  As a
result, the Company's overall yield on finance receivables in the Accounts
Receivable Program, which was 18.4% for the year ended December 31, 1996,
declined to 17.0% for the year ended December 31, 1997.      

    
          During 1997, the Company expanded its STL Program to increase its
penetration of targeted healthcare sub-markets. Through the STL Program, the
Company serves clients that have more diverse and complex financing needs, such
as healthcare facility acquisitions and expansions. In addition to the
collateral securing the loans, the Company generally has recourse to the
borrower. STL Program loans generally have terms of one to three years. As a
result of the Company's expansion of the STL Program, loans under that program
comprised 25.9% of finance receivables at December 31, 1997. The yield on
finance receivables under the STL Program for the year ended December 31, 1997
was 16.3%. While yields on STL Program loans are generally lower than the yields
generated from the Accounts Receivable Program, some STL Program loans also
include warrants and other fees that may enhance their effective yields.      

    
          The Company has implemented a program designed to ensure that all
software used by the Company in connection with its services will manage and
manipulate data involving the transition of dates from 1999 to 2000 without
functional or data abnormality and without inaccurate results related to such
data. The Company does not anticipate that execution of this program will have a
material effect on its operating results. However, the Company believes that 

                                       21
<PAGE>
    
some of its clients and payors may not have implemented such programs. The
failure by clients and payors to implement necessary software changes may
disrupt client billing and reimbursement cycles and adversely affect clients'
cash flow and collectability of pledged accounts receivable. The Company is
unable to predict the effects that any such failure may have on the financial
condition and results of the operations of the Company .      

          The Company is a Delaware corporation which was organized in April,
1993 and commenced its business in September, 1993.  Until September 13, 1996
the Company's name was HealthPartners Financial Corporation.  On that date its
corporate name was changed to HealthCare Financial Partners, Inc.

THE REORGANIZATION

          Prior to the Company's initial public offering ("the Offering"), the
Company conducted its operations principally in its capacity as the general
partner of HealthPartners Funding, L.P. (a former partnership, "Funding") and
DEL. Management concluded that the Company's future financial position and
results of operations would be enhanced if the Company directly owned the
portfolio assets of each of these limited partnerships and the transactions
described below (the "Reorganization") were effected by the Company prior to or
simultaneously with the Offering.

          Effective as of September 1, 1996, Funding acquired all of the net
assets of DEL, consisting principally of finance receivables, for $486,630 in
cash, which amount approximated the fair value of DEL's net assets.  Following
the acquisition, DEL distributed the purchase price to its partners and was
dissolved.  The purpose of this transaction was to consolidate the assets of DEL
and Funding in anticipation of the acquisition by the Company of the limited
partnership interests of Funding described below.

          Effective upon completion of the Offering, the Company acquired from
HealthPartners Investors, L.L.C. ("HP Investors"), the sole limited partner of
Funding, all of the limited partnership interests in Funding and paid the $21.8
million purchase price for such assets from the proceeds of  the Offering.  Such
purchase price represented the limited partner's interest in the net assets of
Funding and approximated both the fair value and book value of the net assets.
Funding was subsequently liquidated and dissolved, and all of its net assets at
the date of transfer, consisting principally of advances made under the Accounts
Receivable Program, were transferred to the Company.

          In connection with the liquidation of Funding, Farallon Capital
Partners, L.P. ("Farallon") and RR Capital Partners, L.P. ("RR Partners"), the
only two members of HP Investors, exercised warrants for the purchase of an
aggregate of 379,998 shares of Common Stock acquired on December 28, 1994 for an
aggregate payment of $500, which represented the fair value of the warrants at
that date.  No additional consideration was paid in connection with the exercise
of the warrants.  HP Investors transferred the warrants to Farallon and RR
Partners in contemplation of the liquidation of Funding.

         

PRO FORMA FINANCIAL INFORMATION

    
          In recognition of the Reorganization, management believes a discussion
and analysis of the Company's financial condition and results of operations is
most effectively presented on a pro forma basis for the years before 1997.  To
provide a context for this, the following information reflects pro forma
statements of operations for each of the years in the two year period      
 
                                       22
<PAGE>
 
ended December 31, 1996 as if the Reorganization had occurred as of the
beginning of that operating period.

                                       23
<PAGE>
 
PRO FORMA STATEMENTS OF OPERATIONS
<TABLE>    
<CAPTION>

                                                   FOR THE YEAR ENDED DECEMBER 31, 1996
                                         HEALTHCARE FINANCIAL
                                            PARTNERS, INC.
                                            (CONSOLIDATED)        PRO FORMA           PRO FORMA,
                                             (HISTORICAL)      ADJUSTMENTS (1)        AS ADJUSTED
                                             -----------       ---------------        -----------
<S>                                          <C>               <C>                    <C>
Fee and interest income
  Fee income..........................       $ 8,518,215                              $ 8,518,215
  Interest income.....................         3,497,756                                3,497,756
                                             -----------                              -----------
  Total fee and interest income.......        12,015,971                               12,015,971
Interest expense......................         3,408,562                                3,408,562
                                             -----------                              -----------
  Net fee and interest income.........         8,607,409                                8,607,409
Provision for losses on
 receivables..........................           656,116                                  656,116
                                             -----------                              -----------
Net fee and interest income
 after provision for losses on
 receivables..........................         7,951,293                                7,951,293
Operating expenses....................         3,326,994                                3,326,994
Other income..........................           233,982                                  233,982
                                             -----------                              -----------
Income before deduction of
 preacquisition earnings and
 income taxes.........................         4,858,281                                4,858,281
Deduction of preacquisition
 earnings.............................         4,289,859        $(4,289,859)(a)
                                             -----------        -----------           -----------
Income before income taxes............           568,422          4,289,859             4,858,281
Income taxes..........................            38,860          1,855,870 (b)         1,894,730
                                             -----------        -----------           -----------
Net income............................       $   529,562         $2,433,989           $ 2,963,551
                                             ===========        ===========           ===========
Pro forma basic earnings per
 share (2)............................                                                $       .50
                                                                                      ===========
Pro forma weighted average
 shares outstanding (2)...............                                                  5,906,032
                                                                                      ===========
Pro forma diluted earnings per
 share (2)............................                                                $       .50
                                                                                      ===========
Pro forma diluted weighted
 average shares outstanding (2).......                                                  5,931,188
                                                                                      ===========

</TABLE>     
1) Pro Forma Statements of Operations adjustments reflect the following:
   a) The elimination of preacquisition earnings allocated to limited
      partners of Funding and DEL.
   b) The provisions for income taxes (at an estimated effective rate of 39%) on
      the pro forma earnings of the consolidated Company, including those of DEL
      and Funding which were previously not subject to income taxes as
      partnerships.
    
2) Pro forma earnings per share was computed by dividing pro forma net income by
   the pro forma weighted average shares outstanding and pro forma diluted
   weighted average shares outstanding, which gives effect to the
   Reorganization.     

                                       24
<PAGE>
 
<TABLE>    
<CAPTION>

                                                            FOR THE YEAR ENDED DECEMBER 31, 1995
                                        HEALTHCARE FINANCIAL
                                           PARTNERS, INC.
                                               AND DEL
                                             (COMBINED)       FUNDING            PRO FORMA            PRO FORMA,
                                            (HISTORICAL)    (HISTORICAL)      ADJUSTMENTS (1)        AS ADJUSTED
                                            -----------     ------------      ---------------        -----------
<S>                                         <C>             <C>               <C>                    <C>
Fee and interest income
  Fee income..........................        $  565,512     $4,248,992                               $4,814,504
  Interest income.....................                          403,659                                  403,659
                                              ----------     ----------                               ----------
  Total fee and interest income.......           565,512      4,652,651                                5,218,163
Interest expense......................            79,671        554,885                                  634,556
                                              ----------     ----------                               ----------
  Net fee and interest income.........           485,841      4,097,766                                4,583,607
Provision for losses on
 receivables..........................            45,993        171,395                                  217,388
                                              ----------     ----------                               ----------
Net fee and interest income
 after provision for losses on
 receivables..........................           439,848      3,926,371                                4,366,219
Operating expenses....................         1,472,240      1,024,057        $  (400,000) (a)        2,096,297
Other income..........................         1,221,837                          (997,146) (a)          224,691
                                              ----------    -----------        -----------            ----------
Income before income taxes
 (benefit)............................           189,445      2,902,314           (597,146)            2,494,613
Income taxes (benefit)................            (5,892)                          978,791  (b)          972,899
                                              ----------    -----------        -----------            ----------
Net income............................        $  195,337     $2,902,314        $(1,575,937)           $1,521,714
                                              ==========     ==========        ===========            ==========

Pro forma basic earnings per
 share (2)............................                                                                $      .26
                                                                                                      ==========
Pro forma weighted average
 shares outstanding (2)...............                                                                 5,899,991
                                                                                                      ==========
Pro forma diluted earnings per
 share (2)............................                                                                $      .26
                                                                                                      ==========
Pro forma diluted weighted
 average shares outstanding (2).......                                                                 5,903,078
                                                                                                      ==========
</TABLE>     
1) Pro Forma Statements of Operations adjustments reflect the following:

   a) The elimination of transactions between the Company and Funding, which
      consist of management fees paid/received and the elimination of the
      Company's income from its investment in Funding.

   b) The provisions for income taxes (at an estimated effective rate of 39%)
      for DEL and Funding which previously were not subject to such taxes as
      partnerships.
    
2) Pro forma earnings per share was computed by dividing pro forma net income
   by the pro forma weighted average shares outstanding and pro forma diluted
   weighted average shares outstanding, which gives effect to the
   Reorganization.     

                                       25
<PAGE>
 
RESULTS OF OPERATIONS

          The following discussion should be read in conjunction with the
information under "Selected Financial Data" and the combined financial
statements, including the notes thereto, of HealthCare Financial Partners, Inc.
and DEL, the consolidated financial statements, including the notes thereto, of
HealthCare Financial Partners, Inc. appearing elsewhere in Item 8.
 
Year ended December 31, 1997 Compared to the Year Ended December 31, 1996
(including pro forma adjustments).
               
          Total fee and interest income increased from $12.0 million for the
year ended December 31, 1996 to $27.7 million for the year ended December 31,
1997, an increase of 130.9%. The increase principally resulted from an increase
of $85.1 million in average finance receivables outstanding due to the growth in
the Company's Accounts Receivable Program and the Company's expansion of its STL
Program, which resulted in increases of $98.9 million and $62.5 million,
respectively, from December 31, 1996 to December 31, 1997. Fees and interest
earned from the STL Program grew from an immaterial amount in the year ended
December 31, 1996 to $5.0 million for the year ended December 31, 1997, which
accounted for 32.0% of the $15.7 million growth in total fee and interest income
between the periods. During the year ended December 31, 1997, the Company
increased its client base from 129 clients to 161 clients in its Accounts
Receivable Program, and from 8 clients to 39 clients in its STL Program.
Additionally, average borrowings from the Company increased by 109.6% in 1997 as
compared to the prior year. Yield on finance receivables declined from 18.4% in
the year ended December 31, 1996 to 16.8% in the year ended December 31, 1997.
As a result, the increase in fee and interest income was due to growth in the
volume of finance receivables. The yield on finance receivables for the year
ended December 31, 1997 was lower because the composition of the Company's
finance receivable portfolio contained a greater percentage of lower-yielding
STL Program loans and a lower percentage of higher-yielding advances against
accounts receivable in its Accounts Receivable Program.
              
