<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-K/A
                                Amendment No. 2

(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 1-13177

                                  APOGEE, INC.
--------------------------------------------------------------------------------
             (Exact Name of Registrant as Specified in its Charter)

              Delaware                                         13-3605119
   -------------------------------                        -------------------
   (State or Other Jurisdiction of                        (I.R.S. Employer
   Incorporation or Organization)                         Identification No.)

              1060 First Avenue
        King of Prussia, Pennsylvania                           19406
        -----------------------------                           -----
   (Address of Principal Executive Offices)                   (Zip Code)

Registrant's telephone number, including area code  610-992-2600

Securities registered pursuant to Section 12(b) of the Act:

                                                         Name of Each Exchange
Title of Each Class                                       on Which Registered
-------------------                                       -------------------
       Common Stock, $.01 par value                     American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

                                      None.

            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 as the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                    Yes |X|      No |_|

            Indicate by check mark if disclosure of delinquent filers, pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |_|
<PAGE>   2
                                                                               2


            As of March 31, 1998, 10,089,329 shares of Common Stock, $.01 par
value, were outstanding, and the aggregate market value of the shares of Common
Stock, $.01 par value, held by non-affiliates of the registrant as of March 31,
1998 was approximately $13,400,000. (Determination of stock ownership by
non-affiliates was made solely for the purpose of responding to this requirement
and registrant is not bound by this determination for any other purpose).

                       DOCUMENTS INCORPORATED BY REFERENCE

            List hereunder the documents, all or portions of which are
incorporated by reference herein, and the Part of the Form 10-K into which the
document is incorporated:

            None

<PAGE>   3
                                                                              3
                                   PART II

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

            The Company operates multi-disciplinary outpatient behavioral health
group practices and is one of the largest providers of outpatient behavioral
health services in the United States. The Company provides behavioral health and
related services, principally at free-standing clinics. The Company operates
behavioral health clinics located in 13 states and the District of Columbia. At
December 31, 1997, the Company's outpatient operations were principally
concentrated in Florida, Maryland, New Jersey, Pennsylvania, Virginia and
Wisconsin.

            Largely through its Integra Division, the Company also provides
managed behavioral health services through full and shared risk arrangements
with employers and managed care organizations to perform behavioral health
services on a capitated, sub- capitated and case rate basis. In addition, the
Company provides an array of managed behavioral health services including:
employee assistance programs; third party clinical case management and claims
adjudication.

Sale and Divestiture of Outpatient Business

            In December 1997, the Company announced its plans to sell and
divest its outpatient behavioral health group practice operations (the "Sale").
The Company entered into an agreement to sell substantially all of the assets of
the outpatient behavioral health group practice business, except for practices
located in the Western region of the United States which the Company plans to
divest. See Notes 3 and 12 in the accompanying Consolidated Financial Statements
of the Company. The consummation of the Sale will result in the divestiture by
the Company of substantially all the assets and business of the Company's
outpatient behavioral health practices. As of December 31, 1997, the outpatient
behavioral health practice business accounted for approximately eighty-four
percent (84%) of the assets of the Company (before the impact of the write down
of assets held for sale and the impact of the restructuring charge - see below);
and for the year ended December 31, 1997 approximately eighty-three percent
(83%) of the Company's net revenues. After the Closing Date, the Company will no
longer operate outpatient behavioral health practices and its primary business
activity will be managed behavioral healthcare through its Integra Division. As
a result of the Sale, the Company will be a significantly smaller company in
terms of revenues and assets.

     On an ongoing basis, the Company evaluates and considers alternatives to
improve operating results and enhance shareholder value. These alternatives
include continued acquisitions or mergers, joint ventures, strategic alliances
and sale of assets. In October 1997, the Company executed a non-binding
memorandum of understanding with PsychPartners for the sale of substantially
all of the Company's outpatient behavioral health businesses. The Company then
began a more focused assessment of alternatives available to the Company
including an evaluation of the transaction with PsychPartners to determine if
such a transaction was both viable and in the best interests of the Company and
its shareholders. In December 1997, the Company's Board of Directors reached
agreement that an exit and disposal of the Company's outpatient operations and
refocus on behavioral managed care was the best course of action for the Company
to pursue. The Board authorized management to proceed with and attempt to close
the transaction with PsychPartners. On December 26, 1997, the Company executed
the Purchase Agreement with PsychPartners. The Company's Board of Directors
believes that the terms of the Sale are fair to, and in the best interests of,
the Company and its shareholders. Accordingly, the Board of Directors has
unanimously approved the Sale and recommends approval of the Sale by the
shareholders. While the Company's estimated future cash flows from these
operations showed full recovery of the carrying value of the related assets
prior to the decision to sell, the Company believes the sale of substantially
all of the Company's outpatient businesses will enable the Company to achieve
higher returns than would be obtained if the Company continued to operate its
outpatient operations. In reaching its decision to approve the Sale to
PsychPartners, the Company and the Board of Directors considered the following
factors:

     (i) The condition, prospects and strategic direction of the Company's
outpatient behavioral healthcare business. In this regard, the Board of
Directors has reviewed its analyses of the earnings potential of the outpatient
behavioral healthcare business based upon various operating and market
assumptions and its conclusion that there was a significant probability that the
shareholder value of the Company may not significantly improve in the near term.
This review included a discussion of (a) the Company's cost structure, (b) the
competitive market in each of the Company's businesses, and (c) the Company's
losses in recent periods;

     (ii) The constraints on the Company's ability to finance growth, including
the dilutive impact of additional equity financing and the costs of additional
financing;

     (iii) Recent and historical market prices for the Common Stock of the
Company indicated that the Company had not created in the eyes of the public 
market a clear enough distinction between its group practice strategy and its 
managed care strategy and the Sale would allow the Company to focus on pursuing
a pure managed care strategy, which might be perceived more positively in the 
market;

     (iv) The successful negotiations regarding the Purchase Agreement which the
Company believed reflected a fair and equitable understanding between the
parties;

     (v) The substantial likelihood that the Sale would be consummated and the
fact that no other viable alternative to the Sale was available; and

     (vi) The $27,000 cash consideration to be received upon the consummation
of the Sale will allow the Company to repay its existing Credit Facility and
satisfy its obligations in connection with past acquisitions and the Florida
Medicare review and will provide the Company with funds to pursue its growth
strategy in the managed behavioral healthcare field through its Integra
Division.



In addition, the Board received a written fairness opinion from Banc One
Capital Corporation which states that the Sale was fair from a financial point
of view. If the Sale is not consummated, the Company will pursue other
strategic alternatives and will be required to refinance its revolving Credit
Facility and obtain additional financing. See "Liquidity and Capital
Resources."


In December 1997, and in conjunction with the above, the Board also authorized
a plan to shut down or sell the remaining outpatient operations not included in
the proposed Sale to PsychPartners. When reaching this decision the Board
considered the following factors:


     (i) The recent operating losses in these remaining outpatient operations.
The Company projected that over time, these operations would be able to be
returned to profitability, however, the Company would be required to make a
substantial investment in terms of both capital to fund the short-term losses
and management resources. The Company believes that dedicating Company
resources to the behavioral managed care market would ultimately result in a
higher return on investment than if the Company continued to invest in the
Western Region outpatient operations.


     (ii) The proposed Sale to PsychPartners would divest the Company of
substantially all of its outpatient operations. By executing a plan to divest
the remaining outpatient operations, the Company would have the opportunity to
significantly reduce its regional and corporate infrastructure which the
Company believes will improve overall profitability.


Results of Operations

            The consolidated financial statements include the accounts of the
Company and all wholly owned and beneficially owned subsidiaries. Because of
corporate practice of medicine laws in certain states in which the Company
operates, the Company does not own the professional corporations which operate
the professional and clinical aspects of the

<PAGE>   4
                                                                               4


outpatient behavioral healthcare practices in those states, but instead has the
contractual right to designate, in its sole discretion and at any time, the
licensed professional who is the owner of the capital stock of the professional
corporation at a nominal cost ("Nominee Arrangements"). In addition, the Company
enters into exclusive long-term management services agreements ("Management
Services Agreements") with the professional corporations. Through the Management
Services Agreements, the Company has exclusive authority over decision making
relating to all major ongoing operations of the underlying professional
corporations with the exception of the professional aspects of the practice of
psychiatry, psychology and other professional behavioral healthcare services as
required by certain state laws. Under the Management Services Agreements, the
Company establishes annual operating and capital budgets for the professional
corporations and compensation guidelines for the clinical professionals. The
Management Services Agreements generally have initial terms of ten years or
greater. The method of computing the management fees varies by contract.
Management fees are based on either (i) billings of the affiliated practice less
the amounts necessary to pay professional compensation and other professional
expenses or (ii) a license fee per location, reimbursement of direct costs,
reimbursement of marketing costs plus a markup, and a flat administrative fee or
(iii) a percentage of gross receipts of the affiliated practice. In all cases,
these fees are meant to compensate the Company for expenses incurred in
providing covered services plus a profit. These interests are unilaterally
saleable and transferable by the Company and fluctuate based upon the actual
performance of the operations of the professional corporations.