          Interest expense increased from $3.4 million for the year ended
December 31, 1996 to $7.9 million in 1997.  However, the Company's average cost
of borrowed funds decreased from 9.7% for the year ended December 31, 1996 to
8.6% for the year ended December 31, 1997. The increase in interest expense was
the result of higher average borrowings required to support the Company's
growth. Because of the Company's overall growth in finance receivables, net fee
and interest income increased from $8.6 million for the year ended December 31,
1996 to $19.8 million for the year ended December 31, 1997. The increased
interest expense from increased borrowings, combined with a lower yield on
finance receivables, resulted in a decrease in the annualized net interest
margin from 13.2% for the year ended December 31, 1996 to 12.2% for the year
ended December 31, 1997.     

          The Company's provision for losses on receivables increased from
$656,116 for the year ended December 31, 1996 to $1.3 million for the year ended
December 31, 1997.  This increase was attributable to an increase in outstanding
finance receivables, which is among the factors considered by the Company in
assessing the adequacy of its allowance for losses on receivables.  The Company
experienced no credit losses in either period.

          Operating expenses increased from $3.3 million for the year ended
December 31, 1996 to $7.2 million for the year ended December 31, 1997, a 117.0%
increase.  This increase was the result 

                                       26
<PAGE>
 
of a 195.2% increase in compensation and benefits due to hiring additional
personnel, as well as increases in other operating expenses, all relating to the
expansion of the Company's operations.

          Other income increased from $233,982 for the year ended December 31,
1996 to $1.6 million for the year ended December 31, 1997.  This increase was
mainly attributable to the Company receiving fees from clients for legal
services performed by in house personnel.  These fees were previously paid by
the clients but passed through to the outside firm that performed the services.
               
          Net income increased from $3.0 million for the year ended December 31,
1996 to $8.0 million for the year ended December 31, 1997, a 169.8% increase,
primarily as a result of the overall growth in the Company's finance receivables
described above.     

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 (including
pro forma adjustments)

          Total fee and interest income increased from $5.2 million for the year
ended December 31, 1995 to $12.0 million for the year ended December 31, 1996,
an increase of 130.3%.  The increase principally resulted from an increase of
$45.6 million in average finance receivables outstanding due to the Company's
introduction of revolving lines of credit secured by accounts receivable during
the last quarter of 1995 and a corresponding increase of $41.0 million in such
revolving lines of credit secured by accounts receivable from December 31, 1995
to December 31, 1996.  Interest earned from revolving lines of credit secured by
accounts receivable increased from $403,659 for the year ended December 31, 1995
to $3.5 million for the year ended December 31, 1996, which accounted for $3.1
million of the $6.8 million growth in total fee and interest income between the
periods. During the year ended December 31, 1996, the Company increased its
client base with respect to advances against accounts receivable from 72 clients
to 84 clients. Additionally, existing clients increased their average borrowings
from the Company in 1996 as compared to the prior year. Because the yield on
finance receivables declined markedly from 26.4% in the year ended December 31,
1995 to 18.4% in the year ended December 31, 1996, the increase in fee and
interest income was due to growth in the volume of finance receivables, and was
somewhat offset by the decline in yield. The yield on finance receivables for
the year ended December 31, 1996 was lower due to a substantially greater volume
of revolving lines of credit secured by accounts receivable outstanding during
the year ended December 31 1996, which have lower yields when compared to
advances against accounts receivable. Interest expense increased from $634,556
for the year ended December 31, 1995 to $3.4 million for 1996. However, the
Company's average cost of borrowed funds decreased from 11.8% for the year ended
December 31, 1995 to 9.7% for the year ended December 31, 1996. This increase in
interest expense was the result of higher average borrowings required to support
the Company's growth. Prior to March 1995, the Company's financing was solely
obtained through equity. Subsequent to March 1995, the Company increasingly
relied on borrowed funds to finance its growth. Because of the Company's overall
growth in finance receivables and increased leverage, net fee and interest
income increased from $4.6 million for the year ended December 31, 1995 to $8.6
million for the year ended December 31, 1996. The increased interest expense
from increased borrowings, combined with a lower yield on finance receivables,
resulted in a significant decrease in the annualized net interest margin from
23.2% for the year ended December 31, 1995 to 13.2% for the year ended December
31, 1996.

          The Company's provision for losses on receivables increased from
$217,388 for the year ended December 31, 1995 to $656,116 for the year ended
December 31, 1996.  This increase was attributable to an increase in outstanding
finance receivables and an increase in the Company's average client balances,
which are among the factors considered by the Company in assessing the 

                                       27
<PAGE>
 
adequacy of its allowance for losses on receivables. The Company experienced no
credit losses in either period.

          Operating expenses increased from $2.1 million for the year ended
December 31, 1995 to $3.3 million for the year ended December 31, 1996, a 58.7%
increase.  This increase was the result of a 36.1% increase in compensation and
benefits due to hiring additional personnel as well as increases in other
operating expenses, all relating to the expansion of the Company's operations.

          Other income increased from $224,691 for the year ended December 31,
1995 to $233,982 for the year ended December 31, 1996.
               
          Net income increased from $1.5 million for the year ended December 31,
1995 to $3.0 million for the year ended December 31, 1996, a 94.8% increase,
primarily as a result of the overall growth in the Company's finance receivables
described above.     

QUARTERLY FINANCIAL DATA
              
          The following table summarizes unaudited quarterly operating results
for the most recent eight fiscal quarters.  The 1996 quarterly financial data
reflect the Reorganization and are prepared on the same basis as the Pro Forma
Financial Statements of Operations.  The 1997 information reflects actual
historical results.     


                             FOR THE QUARTERS ENDED
                             ----------------------
<TABLE>
<CAPTION>
                                                         March 31,       June 30,      Sept. 30,       Dec. 31,
                                                           1996           1996           1996           1996
                                                           ----           ----           ----           ----
<S>                                                   <C>            <C>            <C>            <C>
Fee and interest income
     Fee income................................         $1,869,433     $2,090,853     $2,117,004     $2,440,925
     Interest income...........................            411,703        792,307      1,006,997      1,286,749
                                                        ----------     ----------     ----------     ----------
          Total fee and interest income........          2,281,136      2,883,160      3,124,001      3,727,674
Interest expense...............................            580,030        801,126        923,175      1,104,231
                                                        ----------     ----------     ----------     ----------
     Net fee and interest income...............          1,701,106      2,082,034      2,200,826      2,623,443
Provision for losses on receivables............            343,155         53,646        216,315         43,000
                                                        ----------     ----------     ----------     ----------
     Net fee and interest income after
      provision for losses on
      receivables..............................          1,357,951      2,028,388      1,984,511      2,580,443
Operating expenses.............................            676,627        809,392        796,226      1,044,749
Other income...................................             10,000          8,000        153,651         62,331
                                                        ----------     ----------     ----------     ----------
Income before income taxes.....................            691,324      1,226,996      1,341,936      1,598,025
Income taxes...................................            269,617        478,528        523,355        623,230
                                                        ----------     ----------     ----------     ----------
Net income.....................................         $  421,707     $  748,468     $  818,581     $  974,795
                                                        ==========     ==========     ==========     ==========
<CAPTION>
                                                         March 31,       June 30,      Sept. 30,       Dec. 31,
                                                           1997           1997           1997           1997
                                                           ----           ----           ----           ----
<S>                                                   <C>            <C>            <C>            <C>
Fee and interest income                        
     Fee income................................         $2,570,411     $2,447,452     $3,015,605     $3,460,307
     Interest income...........................          1,917,922      3,013,090      4,936,268      6,384,022
                                                        ----------     ----------     ----------     ----------
          Total fee and interest income........          4,488,333      5,460,542      7,951,873      9,844,329
Interest expense...............................          1,133,156      1,968,569      1,984,344      2,835,261
                                                        ----------     ----------     ----------     ----------
     Net fee and interest income...............          3,355,177      3,491,973      5,967,529      7,009,068
Provision for losses on receivables............            150,000        250,000        605,000        310,122
                                                        ----------     ----------     ----------     ----------
     Net fee and interest income after          
      provision for losses on                   
      receivables..............................          3,205,177      3,241,973      5,362,529      6,698,946
Operating expenses.............................          1,866,483      1,422,901      1,672,075      2,257,913
Other income...................................            429,399        380,723        300,004        472,726
                                                        ----------     ----------     ----------     ----------
Income before income taxes.....................          1,768,093      2,199,795      3,990,458      4,913,759
Income taxes...................................            647,089        749,956      1,532,034      1,948,178
                                                        ----------     ----------     ----------     ----------
Net income.....................................         $1,121,004     $1,449,839     $2,458,424     $2,965,581
                                                        ==========     ==========     ==========     ==========
</TABLE>

                                       28
<PAGE>
 
          The Company's quarterly results of operations are not generally
affected by seasonal factors.

         
    
CLIENT HOLDBACKS      
              
          The Company's primary protection against credit losses on its Accounts
Receivable Program is the Excess Collateral, which consists of client accounts
receivable due from third-party payors which collateralize revolving lines of
credit secured by, and advances against, accounts receivable. The Company
obtains a first priority security interest in all of the client's accounts
receivable, including receivables not financed by the Company. As a result,
amounts loaned or advanced to clients with respect to specific accounts
receivable are cross-collateralized by the Company's security interest in other
accounts receivable of the client.     

          With respect to revolving lines of credit secured by accounts
receivable, the Company will extend credit only up to a maximum percentage,
ranging from 65% to 85%, of the estimated net collectible value of the accounts
receivable due from third-party payors.  The Company obtains a first priority
security interest in all of a client's accounts receivable, and may apply
payments received with respect to the full amount of the client's accounts
receivable to offset any amounts due from the client.  The estimated net
collectible value of a client's accounts receivable thus exceeds at any time
balances under lines of credit secured by such accounts receivable.
              
          With respect to advances against accounts receivable, the Company
purchases a client's accounts receivable at a discount from the estimated net
collectible value of the accounts receivable. The Company will advance only 65%
to 85% of the purchase price (which is equal to aggregate net collectible value
minus a purchase discount) of any batch of accounts receivable purchased. The
excess of the purchase price for a batch of receivables over the amount advanced
with respect to such batch (a "client holdback") is treated as a reserve and
provides additional security to the Company, insofar as holdback amounts may be
applied to offset amounts due with respect to the related batch of client
receivables, or any other batch of client receivables. As is the case with the
revolving lines of credit, the Company obtains a first priority security
interest in all of the client's accounts receivable.     

          In addition, under both programs the Company frequently obtains a
security interest in other assets of a client and may have recourse against
personal assets of the principals or parent company of a client.
              