            Through the Nominee Arrangements, the Company has a significant
long-term financial interest in the affiliated practices and, therefore,
according to Emerging Issues Task Force No. 97-2 "Application of FASB Statement
No. 94, Consolidation of All Majority-Owned Subsidiaries, and APB Opinion No.
16, Business Combinations, to Physician Practice Management Entities and Certain
Other Entities with Contractual Management Arrangement", the Company must
consolidate the results of the affiliated practices with those of the Company.
Because the Company must present consolidated financial statements, net revenues
are presented in the accompanying Consolidated Statements of Operations. All
significant intercompany accounts and transactions, including management fees,
have been eliminated.

<PAGE>   5
                                                                               5
            The following table sets forth, for the periods indicated, the
relative percentages which certain items in the Company's Consolidated
Statements of Operations bear to net revenues:

<TABLE>
<CAPTION>
                                                      Years Ended December 31,
                                                ---------------------------------
                                                    1997       1996       1995
                                                   -----      -----      -----
<S>                                                 <C>        <C>        <C>  
Patient service revenue                             85.1%      92.1%      93.4%
Premium revenue                                     14.9%       7.9%       6.6%
                                                   -----      -----      -----
Total net revenues                                 100.0%     100.0%     100.0%
Gross profit                                        22.7%      23.7%      26.0%
Selling and administrative expenses                 14.9%      14.2%      14.4%
Provision for doubtful accounts                      6.0%       5.0%       5.0%
Amortization of assets held for sale
  and excess cost over fair value of
  net assets acquired                                3.5%       2.9%       2.7%
Write down of assets held for sale                  54.7%
Restructuring and other charges                     28.7%      17.9%       8.2%
                                                   -----      -----      -----
Loss from operations                               (85.1%)    (16.3)%     (4.3)%
Interest expense (includes other expenses)           2.1%       1.0%        .8%

Interest (income)                                    (.1)%      (.2)%     (1.6)%
                                                   -----      -----      -----
Loss before income taxes                           (87.1%)    (17.1)%     (3.5)%
Provision for income taxes                            .2%        .2%        .1%
                                                   -----      -----      -----
Net loss                                           (87.3)%    (17.3)%     (3.6)%
                                                   =====      =====      =====
</TABLE>

Total Net Revenues

Patient Service Revenue

            Patient service revenue is reported when earned at time of service
at the estimated amounts to be realized through payments from patients, third
party payors and others for services rendered. Third party reimbursement is
initially billed at "usual, customary and reasonable" market rates. Aggregate
billings are adjusted when recorded to reflect the estimated amounts realizable
from third party payors based on the Company's historical experience and
contractual rates established with the payors. Patient service revenue
represents billings of the Company's operations other than its behavioral
managed care division, Integra, which are principally comprised of the
outpatient group practice business and long-term care behavioral health business
which the Company exited in December 1996.

            Patient service revenue for 1997 decreased to $59,719 from $72,495
in 1996. This decrease is primarily a result of the impact of operations which
were discontinued or downsized in conjunction with the Company's restructuring
in the fourth quarter of 1996 including the Company's long term care operations.
After adjusting for the impact of these operations, base business revenues
decreased approximately $5,000, primarily as a result of continued reimbursement
pricing pressure from managed care and other third party payors and the
disappointing operating results of selected Western Region outpatient practices.

            Patient service revenue for 1996 increased to $72,495 from $63,760
in 1995. This increase is a result of acquisitions made during 1995 and 1996.
After adjusting for the impact of closing certain long term care operations as a
result of the Company's 1995 restructuring, base business revenues decreased
approximately $4,400, primarily as a result of: 1) reduced revenue volume in
certain long term care markets where the Company continued to provide service
during 1996, but was not actively replacing terminated direct care providers;
and 2) the loss of several group practice contracts in late 1995, partially
offset by increased volumes from other payors/patients.

Premium Revenue

            Premium revenues pertain to the Company's Integra Division which
maintains a portfolio of agreements with managed care organizations and
corporations to provide inpatient and outpatient behavioral health services.
Revenues are primarily generated by capitated managed behavioral health and
employee assistance programs. The fees are defined by contract and are primarily
calculated on a fixed per-member per month fee. Revenues under these contracts
are recorded in the month for which the member is entitled to services.
Generally, these membership contracts are on a one to three year basis subject
to cancellation by either party without cause at any time with thirty to ninety
days written notice. Integra had approximately 600,000, 425,000 and 350,000
covered lives at December 31, 1997, 1996 and 1995, respectively.
<PAGE>   6
                                                                               6


            The Company estimates the cost of providing services under these
agreements, including a reserve for services incurred, but not reported, based
upon authorized services, past claim payment experience for member groups and
other facts. The Company typically does not subcapitate the risk of providing
services under these contracts, but arranges discounted fee-for-service rates
with independent inpatient and outpatient behavioral health providers, which the
Company manages. Integra utilizes certain Apogee outpatient behavioral health
practices as part of the provider network. The Company anticipates that where
practicable, it will continue to utilize these outpatient behavioral health
practices as network providers at the existing or comparable rates which it
believes are at fair market. The Company believes there is a ready supply of
service providers in these markets, and accordingly, is not dependent on the
Apogee outpatient behavioral health practices for the delivery of service to
their contracts.

            Under capitated contracts, the Company is responsible for ensuring
appropriate access to care and bears the risk for utilization levels and pricing
of the cost of services performed under these contracts. The Company believes
the future revenues under these contracts will exceed the costs of services it
will be required to provide under the terms of the contracts. An underestimation
in the utilization or price of services for these contracts could result in
material losses to the Company. Historically, Integra has managed these
capitated contracts profitably. The Company maintains no re-insurance against
the risk of loss under these contracts, however the Company maintains
malpractice and errors and omission insurance coverage for all professionals who
perform services on behalf of the Company.

            Premium revenues for 1997 increased 67% to $10,425 from $6,232 in
1996. Approximately 58% of this increase was from expansion of services provided
under managed care contracts principally due to securing additional Medicaid
lives through a contract with a health maintenance organization in New York. The
remaining increase was a result of new contracts and increased enrollment in the
Company's employee assistance programs and third party clinical case management
and claims adjudication services.

            Premium revenues for 1996 increased 38% to $6,232 from $4,509 in
1995 primarily due to new contracts and increased enrollment in the Company's
employee assistance programs and third party clinical care management and claims
adjudication services.

Gross Profit

            Gross profit comprises net revenues less personnel, field
management, facility and other costs and expenses directly associated with the
delivery of services. Gross profit decreased to $15,942 in 1997 from $18,640 in
1996. This decrease is primarily a result of the impact of operations which were
discontinued or downsized in conjunction with the Company's restructuring in the
fourth quarter of 1996. After adjusting for the impact of these operations,
gross profit from base business decreased approximately $200 due largely to
continued reimbursement pricing pressure from managed care and other third party
payors and the disappointing operating results of selected Western Region
outpatient practices, partially offset by the continued expansion of the
Company's behavioral managed care business.

            Gross profit increased to $18,640 in 1996 from $17,737 in 1995. This
increase is due to acquisitions made during 1995 and 1996. After adjusting for
the impact
<PAGE>   7
                                                                               7


of closing certain long term care operations as a result of the Company's 1995
restructuring, gross profit from base business decreased approximately $2,000,
primarily as a result of: 1) the loss of several group practice contracts in
late 1995; 2) clinician turnover/productivity at certain group practice
operations; and 3) investment in clinical and field support positions.

Selling and Administrative Expenses

            Selling and administrative expenses are primarily comprised of
corporate office, regional management and centralized billing expenses. Selling
and administrative expenses decreased to $10,447 in 1997 from $11,179 in 1996,
due to a combination of reduced administrative costs as a result of discontinued
or downsized operations and the Company's ongoing administrative cost
containment initiatives.

            Selling and administrative expenses increased to $11,179 in 1996
from $9,839 in 1995. This increase is a result of continued investment in
infrastructure and selling and administrative expenses from the businesses
acquired in 1995 and 1996. Selling and administrative expenses as a percentage
of net revenues remained consistent at 14%.

Provision for Doubtful Accounts

            The provision for doubtful accounts increased to $4,226 in 1997 from
$3,886 in 1996. This increase is primarily attributable to increased allowances
recorded for the Western Region outpatient operations in connection with the
Company's exit from these markets. The provision for doubtful accounts increased
to $3,886 in 1996 from $3,408 in 1995. This increase is attributable to higher
net revenues as the provision for doubtful accounts remained consistent at 5% of
net revenues for both years. The provision for doubtful accounts is estimated
based on an ongoing review of collectibility of the Company's accounts
receivable. The Company believes the provision for doubtful accounts and the
associated allowance for doubtful accounts are adequate based on management's
ongoing review of collectibility. At December 31, 1997 and 1996, the Company's
balance sheet allowance for doubtful accounts contained $3,742 and $3,956,
respectively, in allowances associated with long-term care billings and
outpatient locations which the Company has shut down. See Note 5 in the
accompanying 1997 Consolidated Financial Statements.

            The Company recorded additional accounts receivable reserves of
$1,400 and $2,700 in 1997 and 1996, respectively, pertaining largely to the
Company's long-term care business which the Company exited in 1996. The amounts
were included as a component of "Restructuring and Other Charges" in the
accompanying Consolidated Statements of Operations (see Restructuring and Other
Charges below). Including these amounts, the provision for doubtful accounts
would have been 8% of net revenues in both 1997 and 1996.