          Under the STL Program, the Company's term loans to clients are secured
by a first or second lien on various types of collateral, such as real estate,
accounts receivable, equipment, inventory and stock, depending on the
circumstances of each loan and the availability of collateral.     

TURNOVER

          The Company's results of operations are affected by its collections of
client accounts receivable.  The Company's turnover of its finance receivables
in its Accounts Receivable Program, 

                                       29
<PAGE>
     
calculated by dividing total collections of client accounts receivable for each
of the following quarters by the average month-end balance of finance
receivables during such quarter, was 2.4x for the quarter ended March 31, 1996,
2.4x for the quarter ended June 30, 1996, 3.7x for the quarter ended September
30, 1996, 3.5x for the quarter ended December 31, 1996, 2.6x for the quarter
ended March 31, 1997, 2.8x for the quarter ended June 30, 1997, 2.7x for the
quarter ended September 30, 1997 and 2.7x for the quarter ended December 31,
1997.  For the year ended December 31, 1996, the Company's turnover of its 
finance receivables in its Accounts Receivable Program was 11.0x, as compared to
11.4x for the year ended December 31, 1997.     

PROVISION AND ALLOWANCE FOR LOSSES ON RECEIVABLES
    
          The Company regularly reviews its outstanding finance receivables to
determine the adequacy of its allowance for losses on receivables. To date, the
Company has not experienced any credit losses. The allowance for losses on
receivables is maintained at an amount estimated to be sufficient to absorb
future losses, net of recoveries, inherent in the finance receivables. In
evaluating the adequacy of the allowance, management of the Company considers
trends in healthcare sub-markets, past-due accounts, historical charge-off and
recovery rates, credit risk indicators, economic conditions, on-going credit
evaluations, overall portfolio size, average client balances, Excess Collateral,
real estate collateral valuations, and underwriting policies, among other items.
As of December 31, 1996, the Company's general reserve was $1.1 million or 1.2%
of finance receivables; at December 31, 1997, it was $2.7 million or 1.1% of
finance receivables. To the extent that management deems specific finance
receivable advances to be wholly or partially uncollectible, the Company
establishes a specific loss reserve equal to such amount. At December 31, 1996
and 1997, the Company had no specific reserves. In the opinion of management,
based on a review of the Company's portfolio, the allowance for losses on
receivables is adequate at this time, although there can be no assurance that
such reserve will be adequate in the future.

LIQUIDITY AND CAPITAL RESOURCES
    
          Cash flows resulting from operating activities provided sources of
cash amounting to $12.5 million for the year ended December 31, 1997. This
compares to pro forma operating cash flows of $3.8 million and $6.2 million for
1995 and 1996, respectively. The most significant source of cash from operating
activities is derived from the Company's generation of net fee and interest
income from its finance receivables, and the more significant uses of cash from
internal operating activities include cash payments for compensation and
employee benefits, rent expense, and professional fees. As the Company's number
of clients and resulting business opportunities have grown, the Company has
primarily used cash in the acquisition of finance receivables under its Accounts
Receivable and STL Programs. The Company's financing activities have provided
the necessary source of funds for the acquisition of receivables. Financing has
been obtained from both debt and equity sources. The debt financing has been
generated from draws on the Bank Facility, the Warehouse Facility and the sale
of commercial paper through the CP Facility. The sources of equity financing
were primarily from limited partner capital contributions prior to the
Reorganization and the Offering and the Secondary Offering. Subsequent to the
Offering, the limited partnership interest was purchased using a significant
portion of the offering proceeds, the limited partnership was dissolved and its
assets transferred to the Company.     
    
          In conjunction with the Reorganization and in contemplation of the
Offering, at the request of the Company, Fleet increased the committed line of
credit under the Bank Facility from $35 million to $50 million. The Bank
Facility is a revolving line of credit. The interest rates payable by the
Company under the Bank Facility adjust, based on the prime rate of Fleet
National Bank ("Fleet's prime rate"); however, the Company has the option to
borrow any portion of the Bank Facility in an integral multiple of $500,000
based on the one-month, two-month, three-month or six-      

                                       30
<PAGE>
     
month LIBOR plus 2.75%. As of December 31, 1996 and 1997, $21.8 and $40.2
million, respectively, was outstanding under the Bank Facility. The Bank
Facility contains financial and operating covenants, including the requirement
that the Company maintain an adjusted tangible net worth of not less than $5.0
million and a ratio of total debt to equity of not more than 3.0 to 1.0. In
addition, under the Bank Facility the Company is not allowed to have at any time
a cumulative negative cash flow (as defined in the Bank Facility) in excess of
$1.0 million. The inter-creditor arrangements entered into in connection with
the CP Facility excludes borrowings under the CP Facility from debt for purposes
of calculating the debt-to-equity ratio. At December 31, 1996 and 1997, the
Company was in compliance with all of its covenants under the Bank Facility. The
expiration date for the Bank Facility is March 29, 2002, subject to automatic
renewal for one-year periods thereafter unless terminated by either party which
requires six months prior written notice.              

          In December, 1996, the Company entered into an agreement with ING for
$100 million commitment under the CP Facility. On December 30, 1997, that
commitment was increased to $200 million. As of December 31, 1996, $37.2 million
of commercial paper was outstanding under the CP Facility. As of December 31,
1997, $101.2 million of commercial paper was outstanding under the CP Facility.
The CP Facility requires the Company to transfer advances and related
receivables under its Accounts Receivable Program which meet certain criteria to
a bankruptcy remote, special purpose subsidiary of the Company. The special
purpose subsidiary pledges the finance receivables transferred by the Company to
Holland Limited Securitization Inc., a commercial paper conduit which is an
affiliate of ING (the "Conduit"). The Conduit lends against such pledged assets
through the issuance of commercial paper. The CP Facility generally requires the
maintenance of a minimum overcollateralization percentage of 125%. Under the CP
Facility, ING can refuse to make any advances in the event the Company fails to
maintain a tangible net worth of at least $50 million. At December 31, 1997, the
Company was in compliance with all of its covenants under the CP Facility. The
maturity date for the CP Facility is December 5, 2001. However, the CP Facility
may be terminated by the Company at any time after December 5, 1999, without
penalty. See "Business--Capital Resources."

          On June 27, 1997, the Company entered into an agreement with First
Boston under the Warehouse Facility.  Under the terms of the Warehouse Facility,
the Company is able to securitize certain loans under the Company's STL Program.
The Company had a total borrowing capacity under the agreement of $50 million as
of December 31, 1997.  In January 1998, that commitment was raised to $60
million and in February 1998, to $100 million.  As of December 31, 1997, the
Company had borrowed $27.9 million under the Warehouse Facility.  The Warehouse
Facility requires that the amount outstanding under the financing agreement may
not exceed 88% of the principal amount of the STL Program loans securitized.
Interest will accrue under the financing agreement at a rate of LIBOR plus 3.75%
on the first $50 million and 3.0% on the second $50 million.  The Warehouse
Facility requires that the loans advanced by the Company do not exceed 95% of
the appraised value of the real estate, or a multiple of the underwritten cash
flow of the borrower, that the weighted average yield of advances under the
Warehouse Facility must exceed the prime rate of interest plus 3%, that the
maximum weighted average loan to value of advances under the Warehouse Facility
must be no greater than 85%, and that no loan in the portfolio has a life
greater than five years.  Additionally, the Warehouse Facility requires that, to
the extent that the Company makes advances in amounts greater than $7.5 million
to any borrower, that excess is advanced by the Company through other sources.
The commitment to make advances under the 

                                       31
<PAGE>
 
Warehouse Facility terminates on June 27, 1999. Subsequent to that date, no new
loans may be securitized under the existing agreement, however previous loans
securitized will remain outstanding until they have been fully repaid.
Additionally, under the terms of the agreement, the Company has the right to
repurchase any assets securitized at a price equal to the fair market value of
such assets.  At December 31, 1997, the Company was in compliance with all of
the covenants of the agreement.
    
          The Company requires substantial capital to finance its business.
Consequently, the Company's ability to grow and the future of its operations
will be affected by the availability and the terms of financing. The Company
expects to fund its future financing activities principally from (i) the CP
Facility, which expires on December 5, 2001, (ii) the Bank Facility, which
expires on March 29, 2002, subject to automatic renewals for one-year periods
thereafter unless terminated by either party and (iii) the Warehouse Facility,
which expires on June 27, 1999. In addition, on February 9, 1998, the Company
announced its intention to file a registration statement for an offering of 2.95
million shares of its common stock. While the Company expects to be able to
obtain new financing facilities or renew these existing financing facilities and
to have continued access to other sources of credit after expiration of these
facilities, there is no assurance that such financing will be available, or, if
available, that it will be on terms favorable to the Company.     

INTEREST RATE SENSITIVITY

          Interest rate sensitivity refers to the change in interest spread
between the yield on the Company's portfolio and the cost of funds necessary to
finance the portfolio (i.e., the Bank Facility, the CP Facility and the
Warehouse Facility) resulting from changes in interest rates.  To the extent
that interest income and interest expense do not respond equally to changes in
interest rates, or that all rates do not change uniformly, earnings are
affected.  The interest rates charged on revolving lines of credit secured by
accounts receivable adjust based upon changes in the prime rate.  The fees
charged on advances against accounts receivable are fixed at the time of any
advance against a batch of receivables, although such fees may increase
depending upon the timing of collections of receivables within the batch.  The
interest rates on the Company's term loans generally adjust based on the prime
rate.  The interest rates payable by the Company under the Bank Facility adjust,
based on Fleet's prime rate; however, the Company has the option to borrow any
portion of the Bank Facility in an integral multiple of $500,000 based on the
one-month, two-month, three-month or six-month LIBOR plus 2.75%.  The interest
rate on the CP Facility adjusts based upon changes in commercial paper rates.
Because the Company finances most of the Accounts Receivable Program's activity
through the CP Facility, there exists some interest rate risk since the interest
rate on advances to the Company's clients under the Accounts Receivable Program
will adjust based on the prime rate, and the interest rate on most of the
Company's liabilities under the CP Facility will adjust based on commercial
paper rates.  Such limited interest rate sensitivity on the Accounts Receivable
Program portfolio is not expected to have a material effect on the Company's net
interest income if interest rates change.  Additionally, because advances
against accounts receivable are generally fixed and financed with the CP
Facility, which has rates that adjust with changes in commercial paper rates,
there exists interest rate sensitivity with respect to advances against accounts
receivable, and if interest rates increase significantly, such an increase could
have an adverse effect on the Company's net interest income.  However, this
interest rate sensitivity is mitigated by the fact that (i) advances against
accounts receivable comprise only 10.5% of the finance receivables in the
Accounts Receivable Program as of December 31, 1997, and (ii) the Company does
not make long-term commitments  with respect to advances against accounts
receivable and therefore, retains substantial flexibility to negotiate fees
based on changes in interest rates.

INFLATION
 

                                       32
<PAGE>
          Inflation has not had a significant effect on the Company's operating
results to date.

                                       33
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA

                         INDEX TO FINANCIAL STATEMENTS
<TABLE>    

<S>                                                                       <C>
HEALTHCARE FINANCIAL PARTNERS, INC.

Report of Independent Auditors, Ernst & Young LLP.......................   35

Report of Independent Auditors, McGladrey & Pullen, LLP.................   36

Consolidated Balance Sheets as of December 31, 1997 and 1996............   37

Statements of Income for the years ended December 31, 1997,
   1996, and 1995.......................................................   38

Statements of Equity for the years ended December 31, 1997,
   1996 and 1995........................................................   39

Statements of Cash Flows for the years ended December 31, 1997,
   1996 and 1995........................................................   40

Notes to Financial Statements...........................................   41
</TABLE>     
 

                                       34
<PAGE>
 
                        REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
HealthCare Financial Partners, Inc.

          We have audited the accompanying consolidated balance sheets of
HealthCare Financial Partners, Inc. as of December 31, 1997 and 1996, and the
related consolidated statements of income, equity, and cash flows for each of
the two years in the period ended December 31, 1997.  These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

          In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
HealthCare Financial Partners, Inc. at December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the two
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.



                                  Ernst & Young LLP

Washington, D.C.
February 12, 1998

                                       35
<PAGE>
 
                        REPORT OF INDEPENDENT AUDITORS

Board of Directors
HealthCare Financial Partners, Inc.

          We have audited the accompanying combined statements of income,
equity, and cash flows of HealthCare Financial Partners, Inc. and HealthPartners
DEL, L.P., a limited partnership, for the year ended December 31, 1995. These
financial statements are the responsibility of management of the Company and the
Partnership. Our responsibility is to express an opinion on these financial
statements based on our audit.

          We conducted our audit 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 audit provides a reasonable basis for our opinion.

          In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the combined results of operations and
cash flows for the year ended December 31, 1995 of HealthCare Financial
Partners, Inc. and HealthPartners DEL, L.P., in conformity with generally
accepted accounting principles.



                                  McGladrey & Pullen, LLP

Richmond, Virginia
September 13, 1996

                                       36
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.


                          CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                      DECEMBER 31,
                                            ------------------------------
                                                1997               1996
                                            ------------        ----------
<S>                                         <C>                 <C>
                 ASSETS

Cash and cash equivalents.................   $ 18,668,703        $ 11,734,705
Finance receivables.......................    250,688,138          89,328,928
Less:

     Allowance for losses on receivables..      2,654,114           1,078,992
     Unearned fees........................      3,161,237             723,804
                                             ------------        ------------
        Net finance receivables...........    244,872,787          87,526,132
Prepaid expenses and other assets.........      3,405,497           1,407,393
Deferred income taxes.....................      1,041,520             381,462
Investment securities.....................      1,442,814
Investment in limited partnership.........        767,244
Property and equipment, net...............        416,284             223,397
Goodwill..................................      1,740,097
                                             ------------        ------------
        Total assets......................   $272,354,946        $101,273,089
                                             ============        ============


  LIABILITIES AND STOCKHOLDERS' EQUITY

Line of credit............................   $ 40,157,180        $ 21,829,737
Commercial paper facility.................    101,179,354          37,209,098
Warehouse facility........................     27,932,520
Client holdbacks..........................      6,173,260          11,739,326
Accounts payable to clients...............        834,367           1,020,131
Income taxes payable......................      5,138,144             389,592
Accounts payable and accrued expenses.....      2,217,947           1,853,905
Notes payable.............................        115,286             126,389
Accrued interest..........................        776,700             383,935
                                             ------------        ------------
        Total liabilities.................    184,524,758          74,552,113


Stockholders' equity:
     Preferred stock, par value $0.01
      per share; 10,000,000 shares
      authorized; none outstanding........
     Common stock, par value $.01 per
      share; 30,000,000 shares
      authorized; 9,670,291 and
      6,214,991 shares issued and
      outstanding, respectively...........         96,703              62,150
  Paid-in-capital.........................     79,784,045          26,704,234
  Retained equity (deficit)...............      7,949,440             (45,408)
                                             ------------        ------------
        Total stockholders' equity........     87,830,188          26,720,976
                                             ------------        ------------
        Total liabilities and
         stockholders' equity.............   $272,354,946        $101,273,089
                                             ============        ============
</TABLE>

                            See accompanying notes.

                                       37
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.
 
 
                             STATEMENTS OF INCOME

<TABLE>    
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                      --------------------------------------------------
                                                           1997               1996       ||      1995
                                                      --------------      -------------  ||   ----------
                                                      (CONSOLIDATED)      (CONSOLIDATED) ||   (COMBINED)
<S>                                                   <C>                 <C>            ||   <C>
Fee and interest income:                                                                 || 
     Fee income.....................................   $11,493,775         $ 8,518,215   ||    $  565,512
     Interest income................................    16,251,302           3,497,756   || 
                                                       -----------         -----------   ||    ----------
Total fee and interest income.......................    27,745,077          12,015,971   ||       565,512
Interest expense....................................     7,921,330           3,408,562   ||        79,671
                                                       -----------         -----------   ||    ----------
Net fee and interest income.........................    19,823,747           8,607,409   ||       485,841
Provision for losses on receivables.................     1,315,122             656,116   ||        45,993
                                                       -----------         -----------   ||    ----------
Net fee and interest income after                                                        || 
 provision for losses on receivables................    18,508,625           7,951,293   ||       439,848          
Operating expenses:                                                                      || 
           Compensation and benefits................     3,741,827           1,267,625   ||       931,189
           Commissions..............................       176,282             463,499   || 
           Professional fees........................       512,989             283,935   ||       153,948
           Occupancy................................       218,636             196,319   ||       156,720
           Other....................................     2,569,638           1,115,616   ||       230,383
                                                       -----------         -----------   ||    ----------
Total operating expenses............................     7,219,372           3,326,994   ||     1,472,240
Other income:                                                                            || 
           Management fees..........................                                     ||       624,691
           Income from limited partnerships.........        84,988                       ||       597,146            
           Other....................................     1,497,864             233,982   || 
                                                       -----------         -----------   ||    ----------
Total other income..................................     1,582,852             233,982   ||     1,221,837
                                                       -----------         -----------   ||    ----------
Income before deduction of preacquisition                                                || 
  earnings and income taxes (benefit)...............    12,872,105           4,858,281   ||       189,445
Deduction of preacquisition earnings................                         4,289,859   || 
                                                       -----------         -----------   ||    ----------
Income before income taxes (benefit)................    12,872,105             568,422   ||       189,445
Income taxes (benefit)..............................     4,877,257              38,860   ||        (5,892)
                                                       -----------         -----------   ||    ----------
Net income..........................................   $ 7,994,848         $   529,562   ||    $  195,337
                                                       ===========         ===========   ||    ==========
                                                                                         || 
Basic earnings per share............................   $       .99                $.13   || 
                                                       ===========         ===========   || 
                                                                                         || 
Diluted earnings per share..........................   $       .96                $.13   || 
                                                       ===========         ===========   || 
</TABLE>     

                            See accompanying notes.

                                       38
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.

                             STATEMENTS OF EQUITY
<TABLE>    
<CAPTION>
                                                                       STOCKHOLDERS' EQUITY (DEFICIT)
                                                          -----------------------------------------------------------------
                                             LIMITED                                RETAINED                         TOTAL
                                            PARTNERS'      COMMON    PAID-IN        EARNINGS                        EQUITY
                                             CAPITAL       STOCK     CAPITAL        (DEFICIT)        TOTAL        (DEFICIT)
                                            ---------     -------    -------        ---------      ---------      ---------
<S>                                         <C>            <C>       <C>            <C>            <C>            <C>
Balance at January 1, 1995 (combined).....   $ 144,857      $34,200                  $ (392,966)    $  (358,766)   $  (213,909)

Capital contributions.....................      89,021                                                                  89,021

Net income (loss).........................     377,341                                 (182,004)       (182,004)       195,337

Distributions to partners.................    (195,914)                                                               (195,914)
                                             ---------      -------   -----------    ----------     -----------    -----------

Balance at December 31, 1995 (combined)...     415,305       34,200                    (574,970)       (540,770)      (125,465)

Issuance of 2,415,000 shares of $.01
 par value common stock...................                   24,150   $26,708,034                    26,732,184     26,732,184

Conversion of common stock warrants
 to 379,998 shares of $.01 par value
 common stock.............................                    3,800        (3,800)

Net distributions to partners.............    (415,305)                                                               (415,305)

Net income................................                                              529,562         529,562        529,562
                                             ---------      -------   -----------    ----------     -----------    -----------

Balance at December 31, 1996                                 
 (consolidated)...........................                   62,150    26,704,234       (45,408)     26,720,976     26,720,976

Issuance of 3,450,000 shares of $.01
 par value common stock...................                   34,500    53,005,310                    53,039,810     53,039,810

Common stock issuable under directors'
 option plan..............................                                 15,989                        15,989         15,989

Common stock issued under employee
 option plans.............................                       53        58,512                        58,565         58,565

Net income................................                                            7,994,848       7,994,848      7,994,848
                                             ---------      -------   -----------    ----------     -----------    -----------

 Balance at December 31, 1997
(consolidated)............................   $       -      $96,703   $79,784,045    $7,949,440     $87,830,188    $87,830,188
                                             =========      =======   ===========    ==========     ===========    ===========
</TABLE>     

                            See accompanying notes.

                                       39
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.