            The Company recorded additional accounts receivable reserves of
$2,700 and $1,025 in 1996 and 1995, pertaining to the Company's long-term care
business. The amounts were included as a component of "Restructuring Charges" in
the accompanying Consolidated Statements of Operations (see Restructuring and
Other Charges below). Including these amounts, the provision for doubtful
accounts would have been 8% and 6% of net revenues in 1996 and 1995,
respectively. This increase is attributable to the
<PAGE>   8
                                                                               8


increased reserves and allowances for long-term care receivables which the
Company recognized in connection with its decision to exit this market.

Amortization of Intangible Assets and Excess Cost Over Fair Value of Net Assets
Acquired

            Amortization of intangible assets and excess cost over fair value of
net assets acquired increased to $2,441 in 1997 from $2,301 in 1996. After the
completion of the Sale and divestiture, the Company will be substantially
smaller in terms of both assets and net revenues. In light of the repositioning
of the Company as a managed behavioral healthcare company and continuing changes
in the managed health care industry, the Company in the fourth quarter of 1997,
changed its estimated useful life for the excess of cost over fair value of
assets acquired from 40 years to 25 years. Amortization expense increased
approximately $300 in the fourth quarter as a result of this change in estimate.

            Amortization of intangible assets and excess cost over fair value of
net assets acquired increased to $2,301 in 1996 from $1,814 in 1995. This
increase was due to additional businesses acquired in 1996 and the full year of
amortization for businesses acquired in 1995.

Write Down of Assets

            The Company applies Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("SFAS 121"), which established accounting standards
for the impairment of long-lived assets, certain identified intangible assets
and goodwill related to those assets to be held and used and for long-lived
assets and certain intangible assets to be disposed of. In accordance with
SFAS 121, the Company reviews the realizability of long-lived assets, certain
intangible assets and goodwill whenever events or circumstances occur which
indicate recorded costs may not be recoverable. The Company also reviews the
overall recoverability of goodwill based primarily on estimated future
undiscounted cash flows.


            If over the remaining useful life of such assets, the expected
undiscounted future cash flows are less than the carrying amount of such assets,
the Company recognizes an impairment loss for the difference between the
carrying amount of the assets and their estimated fair value. In estimating
future cash flows, the Company uses a combination of recent operating results,
financial forecasts and budgets, and management estimates and assumptions of
factors such as growth and potential future changes when determining whether an
asset is impaired, and in measuring assets that are impaired, the Company groups
assets by geographic region. The geographic region is the level at which the
Company contracts with managed care payors, deploys administrative and clinical
resources and consolidates back office operations. In addition, patients and
Company providers often use clinic locations interchangeably within a geographic
region. Upon signing a non-binding memorandum of understanding ("MOU") with
PsychPartners in October 1997, the Company had an impairment indicator as the
fair value of the Company's assets included in the MOU were less than their
respective carrying values. Accordingly, the Company performed undiscounted cash
flow analyses. In accordance with the Company's policy and SFAS 121, during
1997, the Company measured the carrying value of the related intangible assets
against the estimated future undiscounted cash flows expected to result from the
continued use of these assets. The analyses indicated full recovery of the
related intangible assets prior to the expiration of their remaining estimated
useful lives which were approximately 36 years. The Company changed its
strategic direction in December 1997 with respect to these assets and the Board
approved a plan to exit and dispose of the outpatient operations (see "Sale and
Divestiture of Outpatient Business"). Accordingly, in December 1997, the Company
revised its cash flow analyses to reflect the cash flows expected to result from
the use of these assets prior to their disposal as well as the proceeds expected
to result from their disposal based upon the terms of the Purchase Agreement
with PsychPartners and recorded a charge of $38,400 to write down the carrying
amounts of these businesses to their estimated fair value less cost to sell. The
Sale will close as soon as practicable after approval of the Purchase Agreement
by the holders of a majority of the outstanding shares of the Company Common
Stock. The Company anticipates completing this Sale in the second quarter of
1998. Net revenues for the outpatient group practices were approximately
$58,056, $61,237 and $48,349 and recorded (loss) income from operations of
($2,696), ($783), and $836 in 1997, 1996 and 1995, respectively, excluding the
above write down of assets and restructuring and other charges.

Restructuring and Other Charges

            This charge is comprised of the following:

                                                    
<TABLE>
<CAPTION>
                                                   Years Ended December 31,
                                             ----------------------------------- 
                                               1997          1996          1995
                                             -------       --------      -------
<S>                                          <C>           <C>           <C>    
Restructuring charges ................       $14,200       $ 9,650       $ 5,600
Long-term care reserves ..............         5,900         4,450
                                             -------       -------       -------
                                             $20,100       $14,100       $ 5,600
                                             =======       =======       =======
</TABLE>

Restructuring Charges:

            In December 1997, the Company recorded a provision for restructuring
pertaining to the Company's decision to divest the outpatient group practices
which were not sold to PsychPartners and to reorganize corporate office
functions to reflect the exit from the outpatient business. The writedown of
assets includes a goodwill impairment
<PAGE>   9
                                                                               9


charge of $10,287 associated with the remaining outpatient operations. The
remainder of the write down of assets consists primarily of fixed assets related
to the discontinued operations. In accordance with its policy and SFAS 121, the
Company reached the decision to exit the outpatient business and divest these
remaining outpatient operations (see "Sale and Divestiture of Outpatient 
Business"). The Company measures the carrying value of the related assets 
against the estimated current fair market value for these remaining operations 
less costs to dispose and record the above writedown. Contract termination 
costs pertain primarily to accrued costs for lease terminations, and storage of
clinical records. Employee severance costs include the accumulation of benefits
set forth in the Company's severance policy which will be paid to approximately
200 of the Company's employees who will be terminated as a result of the 
restructuring plan. The primary employee groups affected include clinical and 
administrative personnel at Western Region clinic locations and regional and 
corporate staff. At December 31, 1997, the full balance remained for both 
contract termination costs and employee severance as no amounts were paid out 
prior to year end. The Company anticipates the restructuring plan will be 
substantially completed in 1998.

            Subsequent to completion of this plan and the Sale to PsychPartners,
the Company's operations will consist primarily of its Integra Division through
which the Company provides managed behavioral health services. The Company
believes the benefit of exiting the outpatient behavioral health business will
be the opportunity to focus full management and Company resources to the Integra
Division which historically has been profitable and has generated strong same
store revenue growth.

            The following unaudited pro forma results of operations were
prepared as if the discontinuation and sale of the Company's operations other
than the Integra Division were effective January 1, 1996. This pro forma
financial information is presented for informational purposes only, and is not
necessarily indicative of the results that would have actually occurred or the
results that may occur in the future.

<TABLE>
<CAPTION>
                                                          Years Ended December 31,
                                                    ---------------------------------
                                                        1997                1996
                                                    --------------     --------------
                                                      (Unaudited)       (Unaudited)
<S>                                                    <C>               <C>    
Net revenues ...............................           $10,425           $ 6,232
Income from operations .....................             1,224                19
</TABLE>

            During 1997, the Company also completed execution of the 1996
restructuring plan which discontinued the Company's long-term care operations,
exited and consolidated underperforming outpatient locations and reduced
management and overhead costs. Under these plans, approximately 300 of the
Company's employees were terminated and the Company wrote off assets consisting
primarily of goodwill in the amount of $5,850.

            The following summarizes the Company's restructuring activity:

<TABLE>
<CAPTION>
                                                            Restructure                         Restructure
                          1995        1996       Amounts     Balance at   1997        Amounts    Balance at
                      Restructure  Restructure Utilized in   December  Restructure   Utilized    December
                       Provision    Provision  1995 & 1996   31, 1996   Provision     in 1997    31, 1997
                      ----------   ----------  ----------   ---------  ----------     --------  ---------
<S>                       <C>          <C>        <C>          <C>        <C>          <C>          <C> 
Write down of assets      $4,400       $7,975     $11,272      $1,103     $11,622      $12,477      $248
Contract Termination         726          985         726         985       2,253          645     2,593
Employee severance costs     474          690         549         615         325          563       377
                          ------       ------     -------      ------     -------      -------    ------
                          $5,600       $9,650     $12,547      $2,703     $14,200      $13,685    $3,218
                          ======       ======     =======      ======     =======      =======    ======
</TABLE>
<PAGE>   10
                                                                              10


Long-Term Care Reserves:

            The long-term care reserves pertain largely to reserves established
by the Company for billings for services to Medicare patients in long-term care
facilities. At December 31, 1996, the Company established a reserve for
potential settlement of the Florida Medicare review of $1,300, which it believed
to be adequate based on the preliminary results of the review at this time. As
explained below, the Company reached a tentative agreement of $3,000 to settle
this matter in December 1997. Accordingly, the Company has reserved an
additional $1,700 at December 31, 1997, to cover the anticipated settlement of
this review. The Company also reserved $1,400 against the suspended accounts
receivable with the Florida intermediary.

            In March 1998, the Company received notification that the Medicare
intermediary in California has completed a post payment medical review of
billings previously submitted and paid between 1990 and 1994. Based on the
results of their review, the intermediary has requested a refund of
approximately $1,200. Services were denied primarily on the basis of medical
necessity and incomplete documentation. The Company has not yet completed its
review of the intermediary's findings, but anticipates requesting an
administrative hearing. At December 31, 1997, the Company fully reserved the
above amount. In addition, the Company has recorded a reserve of $1,600 for
other potential exposures pertaining to long-term care services.

            Although management believes that established reserves for the above
are sufficient, it is possible that the final resolution of these matters may
exceed the established reserves by an amount which could be material to the
Company's results of operations. The Company does not believe the ultimate
outcome of these matters will have a material adverse effect on the Company's
overall financial condition, liquidity or operations.

            Of the total 1997 restructuring and other charges, approximately
$5,000 related to amounts to be paid in cash. The non-cash portion of the
charges relates to the write-off of certain assets, principally goodwill
associated with Western Region outpatient operations and reserves established
for long-term care services for denied claims.

Interest Expense

            Interest expense increased to $1,474 in 1997 from $763 in 1996 due
primarily to a higher average outstanding debt balance during 1997 than in 1996.
Interest expense increased to $763 in 1996 from $498 in 1995 due primarily to a
higher average outstanding debt balance during 1996 than in 1995.

Interest Income

            Interest income decreased to $30 in 1997 from $116 in 1996 due to a
lower average outstanding investment portfolio balance during 1997. Interest
income decreased to $116 in 1996 from $1,078 in 1995 due to a lower average
outstanding investment portfolio balance during 1996.

Medicare Review

            During 1996, certain of the Company's Medicare Part B and related
co-insurance billings previously submitted were selected for review by the
Office of the
<PAGE>   11
                                                                             11 


Inspector General of the Department of Health and Human Services ("OIG") and the
Department of Justice ("DOJ"). The Company has been informed by the DOJ that the
review is a civil matter relating to billings for services to Medicare patients
in long-term care facilities in the State of Florida during the period from
approximately January 1994 through mid-1995. During the pendency of this review,
the Medicare intermediary has suspended all Medicare payments to this
subsidiary. It is the Company's policy to comply with all federal, state and
local laws including those applicable to the Medicare program. In December 1997,
the Company and representatives from the United States Attorney's office reached
an agreement in principle that would settle all of the OIG's civil claims
against the Company relating to this matter for a payment of $3,000. This
tentative agreement is subject to the final approval by the appropriate officers
of the DOJ and OIG. Throughout this process, the Company has been fully
cooperating with the review and anticipates reaching a definitive agreement in
1998. As described above in "Long Term Care Reserves," the Company has
established a reserve for the above amount, which is included with Accrued
Expenses and Other Accrued Liabilities in the accompanying 1997 Consolidated
Balance Sheet. The final agreement, when reached, is not expected to materially
differ from the terms outlined above.

Liquidity and Capital Resources

            Net cash provided by operations was $1,792 in 1997, compared to net
cash provided by operations of $2,531 in 1996. Cash and cash equivalents
remained fairly consistent, decreasing from $2,299 at December 31, 1996 to
$2,154 at December 1997. In 1997, the Company used $1,293 in cash for capital
expenditures compared with $1,345 in 1996.

            At December 31, 1997, the Company had a working capital deficit of
$27,646. This deficit is primarily attributable to the current classification of
the Company's revolving credit facility ("Credit Facility") and accrued
liabilities of $9,018 which pertain to the Company's sale of and exit from
outpatient behavioral group practice business and reserves established for its
long term care operations which were discontinued in 1996.

            In April 1996, the Company entered into an agreement with PNC Bank
to establish the revolving Credit Facility for up to a maximum of $15,000.
Borrowings availability under this Credit Facility are based on the Company's
earnings before interest, income taxes, depreciation and amortization, and the
value of selected assets, principally accounts receivable and property and
equipment; subject to various financial and non-financial covenants; and secured
by substantially all of the assets of the Company. Borrowings under this
facility bear interest at the bank's prime rate plus 1.0% or LIBOR plus 2.85%.
The weighted average interest rate on outstanding borrowings at December 31,
1997 was 8.8%. The proceeds of this Credit Facility are available for future
acquisitions, working capital and general corporate purposes. In March 1997, the
Credit Facility was amended to reset various financial covenants to reflect the
Company's restructuring and other charges incurred in 1996. In addition, the
bank retained discretion for borrowings in excess of $12,000.

            At December 31, 1997, the Company was in default of certain
financial covenants contained in the Credit Facility. The bank has waived the
covenant violations and extended the additional borrowings contingent upon
consummation of the Sale to PsychPartners at which point the Company has agreed
to repay all existing bank debt with proceeds from the Sale. Through March 25,
1998, total advances under the Credit Facility
<PAGE>   12
                                                                              12

were $14,300 and are payable at the earlier of April 30, 1998 or the closing
date of the sale to PsychPartners.

            The Company anticipates that the net proceeds from the Sale to
PsychPartners will primarily be used to repay bank debt, fund payment of
acquisition notes and contingent consideration and settlement of the Florida
Medicare review (see above). The Company estimates that approximately $4,000 of
the net proceeds of the Sale will be available to the Company for general
corporate purposes and to invest in future growth. The Sale is expected to close
in the second quarter of 1998. The Company intends to establish a new credit
facility with the bank after the original Credit Facility is repaid. The Company
expects this facility will provide between $7,000 and $10,000 in borrowings
availability in future periods.