                           STATEMENTS OF CASH FLOWS
<TABLE>    
<CAPTION>
                                                                               YEAR ENDED DECEMBER 31,
                                                                --------------------------------------------------
                                                                    1997                 1996       ||    1995
                                                                --------------      --------------  ||  ----------
                                                                (CONSOLIDATED)      (CONSOLIDATED)  ||  (COMBINED)
<S>                                                             <C>                 <C>             ||  <C>
OPERATING ACTIVITIES                                                                                || 
 Net income...................................................   $   7,994,848       $    529,562   ||   $   195,337
 Adjustments to reconcile net income to                                                             || 
     net cash provided by (used in) operations:                                                     || 
   Depreciation...............................................         113,550             77,916   ||        17,309
   Amortization of goodwill...................................          92,248                      || 
   Provision for losses on receivables........................       1,315,122            656,116   ||        45,993
   Income from unconsolidated limited                                                               || 
     partnership..............................................                                      ||      (597,146)
   Deferred income tax benefit................................        (660,058)          (351,127)  ||       (17,067)
   Stock compensation plan....................................          15,989                      || 
   Changes in assets and liabilities:                                                               || 
     Increase in prepaid expenses and other...................      (1,998,104)          (670,709)  ||      (102,986)
     Increase in accrued interest.............................         392,765             79,586   ||        12,591
     Increase in income taxes payable.........................       4,748,552            278,418   || 
     Increase in accounts payable and                                                               || 
       accrued expenses.......................................         496,271          1,265,420   ||       174,435
                                                                 -------------       ------------   ||   -----------
   Net cash provided by (used in) operating                                                         || 
     activities...............................................      12,511,183          1,865,182   ||      (271,534)
INVESTING ACTIVITIES                                                                                || 
     Increase in net finance receivables......................    (151,189,744)       (10,338,502)  ||    (1,527,448)
     Acquisition of limited partnership, net of cash acquired.     (15,200,257)       (16,138,888)  || 
     Purchase of investment securities........................        (925,002)                     || 
     (Increase) decrease in investment in limited                                                   || 
        partnership...........................................        (767,244)                     ||       489,792
     Purchase of property and equipment, net..................        (306,436)          (225,173)  ||       (45,635)
     Other....................................................        (188,000)                     || 
                                                                 -------------       ------------   ||   -----------
       Net cash used in investing activities..................    (168,576,683)       (26,702,563)  ||    (1,083,291)
FINANCING ACTIVITIES                                                                                || 
       Net borrowings (payments) under line of credit.........      18,327,443        (26,984,082)  ||     1,433,542
       Net borrowings under commercial paper facility.........      63,970,256         37,209,098   || 
       Net borrowings under warehouse facility................      27,932,520                      || 
       Decrease in notes payable to related parties...........                            (75,000)  || 
       (Decrease) increase in notes payable...................         (11,103)           105,191   ||        21,198
       Issuance of common stock...............................      53,098,375         26,732,184   || 
       Distributions to partners, net.........................        (317,993)          (415,305)  ||      (106,893)
                                                                 -------------       ------------   ||   -----------
          Net cash provided by financing activities...........     162,999,498         36,572,086   ||     1,347,847
                                                                 -------------       ------------   ||   -----------
       Net increase (decrease) in cash and cash                                                     || 
         equivalents..........................................       6,933,998         11,734,705   ||        (6,978)
                                                                 -------------       ------------   ||   -----------
                                                                                                    || 
       Cash and cash equivalents at beginning of period.......      11,734,705                      ||         6,978
                                                                 -------------       ------------   ||   -----------
       Cash and cash equivalents at end of period.............   $  18,668,703       $ 11,734,705   ||   $
                                                                 =============       ============   ||   ===========
                                                                                                    || 
       Supplemental disclosure of cash flow information:                                            || 
          Cash payments for interest..........................   $   7,528,565       $  3,037,218   ||   $    67,080
                                                                 =============       ============   ||   ===========
          Cash payments for income taxes......................   $     788,764       $     23,839   || 
                                                                 =============       ============   || 
</TABLE>      

                            See accompanying notes.

                                       40
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.

                         NOTES TO FINANCIAL STATEMENTS


1.   BASIS OF PRESENTATION

          The consolidated financial statements of HealthCare Financial
Partners, Inc. (the "Company") for 1997 include the accounts of the Company and
the accounts of its wholly-owned subsidiaries, HCFP Funding, Inc., HCFP Funding
II, Inc., HCFP Funding III, Inc., Wisconsin Circle Funding Corporation,
Wisconsin Circle II Funding Corporation, and HealthCare Analysis Corporation.
Significant intercompany accounts and transactions have been eliminated in
consolidation.  The Company's principal activity is providing financing to
healthcare providers and to businesses in sub-markets of the healthcare industry
throughout the United States.

          The Company, which was incorporated and previously doing business as
HealthPartners Financial Corporation from inception to September 13, 1996, was
formed in 1993 under the laws of the state of Delaware. The Company issued
2,415,000 shares of common stock, including underwriters over allotment, in an
initial public offering (the "offering") in November 1996.  In connection with
the offering, the Company increased its authorized common shares from 1,000,000
shares to 30,000,000 and effected a 4.56-to-1 split of the common stock in the
form of a stock dividend, including outstanding warrants and options, on
September 13, 1996. Shares of common stock outstanding for all periods presented
have been retroactively restated to give effect to the stock split.  Effective
upon the completion of the offering, the Company used the proceeds of the
offering to acquire, using the purchase method of accounting, all the limited
partnership interests in HealthPartners Funding, L.P. ("Funding") and Funding
was liquidated (the acquisition) (See Note 14).  The amount paid to acquire the
limited partnership interest approximated both the fair value and the book value
of Funding at the date of the acquisition. Prior to the offering and the
acquisition of Funding by the Company, the Company owned a 1% general partner
interest in HealthPartners DEL, L.P. ("DEL") and Funding. In addition, the
majority owners of the Company owned all of the limited partnership interests of
DEL. Prior to the offering, the Company's principal activity was its interest in
Funding. Additionally, the Company provided operational and management support
to Funding for a fee. Funding's principal activity was providing financing to
healthcare providers and to businesses in sub-markets of the healthcare industry
throughout the United States.

          The financial statements of the Company for 1996 are consolidated
assuming the acquisition of Funding occurred as of January 1, 1996 under the
provisions of Accounting Research Bulletin No. 51. The deduction of
preacquisition earnings reflects the operations of Funding and DEL allocated to
the limited partners of Funding and DEL prior to the acquisition.  The financial
statements for 1995 are combined to include the accounts and operations of the
Company and DEL. The 1995 financial statements are combined as a result of
common control and management between the Company and DEL. All transactions
between the Company and DEL have been eliminated in preparation of the combined
financial statements. The Company accounted for its investment in Funding on the
equity basis, as the Company did not have sufficient control to warrant
consolidation.

                                       41
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

1.   BASIS OF PRESENTATION (CONTINUED)

          Effective September 1, 1996, in contemplation of the offering, Funding
acquired, using the purchase method of accounting, the assets of DEL (consisting
principally of client receivables) by assuming DEL's liabilities and paying
$472,369 in cash. The cash payment approximated the fair value and book value of
DEL's net assets.  Immediately following the acquisition, DEL was dissolved.

2.   SIGNIFICANT ACCOUNTING POLICIES

     CASH AND CASH EQUIVALENTS

          Cash and cash equivalents includes cash and other liquid financial
instruments with an original maturity of three months or less.

     FINANCE RECEIVABLES

          The Accounts Receivable Program includes purchased finance receivables
and asset-based lending.  Purchased finance receivables are recorded at the
contractual purchase amount, less the discount fee (the "amount purchased"). The
difference between the amount purchased and the amount paid to acquire such
receivables is reflected as client holdbacks. In the event purchased receivables
become delinquent, the Company has certain rights of offset to apply client
holdbacks (or future fundings) against delinquent accounts receivable.  Asset-
based lending is provided in the form of a revolving line of credit.  The amount
of credit granted is based on a predetermined percentage of the client total
accounts receivable.

          Secured term loans are loans up to three years in duration secured by
real estate, accounts receivable, and other assets, such as equipment,
inventory, and stock.  These loans are often provided to clients currently
borrowing under the aforementioned Accounts Receivable Program.  In conjunction
with secured term loans, the Company may receive stock, or warrants to convert
to stock, in the client entity.  Securities received in conjunction with such
loans totaled $517,812 for the year ended December 31, 1997.

     ALLOWANCE FOR LOSSES ON RECEIVABLES

          The allowance for losses on receivables is maintained at the amount
estimated to be sufficient to absorb future losses, net of recoveries, inherent
in the finance receivables. The provision for losses on receivables is the
periodic cost of maintaining an adequate allowance. In evaluating the adequacy
of the allowance, management considers trends in past-due accounts, historical
charge-off and recovery rates, credit risk indicators, economic conditions, on-
going credit evaluations, overall portfolio size, average client balances,
excess collateral, and underwriting policies, among other items.  The Company
performs a loan-by-loan review to identify loans to be charged off.

                                       42
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

2.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     ALLOWANCE FOR LOSSES ON RECEIVABLES (CONTINUED)

          Additionally, client holdbacks are available to offset losses on
receivables. And, under certain circumstances, credit losses can be offset
against client holdbacks related to other financings.

     INVESTMENT SECURITIES

          Marketable equity securities are classified as securities available
for sale.  These securities are stated at fair value, with unrealized gains and
losses, net of tax, reported as a component of stockholders' equity.  Investment
securities which have no ready market (private companies) are carried at cost
and evaluated periodically for impairment.

     PROPERTY AND EQUIPMENT

          Property and equipment, principally computer and related peripherals,
are stated at cost less accumulated depreciation ($202,938, $90,772, and
$29,868, at December 31, 1997, 1996 and 1995, respectively). Depreciation
expense is computed primarily using the straight-line method.

     CLIENT HOLDBACKS

          Client holdbacks represent the excess of the net recorded amount of
purchased receivables over the amount advanced. In its purchase agreements with
clients, the Company retains the right to apply any past-due or uncollectible
amounts against these holdbacks. Holdbacks are assigned to specific purchased
receivables. The client holdbacks are payable upon collection of the respective
purchased receivable amount.

     REVENUE RECOGNITION

          Fee income, including discount fees, commitment fees, management,
termination, success and set-up fees, is recognized in income over the periods
earned under methods that approximate the effective interest method.

          Accrual of interest income on finance receivables is suspended when a
loan is contractually delinquent for 90 days or more.  The accrual of interest
is renewed when the loan becomes contractually current, and past due interest
income is recognized at that time.

                                       43
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

2.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     INCOME TAXES

          The Company uses the liability method of accounting for income taxes
as required by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Under the liability method, deferred-tax assets and
liabilities are determined based on differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities (i.e.
temporary differences) and are measured at the enacted rates that will be in
effect when these temporary differences reverse.

          DEL elected partnership reporting status under the Internal Revenue
Code. Accordingly, taxable income or loss of DEL was allocated to the partners
in accordance with the partnership agreement and was reported on the individual
partner's income tax return. Therefore, no provision for income tax is included
in the historical financial statements for DEL.

     EARNINGS PER SHARE

          In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"), replacing the presentation required under Accounting Principles Board
Opinion No. 15, "Earnings Per Share."  Under SFAS 128, basic earnings per share
is based on the weighted average number of common shares outstanding excluding
any dilutive effects of options, warrants and other dilutive securities, while
diluted earnings per share reflects the assumed conversion of all dilutive
securities.  All prior period earnings per share have been restated to conform
with SFAS 128.  Earnings per share is not presented for periods prior to 1996
because it is not meaningful due to the partnership reporting basis of DEL and
to the reorganization and offering described in Note 1.

     USE OF ESTIMATES

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

     FAIR VALUE OF FINANCIAL INSTRUMENTS

          Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments, whether or not recognized on the
balance sheet, for which it is practicable to estimate that value. Due to the
variable rates associated with most of the Company's financial instruments,
there are no significant differences between recorded values and fair values.

                                       44
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

2.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     RECLASSIFICATIONS

           Certain reclassifications were made to the prior year financial
statements to conform to current year presentation.

3.   FINANCE RECEIVABLES

          Finance receivables consisted of the following:
<TABLE>
<CAPTION>
                                        DECEMBER 31,
                                 --------------------------
                                     1997          1996
                                 ------------   -----------
<S>                              <C>            <C>
Accounts receivable program      $185,727,628   $86,875,670
Secured term loans                 64,960,510     2,453,258
                                 ------------   -----------
                                 $250,688,138   $89,328,928
                                 ============   ===========
</TABLE>

          At December 31, 1997, loans totaling $1,433,644 were on non-accrual
status.  The Company anticipates that all of these loans will be collected in
full, and therefore, there is no specific allowance for these loans.  The
average recorded investment in non-accrual loans during the year ended December
31, 1997 was $332,992.  No interest income was recognized on any of these loans
after they were placed on non-accrual status.  There were no loans placed on
non-accrual status during the year ended December 31, 1996.

4.   ALLOWANCE FOR LOSSES ON RECEIVABLES

          Activity in the allowance for losses on receivables was as follows:
<TABLE>
<CAPTION>
 
                                                    YEAR ENDED DECEMBER 31,
                                               ---------------------------------
                                                  1997         1996       1995
                                               ----------   ----------   -------
<S>                                            <C>          <C>          <C>
Beginning of period                            $1,078,992   $   66,840   $20,847
Allowance acquired from purchased finance
 receivables                                      260,000      356,036
Provision for losses on receivables             1,315,122      656,116    45,993
                                               ----------   ----------   -------
End of period                                  $2,654,114   $1,078,992   $66,840
                                               ==========   ==========   =======
</TABLE>

INVESTMENT SECURITIES

          Marketable equity securities, consisting primarily of publicly traded
common stock and related warrants, totaled $357,488 as of December 31, 1997,
which reflected both the cost and market value at that date.

          Non-marketable equity securities, consisting primarily of common stock
in privately held companies and related warrants, totaled $1,085,326 at December
31, 1997 and were carried at cost.

                                       45
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)


6.  INVESTMENTS IN LIMITED PARTNERSHIPS

          In March 1997, the Company formed HealthCare Financial Partners-
Funding II, L.P. ("Funding II, L.P."), a limited partnership in which HCFP
Funding II, Inc., a wholly-owned subsidiary of the Company ("Funding II"),
became the General Partner.  Funding II, L.P. was established to develop a
secured term lending program.  In June 1997, using proceeds from the Company's
secondary offering of shares of common stock to the public, Funding II acquired
all of the limited partnership interests in Funding II, L.P., utilizing the
purchase method of accounting, for a purchase price of $15.5 million.  Funding
II, L.P. was then liquidated.  This payment reflected the fair value of the
business and exceeded the book value by $1.6 million, which was recorded as
goodwill, and is being amortized over ten years using a straight line method.

          In August 1997, the Company formed HealthCare Financial Partners -
Funding III, L.P. ("Funding III, L.P."), a limited partnership in which HCFP
Funding III, Inc., a wholly-owned subsidiary of the Company ("Funding III"),
became the General Partner.  Funding III, L.P. participated in a Department of
Housing & Urban Development auction of a distressed mortgage loan portfolio.
Funding III holds a 1% General and 49% Limited partnership interest in Funding
III, L.P. and receives 60% of the income from the partnership's activities.  The
Company accounts for its investment in Funding III, L.P. under the equity basis
of accounting, as it does not have sufficient control to warrant consolidation.

7.   BORROWINGS

          LINE OF CREDIT

    
          The Company maintains a revolving line of credit with Fleet Capital
Corporation ("Fleet"). At December 31, 1997, the facility limit under this line
of credit was $40,000,000; however, the Company was permitted to borrow up to
$50,000,000 during 1997 and as of December 31, 1997.  This agreement is in
effect through March 2002, and will automatically renew for one-year periods
thereafter, unless terminated by Fleet or the Company, subject to certain
periods of notice as required in the agreement.     

          The line of credit is collateralized by the Company's finance
receivables. The rate of interest charged under the agreement is Fleet's prime
rate, plus 1.25%, or the revolving credit LIBOR rate plus 2.75% determined at
the option of the Company upon each additional draw, subject to certain
limitations.  In addition, the Company pays an unused line fee of .05% based on
the average unused capacity in the line.  For the years ended December 31, 1997
and 1996, the weighted average interest rate paid under the line of credit was
9.7% and 10.3%, respectively.

                                       46
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.


                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

7.   BORROWINGS (CONTINUED)

          COMMERCIAL PAPER FACILITY
              
          In December 1996, the Company committed to an asset-backed
securitization facility (the "Commercial Paper Facility") with Holland Limited
Securitization, Inc.  ("HLS"), a multi-seller commercial paper issuer sponsored
by ING Baring (U.S.) Capital Markets, Inc. ("ING").  The total borrowing
capacity under this facility is $200,000,000, and $125,000,000 was authorized
for use at December 31, 1997.  Increases in the authorized borrowing capacity
are at the Company's discretion and are subject to over-collateralization
levels.  The securitization facility expires in December 2001.  However, the 
program may be terminated by the Company at any time after December 5, 
1999.     

          In connection with the Commercial Paper Facility, the Company formed a
wholly-owned subsidiary, Wisconsin Circle Funding Corporation ("Wisconsin") to
purchase receivables from the Company.  Wisconsin pledges receivables on a
revolving line of credit with HLS.  HLS issues commercial paper or other
indebtedness to fund the Commercial Paper Facility with Wisconsin.  HLS is not
affiliated with the Company or its affiliates. Interest is payable on the
Commercial Paper Facility based on certain commercial paper rates combined with
a monthly facility fee.

          The net assets of Wisconsin, totaling approximately $38,347,000 at
December 31, 1997 and $10,637,000 at December 31, 1996 were restricted as over-
collateralization to the Commercial Paper Facility, including approximately
$14,306,000 and $7,568,000 of cash held at Wisconsin at December 31, 1997 and
1996, respectively. The weighted average rate paid, including the aforementioned
facility fee, in 1997 and 1996 under the Commercial Paper Facility was 7.65% and
7.53%, respectively.

          WAREHOUSE FACILITY

          In June 1997, the Company and Funding II entered into a financing
agreement (the "Warehouse Facility") with Credit Suisse First Boston Mortgage
Capital, LLC ("CSFB") to securitize certain secured term loans.  The Company had
total borrowing capacity under the agreement of $50,000,000 at December 31,
1997.  In February 1998, the capacity was increased to $100,000,000.  The
facility is in place until June 27, 1999.  Subsequent to that date, no new loans
may be securitized under the existing agreement; however, previous loans
securitized will remain outstanding until they have been fully repaid.

          In connection with this Warehouse Facility, Funding II formed a
wholly-owned subsidiary, Wisconsin Circle II Funding Corporation ("Wisconsin
II"), a single-purpose bankruptcy remote corporation, to purchase qualifying
secured term loans from Funding II, which are subsequently securitized.  The
amount outstanding under the Warehouse Facility may not exceed 88% of the
principal amount of the securitized loans.  Additionally, under the terms of the
agreement, Wisconsin II has the right to repurchase any assets securitized at a
price equal to the fair market value of such assets.  Interest accrues under the
Warehouse Facility at a rate of LIBOR plus 3.75% on the initial $50 million and
LIBOR plus 3.0% on the second $50 million. For the year ended December 31, 1997,
the weighted average rate paid under the Warehouse Facility was 9.16%.

                                       47
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

8.  STOCK OPTION PLANS
              
          During September 1996, the Company adopted the HealthCare Financial
Partners, Inc. 1996 Stock Incentive Plan (the "Incentive Plan") and the
HealthCare Financial Partners, Inc. 1996 Director Incentive Plan (the "Director
Plan"). Under these plans, the Company has reserved 258,740 shares of common
stock for future grants. Options issued under the Incentive Plan generally vest
and become exercisable over a four- to five-year period following the grant date
and expire ten years from the grant date. Options issued under the Director 
Plan vest upon grant and are exercisable one year after the grant date.     

          Under the Director Plan, during 1997, the Company granted certain
directors, in lieu of director fees, 2,510 options with an exercise price below
the market price at the grant date.  These options fully vest one year from the
grant date.

          Prior to adopting the aforementioned plans, in November 1995, the
Company issued stock options to purchase 38,381 shares of the Company's common
stock at an exercise price of $2.61 per share. The stock options expire in 2005
and are exercisable at December 31, 1997.

          In December 1994, the Company issued warrants providing the right to
receive 379,998 shares of the Company's common stock for $500 of consideration
which, in the opinion of management, approximated the fair value of the warrants
at that date. The warrants were exercised in connection with the reorganization
and offering described in Note 1.

          The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", ("APB 25") and related
interpretations in accounting for its stock-based compensation plans.  In
accordance with APB 25, no compensation cost is recognized for the Company's
stock options where the exercise price equals the market price of the underlying
stock on the date of grant.

                                       48
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)


8.  STOCK OPTION PLANS (CONTINUED)
              
          In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"), which
requires, for companies electing to continue to follow the recognition
provisions of APB 25, pro forma disclosures of what net income and earnings per
share would have been had the recognition provisions of SFAS 123 been adopted.
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the option's vesting period.  For the years ended
December 31, 1997 and 1996, the Company's pro forma net income and earnings per
share would have been:     
<TABLE>
<CAPTION>
 
 
                                            YEAR ENDED DECEMBER 31,
                                            -----------------------
                                               1997         1996
                                            ----------    ---------
<S>                                         <C>          <C>
 
Pro forma net income                         $7,610,754   $494,648
                                             ==========   ========
                                             
Pro forma basic net income per share         $      .94   $    .12
                                             ==========   ========
                                             
Pro forma diluted net income per share       $      .92   $    .12
                                             ==========   ========
 
</TABLE>

          The effects of applying SFAS 123 for pro forma disclosures are not
likely to be representative of the effects for future years.

          For purposes of the pro forma disclosures above, the fair value of
options was estimated at the date of grant using a Black-Scholes option-pricing
model with the following weighted average assumptions: dividend yield 0%;
volatility factors of the expected market price of the Company's common stock of
 .519% in 1997 and .623% in 1996; risk-free interest rate of 6.0% for both years
and expected option lives of five years.

                                       49
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

8. STOCK OPTION PLANS (CONTINUED)

          A summary of the Company's stock option activity for the years ended
December 31 was as follows:
<TABLE>
<CAPTION>
 
                                                   1997                       1996                    1995
                                          ---------------------     ----------------------   ----------------------
                                                       Weighted                   Weighted                 Weighted        
                                                       Average                    Average                  Average         
                                                       Exercise                   Exercise                 Exercise        
                                          Options       Price       Options        Price      Options        Price          
                                          --------     --------     -------       ---------   --------     --------
<S>                                      <C>           <C>        <C>           <C>           <C>          <C>
Outstanding - beginning of year            338,381      $10.57      38,381         $ 2.61                  
Granted                                    291,260       17.26     300,000          11.59      $38,381       $2.61
Exercised                                   (5,300)      11.05                                             
Forfeited                                   (3,750)      11.28                                             
                                           -------                 -------                    --------     
Outstanding - end of year                  620,591                 338,381                      38,381     
                                           =======                 =======                    ========     
                                                                                                        
Outstanding - end of year                                                                               
          Exercise price at $2.61           38,381        2.61      38,381           2.61       38,381        2.61
          Exercise price at $6.37            2,510        6.37                                             
          Exercise prices at $11.05 to     
           $13.50                          499,950       12.29     300,000          11.59                    
          Exercise price at $28.25          79,750       28.25                                             
                                           -------                 -------                    --------     
Total                                      620,591                 338,381                      38,381     
                                           =======                 =======                    ========     
                                                                                                        
Exercisable - end of year                                                                               
          Exercise price at $2.61           38,381        2.61      38,381           2.61       38,381        2.61
          Exercise prices at $11.05 to    
           $13.50                           61,336       11.57                                             
Total                                      -------                 -------                    --------        
                                            99,717                  38,381                      38,381     
                                           =======                 =======                    ========     
                                                                                  
</TABLE>

          The weighted average fair value of options granted during 1997 and
1996 was $7.62 and $6.76, respectively.  The weighted average remaining
contractual life of outstanding options as of December 31, 1997 was 8.96 years.

9.  EQUITY

          For each year presented, basic earnings per share were computed by
dividing net income by the weighted average number of shares outstanding during
the year.  The weighted average number of shares outstanding during the years
ended December 31, 1997 and 1996, was 8,087,857 and 4,030,416, respectively.

                                       50
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

9.  EQUITY (CONTINUED)

          For each year presented, diluted earnings per share were computed by
dividing net income by the weighted average number of shares outstanding during
the year plus the number of dilutive common stock equivalents related to
outstanding stock options at the end of each year.  The number of dilutive
common stock equivalents related to outstanding stock options at December 31,
1997 and 1996, was 222,254 and 25,156, respectively.

          The Company has authorized 10,000,000 shares of preferred stock. The
rights and preferences of the preferred stock are established by the Board of
Directors in its sole discretion. The specific rights and preferences have not
been established and no preferred stock has been issued.

10.   LEASE COMMITMENTS

          The Company leases office space under noncancelable operating leases.
The future minimum lease payments as of December 31, 1997 were as follows:

        <TABLE>                                            
        <S>                             <C>               
         1998                            $  487,000       
         1999                               498,000       
         2000                               514,000       
         2001                               530,000       
        Thereafter                          545,000       
                                         ----------       
                                         $2,574,000       
                                         ==========       
</TABLE>
          Rent expense for the year ended December 31, 1997, 1996 and 1995 was
$216,503, $118,400, and $156,720, respectively.

11.  INCOME TAXES

          Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.  As stated in
Note 2, DEL was a partnership under the Internal Revenue Code.  Accordingly,
income taxes are not material nor meaningful for years prior to 1996.
Significant components of the Company's deferred tax assets as of December 31,
were as follows:
<TABLE>    
<CAPTION>
 
                                                      1997         1996
                                                   -----------   --------
<S>                                                <C>           <C>
Deferred tax assets:
          Allowance for losses on receivables      $1,031,087    $381,462
          Amortization of goodwill                     10,733
          Depreciation                                 (6,511)
          Stock options                                 6,211
                                                   ----------    --------
                                                   $1,041,520    $381,462
                                                   ==========    ========
 
</TABLE>     

                                       51
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

11.  INCOME TAXES (CONTINUED)

          Significant components of the provision for income taxes for the years
ended December 31, were as follows:
<TABLE>
<CAPTION>
 
                               1997          1996
                            -----------   ----------
<S>                         <C>           <C>
Federal taxes               $4,539,321    $ 316,455
State taxes                    997,994       73,532
Deferred income taxes         (660,058)    (351,127)
                            ----------    ---------
          Income taxes      $4,877,257    $  38,860
                            ==========    =========
</TABLE>

          The reconciliations of income tax attributable to continuing
operations computed at the U.S. federal statutory tax rates to income tax
expense for the years ended December 31, were:
<TABLE>
<CAPTION>
 
                                                          1997          1996
                                                       -----------   ----------
<S>                                                    <C>           <C>
Income tax at statutory federal tax rate               $4,376,516    $ 193,264
State taxes, net of federal benefit                       592,270       26,261
Reversal of deferred tax assets valuation allowance                   (183,218)
Other                                                     (91,529)       2,553
                                                       ----------    ---------
Income taxes                                           $4,877,257    $  38,860
                                                       ==========    =========
</TABLE>

          The reversal of the deferred tax asset valuation allowance in 1996
results from the Company's generation of sufficient taxable income to ensure the
recoverability of deferred tax assets arising from the deductible temporary
differences.

12.   RELATED PARTY TRANSACTIONS

          Prior to the reorganization and offering, the Company had an agreement
with Funding, whereby Funding paid a monthly management fee for operational and
management support provided. Management fees under this agreement were $400,000
for the year ended December 31, 1995.

13.   COMMITMENTS AND CONCENTRATIONS OF CREDIT RISK

          The Company earned fee income in excess of 10% of total fee income
from one client, aggregating 11% of total fee income for the year ended December
31, 1996.  For the year ended December 31, 1997, no one client accounted for 10%
or more of total fee income.

          At December 31, 1997 and 1996, the Company had committed lines of
credit to its clients of approximately $275,432,000 and $84,600,000 of which
approximately $107,500,000 and  $37,400,000, respectively were unused.  The
Company extends credit based upon qualified client receivables outstanding and
is subject to contractual collateral and loan-to-value ratios.

                                       52
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

13.   COMMITMENTS AND CONCENTRATIONS OF CREDIT RISK (CONTINUED)

          At December 31, 1997, outstanding finance receivables to three clients
comprised approximately 14% of the total finance receivable portfolio.  At
December 31, 1996, outstanding finance receivables to seven clients comprised
approximately 50% of the total finance receivable portfolio.

          The Company has provided one-year letter of credit guarantees to three
clients totaling $4.8 million, which are substantially collateralized by finance
receivables.  If the clients were to default on their commitments, the Company
would be responsible to meet the client's financial obligation.  The revenue
earned by the Company is being recognized ratably over the life of the letters
of credit by the effective interest method.  Additionally, the Company has
extended a corporate guarantee of $1 million on behalf of a client.  If that
client were to default on its obligation, the Company would be similarly liable.
The Company recognizes the revenue earned on this guarantee ratably over the one
year life of the guarantee using the effective interest method.  The Company
currently does not anticipate that it will be required to fund any of these
commitments.

14.   PURCHASE OF FUNDING

          Effective upon the completion of the offering described in Note 1, the
Company acquired, using the purchase method of accounting, the limited
partnership interest in Funding, consisting primarily of finance receivables and
related borrowings.  The amount paid to acquire Funding, net of cash acquired,
of $16,200,000 approximated both the fair value and book value of Funding at the
date of acquisition.

          The financial statements of the Company for 1996 are consolidated
assuming the acquisition of Funding occurred as of January 1, 1996 under the
provisions of Accounting Research Bulletin No. 51.  The pro forma results of
operations following reflect the operating results of the Company for the years
ended December 31, 1996 and 1995 as if the acquisition of Funding had occurred
on January 1, 1995, and Funding operations were included with the Company.
<TABLE>
<CAPTION>
 
                                            1996         1995
                                         ----------   ----------
<S>                                      <C>          <C>
Net fee and interest income              $8,607,409   $4,583,607
Provision for losses on receivables         656,116      217,388
Net operating expenses                    4,987,742    2,844,505
                                         ----------   ----------
          Net income                     $2,963,551   $1,521,714
                                         ==========   ==========
 
</TABLE>

                                       53
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

14.   PURCHASE OF FUNDING (CONTINUED)

The stand-alone results of operations of Funding for the period January 1, 1996
to November 26, 1996 (date of acquisition by the Company of Funding) were as
follows:
<TABLE>
<CAPTION>
 
<S>                                        <C>
Net fee and interest income                 $ 6,588,579
Provision for losses on receivables             537,805
Net operating expenses                        1,604,389
                                            -----------
          Income before income taxes
           and deduction
          of preacquisition earnings        $ 4,446,385
                                            ===========
</TABLE> 
 
15.   HEALTHCARE FINANCIAL PARTNERS, INC. (PARENT COMPANY ONLY) CONDENSED
FINANCIAL INFORMATION
 
 
<TABLE> 
<CAPTION> 
                                                  DECEMBER 31,
                                         ---------------------------
BALANCE SHEET                                1997           1996
                                         -------------  ------------
<S>                                      <C>            <C>  
 
Assets:
 
Cash and cash equivalents                 $    65,294     $    35,442
Investment in subsidiaries                 87,338,737      26,986,465
Other                                         608,921           3,373
                                           ----------     -----------
          Total Assets                     
                                          $88,012,952     $27,025,280
                                          ===========     ===========
                                           
                                           
Liabilities and Equity:                    
                                           
Accounts payable and accrued expenses     $   182,764     $   304,304
Stockholders' equity                       87,830,188      26,720,976
                                           ----------     -----------
          Total Liabilities and Equity    $88,012,952     $27,025,280
                                           ==========     ===========
 <CAPTION> 
 
                                            YEAR ENDED DECEMBER 31,
                                           -------------------------
STATEMENT OF OPERATIONS                        1997         1996
                                           -----------    -----------
<S>                                      <C>             <C>  
 
Income                                    $  2,576,597     $ 1,401,025
 
Operating expenses                           2,419,875       1,784,272
                                           -----------     -----------
 
 
Income (loss) before income taxes and
 equity in undistributed earnings of 
 subsidiary                                    156,722        (383,247)
 
 
Income tax expense                               1,485          27,358
                                           -----------     -----------
Income (loss) before equity in
 undistributed earnings of subsidiary          155,237        (410,605)
Equity in undistributed earnings of
 subsidiaries                                7,839,611         940,167
                                           -----------     -----------
Net income                                $  7,994,848     $   529,562
                                           ===========     ===========
 
</TABLE>

                                       54
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.

                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

15.   HEALTHCARE FINANCIAL PARTNERS, INC. (PARENT COMPANY ONLY) CONDENSED
FINANCIAL INFORMATION (CONTINUED)
<TABLE>    
<CAPTION>
 
                                                  YEAR ENDED DECEMBER 31,
                                                 -------------------------
STATEMENT OF CASH FLOWS                              1997         1996
                                                 -----------   ------------
<S>                                            <C>             <C> 
                                       
OPERATING ACTIVITIES                   
                                       
Net  income                                    $   7,994,848   $    529,562
Adjustments to reconcile net income to
 net cash used by operations:
 
 Depreciation                                        113,550         54,401
 Stock compensation                                   15,989
 Equity in undistributed earnings of              
  subsidiary                                      (7,839,611)      (940,167)
 Other                                              (840,638)        76,627
                                               -------------   ------------
 
 
  Net cash used by operating activities             (555,862)      (279,577)
 
 
INVESTING ACTIVITIES
Increase in investment in subsidiary             (52,512,661)   (26,046,298)
Payment of amounts due to affiliates                               (149,537)
Other                                                              (221,330)
                                                ------------   ------------
  Net cash used in investing activities          (52,512,661)   (26,417,165)
 
 
FINANCING ACTIVITIES
Issuance of common stock and warrants             53,098,375     26,732,184
                                               -------------   ------------
  Net cash provided by financing
   activities                                     53,098,375     26,732,184
                                               -------------   ------------ 
 
Increase in cash and cash equivalents                 29,852         35,442
Cash and cash equivalents at beginning
 of year                                              35,442
                                               -------------   ------------
Cash and cash equivalents at end of year       $      65,294   $     35,442
                                               =============   ============
 
</TABLE>     

                                       55
<PAGE>
 
ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

          Although not dissatisfied with the performance of McGladrey & Pullen,
L.L.P., the Company's Board of Directors determined that, in contemplation of
becoming a publicly-owned company, the Company would be better served by the
engagement of a big-six accounting firm.  According, on June 21, 1996, the
Company dismissed McGladrey & Pullen, LLP, and subsequently decided to engage
Ernst & Young LLP, as the Company's independent accountants for the year
beginning January 1, 1996.  The reports of McGladrey & Pullen, LLP, for the
years ended December 31, 1995 and 1994 did not contain an adverse opinion or
disclaimer of opinion and were not qualified as to uncertainty, audit scope or
accounting principles.  During such years and for the period January 1, 1996
through June 21, 1996 there was no disagreement with McGladrey & Pullen, LLP on
any matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedures.  During the Company's two most recent fiscal
years and during the current fiscal year prior to its engagement, neither the
Company nor anyone acting on its behalf consulted Ernst & Young LLP, regarding
either the application of accounting principles to a specified transaction
(either completed or proposed) or the type of audit opinion that might be
rendered on the Company's financial statements.

                                       56
<PAGE>
 
                                    PART III
                                    --------

          The Proxy Statement for the Annual Meeting of Stockholders to be held
May 29, 1998 (other than the portions thereof not deemed to be "filed" for the
purposes of Section 18 of the Securities Exchange Act of 1934), which when filed
pursuant to Regulation 14A under the Securities Exchange Act of 1934 will be
incorporated by reference in this Annual Report on Form 10-K pursuant to General
Instruction G(3) of Form 10-K, will provide the information required under Part
III (Items 10, 11, 12 and 13).
 
                                    PART IV
                                    -------

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

(a)       1.    Financial Statements.  See Index to Financial Statements in Item
8 hereof.

The financial statement schedules are either not applicable or the information
            is otherwise included in the footnotes to the financial statements.

Exhibits required by Item 601 of Regulation S-K.    
 
EXHIBIT
NUMBER         DESCRIPTION
--------------------------------------------------------------------------------
    2.1   -    Assignment and Assumption of Partnership Interest, dated as of
               November 21, 1996, between the Company and HealthPartners
               Investors, L.L.C.(1)
    3.1   -    Amended and Restated Certificate of Incorporation of the
               Company.(1)
    3.2   -    Amended and Restated Bylaws of the Company.(1)
    4.1   -    Specimen Common Stock certificate.(1)
    4.2   -    See Exhibits 3.1 and 3.2 for the provisions of the Company's
               Amended and Restated Certificate of Incorporation and Amended and
               Restated Bylaws governing the rights of holders of securities of
               the Company.
   10.1   -    Employment Agreement, dated as of January 1, 1996, between the
               Company and John K. Delaney, as amended September 19, 1996.(1)
   10.2   -    Employment Agreement, dated as of January 1, 1996, between the
               Company and Ethan D. Leder, as amended September 19, 1996.(1)
   10.3   -    Employment Agreement, dated as of January 1, 1996, between the
               Company and Edward P. Nordberg, Jr.(1)
   10.4   -    HealthCare Financial Partners, Inc. 1996 Incentive Stock Plan,
               together with form of Incentive Stock Option award.(1)
   10.5   -    HealthCare Financial Partners, Inc. 1996 Director Stock Option
               Plan.(1)
   10.6   -    Form of Indemnification Agreement between the Company and each of
               its directors and executive officers.(1)
   10.7   -    Form of Registration Rights Agreement between the Company and
               certain stockholders.(1)
   10.8   -    Marketing Services Agreement, dated as of November 1, 1995, among
               HealthPartners Funding, L.P., the Company and Steven Silver and
               assignment by Steven Silver to Medical marketing and Services,
               Inc. dated January 1, 1996.(1)
   10.9   -    Loan and Security Agreement, dated as of November 27, 1996,
               between Fleet Capital Corporation and HCFP Funding, Inc.(3)
  10.10   -    Office Lease, dated January 4, 1996, between Two Wisconsin Circle
               Joint Venture and the Company, as amended on July 26, 1996 and
               August 13, 1996.(1)

                                       57
<PAGE>
 
   10.11       Software Purchase and License Agreement, dated as of September 1,
               1996, between Creative Systems, L.L.C. and the Company.(1)
   10.12       Amended and Restated Limited Partnership Agreement of
               HealthPartners Funding, L.P., dated as of December 1, 1995, among
               the Company, Farrallon Capital Partners, L.P. and RR Capital
               Partners, L.P., as amended and assigned on March 28, 1996.(1)
   10.13       Limited Partnership Agreement of HealthCare Financial Partners -
               Funding II, L.P. dated as of March 5, 1997 between HCFP Funding
               II, Inc., as general partner and HealthPartners Investors II,
               LLC, as limited partner, and Guaranty Agreement dated as of March
               5, 1997 between HealthCare Financial Partners, Inc. and
               HealthPartners Investors II, LLC.(2)
   10.14       Receivables Loan and Security Agreement dated as of December 5,
               1996 among Wisconsin Circle Funding Corporation, as Borrower,
               HCFP Funding, Inc. as Servicer, Holland Limited Securitization,
               Inc., as Lender, and ING Baring (U.S.) Capital Markets, Inc. and
               Purchase and Contribution Agreement dated as of December 5, 1996
               between HCFP Funding, Inc. and Wisconsin Circle Funding
               Corporation.(3)
   10.15       Employment Agreement between the Company and Hilde M. Alter, 
               dated as of July 1, 1997.(4)
   10.16       Employment Agreement between the Company and Steven M. Curwin, 
               dated as of September 1, 1997.(4)
   10.17       Employment Agreement between the Company and Steven I. Silver,
               dated as of October 1, 1996.(4)
   10.18       Amendment No. 1 to Employment Agreement between the Company and 
               Steven I. Silver, dated as of July 1, 1997.(4)
   10.19       Purchase and Sale Agreement dated as of June 27, 1997 between 
               HCFP Funding II, Inc., as Seller, and Wisconsin Circle II
               Funding Corporation, as Buyer; Pooling and Servicing Agreement
               dated as of June 27, 1997 among Wisconsin Circle II Funding
               Corporation, as Transferor, HCFP Funding II, Inc. as Servicer and
               First Bank National Association, as Trustee; Certificate Purchase
               Agreement dated as of June 27, 1997 among Wisconsin Circle II
               Funding Corporation, as Transferor, and The Purchasers described
               therein; Appendix - Definitions; and Guarantee by HealthCare
               Financial Partners, Inc.(5)
   10.20       Assignment and Assumption Agreement by and among HealthPartners
               Investors II, LLC, HCFP Funding, Inc., and HealthCare Financial
               Partners, Inc.(6)
   10.21       First Supplemental Pooling and Servicing Agreement dated as of 
               August 21, 1997 among Wisconsin Circle II Funding Corporation,
               HCFP Funding II, Inc. and U.S. Bank National Association.
   10.22       Second Supplemental Pooling and Servicing Agreement dated as of
               September 22, 1997 among Wisconsin Circle II Funding Corporation,
               HCFP Funding II, Inc. and U.S. Bank National Association.
   10.23       Modification Agreement dated January 15, 1998 among Wisconsin 
               Circle II Funding Corporation, HCFP Funding II, Inc., Credit
               Suisse First Boston Mortgage Capital, LLC, HealthCare Financial
               Partners, Inc. and U.S. Bank National Association.
   10.24       Second Modification Agreement dated February 6, 1998 among
               Wisconsin Circle II Funding Corporation, HCFP Funding II, Inc.,
               Credit Suisse First Boston Mortgage Capital, LLC, HealthCare
               Financial Partners, Inc. and U.S. Bank National Association.
   10.25       First Amendment Agreement dated as of December 30, 1997 among 
               Wisconsin Circle Funding Corporation, HCFP Funding, Inc., ING
               Baring (U.S.) Capital Markets, Inc. and Holland Limited
               Securitization, Inc.
   10.26       Amendment No. 3 to Office Lease dated July 17, 1997, between Two 
               Wisconsin Circle Joint Venture and HealthCare Financial Partners,
               Inc.
   10.27       Amendment to Loan and Security Agreement dated as April 15, 1997 
               among Fleet Capital Corporation and HCFP Funding, Inc.
   21.1        List of Subsidiaries of the Registrant.
 
---------------------
(1) Incorporated by reference to the document filed under the same Exhibit
    number to the Company's Registration Statements on Form S-1 (No. 333-
    12479).
(2) Incorporated by reference to Exhibit 99.1 to the Company's Current Report on
    Report 8-K filed with the Commission on March 13, 1997.
(3) Incorporated by reference to the document filed under the same Exhibit
    number to the Company's Annual Report on Form 10-K for the year ended
    December 31, 1996.
(4) Incorporated by reference to the document filed under the same Exhibit
    number to the Company's Quarterly Report on Form 10-Q for the quarter ended
    September 30, 1997.
(5) Incorporated by reference to the documents filed under Exhibit
    numbers 10.15, 10.16, 10.17, 10.18 and 10.19 to the Company's Current Report
    on Form 8-K filed with the Commission on July 18, 1997.
(6) Incorporated by reference to the document filed under Exhibit number 99.2 to
    the Company's Current Report on Form 8-K filed with the Commission on July
    18, 1997.

Reports on Form 8-K.

      None.

                                       58
<PAGE>
 
                                    SIGNATURES

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

 
 
                                          HEALTHCARE FINANCIAL PARTNERS, INC.

DATE:  February 19, 1998                      /s/ Edward P. Nordberg, Jr.
                                          ----------------------------------
                                         By:  EDWARD P. NORDBERG, JR.
                                              Executive Vice President and
                                              Chief Financial 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>
 
<S>                                      <C>
 
 DATE:  February 19, 1998                       /s/ John K. Delaney
                                          ------------------------------------- 
                                                    JOHN K. DELANEY
                                         Chairman of the Board, Chief Executive
                                            Officer and Director (principal
                                                   executive officer)
 
DATE:  February 19, 1998                           /s/ Ethan D. Leder
                                         ------------------------------------- 
                                                       Ethan D. Leder
                                         Vice-Chairman of the Board, President
                                                      and Director
 
DATE:  February 19, 1998                      /s/ Edward P. Nordberg, Jr.
                                         ------------------------------------- 
                                                EDWARD P. NORDBERG, JR.
                                            Executive Vice President, Chief
                                                   Financial Officer
                                           and Director (principal financial
                                                        officer)
 
DATE:  February 19, 1998                           /s/ Hilde M. Alter
                                         ------------------------------------- 
                                                     HILDE M. ALTER
                                            Treasurer (principal accounting
                                                        officer)
 
DATE:  February 19, 1998                        /s/ Geoffrey E.D. Brooke
                                         ------------------------------------- 
                                                  GEOFFREY E.D. BROOKE
                                                       (Director)
 
DATE:  February 19, 1998                           /s/ John F. Dealy
                                         ------------------------------------- 
                                                     JOHN F. DEALY
                                                       (Director)
</TABLE>

                                       59