            If the Sale is not consummated, the Company will be required (i) to
either continue operating the outpatient behavioral healthcare business or
attempt to locate another buyer for the outpatient behavioral healthcare
business and (ii) to refinance its revolving Credit Facility and obtain
additional financing. The Company estimates additional cash needs of
approximately $7.0 million will be required during 1998 for contingent payments,
seller notes and for restructure related activities. The Company has obtained a
letter of intent from PNC Bank indicating their present intention to keep the
existing Credit Facility in place and to expand the Credit Facility to $22,000.
The preceding letter of intent would be subject to, among other things, PNC Bank
obtaining guarantees to partially collateralize the Credit Facility.

            The Company has entered into an agreement with the investment
partnerships which are significant stockholders of the Company and are managed
by Foster Management Company (the "Investment Partnerships"), an affiliated
party, to obtain their commitment to guarantee the additional $7,000 of
financing. In return, the investment funds will receive the following: (i) a
commitment fee of 2% of the guaranteed amount; (ii) a draw down fee of 2% on
borrowings in excess of $15,000; (iii) an unused commitment fee of 1/2% per
annum; and (iv) the Apogee Warrants to purchase 400,000 shares of Company
Common Stock at a price of $0.05 per share or, in the event the Sale is not
consummated, a transaction fee of $3,500 payable on April 30, 1999. The
Investment Partnerships have indicated to the Company that they intend to seek
one or more financial institutions as participants in such guarantees. In the
event that the Commitment Arrangement is terminated and the Sale is
consummated, the cost to the Company will be $140 in cash payable to the
Investment Partnerships and a non-recurring charge of $930 which represents the
difference between the exercise price of the Apogee Warrants and the fair
market value of the underlying Company Common Stock. In the event the Sale is
not consummated, the cost to the Company could be up to $280 in cash payable to
the Investment Partnerships for commitment and draw down fees and $3,500 in
cash payable on or before April 30, 1999. In recognition of the Company's need
to evaluate other potential guarantors and the terms they may offer, the
Company was given the right to accept proposals from other potential guarantors
(As of April 15, 1998, the Company has not accepted proposals from any other
potential guarantors). In the event the Company terminates the Investment
Partnerships' obligations because it has secured more favorable financing
arrangements, the Company shall be obligated to pay such Investment
Partnerships the commitment fee described in clause (i) above. In addition, the
Company shall be obligated to pay (a) 30% of the Apogee Warrants if such
termination occurs on or after March 30 and before April 6, 1998, (b) 60% of
the Apogee Warrants if such termination occurs on or after April 6, 1998 and
before April 13, 1998 and (c) 90% of the Apogee Warrants if such termination
occurs thereafter.

            The Company believes that the cash flow generated by the Company's
operations, together with its existing cash and either the proceeds from the
Sale, or in the event the Sale is not consummated the availability of additional
borrowings under the expanded Credit Facility, will be sufficient to meet the
Company's cash requirements in 1998.
<PAGE>   13
                                                                              13


            The Company's current ratio, working capital and debt to equity
ratio are set forth below for the dates indicated:

<TABLE>
<CAPTION>
                                      December 31, 1997     December 31, 1996
                                      ----------------      ----------------
<S>                                     <C>                  <C>     
           Current Ratio                   .26:1                 .70:1
           Working Capital                                   
           Deficit                      ($27,646)             ($ 7,102)
           Debt to Equity                  3.1:1                 .20:1
</TABLE>

Inflation

            A significant portion of the Company's operating expenses have been
subject to inflationary increases, including clinical and administrative
salaries and rent expense. Based on management's assessment, the Company has
historically been unable to substantially offset inflationary increases through
price increases but believes the Company has somewhat mitigated the effect by
expanding services and increasing operating efficiencies. There can be no
assurance that the Company will be able to offset future inflationary increases
in expenses, if any which would result in a dilutive impact on the Company's
future earnings.

CAUTIONARY STATEMENT

            Matters discussed above contain forward-looking statements that are
based on the Company's estimates, assumptions and projections. Major factors
which could cause results to differ materially from those expected by management
include the timing and nature of reimbursement charges, the nature of changes in
laws and regulations that govern various aspects of the Company's business, new
criteria adopted to determine medical necessity for behavioral health services,
the outcome of post-payment reviews of the Company's billings to Medicare
patients in long-term care facilities, including a review in the State of
Florida by the Department of Justice, successful renegotiation of the Company's
Credit Facility, changes in procedures by third party payors, pricing of managed
care and other third party contracts, the number and productivity of clinicians,
the direction and success of competitors, management retention and unanticipated
market changes.
<PAGE>   14
                                                                              14


                INTEGRA OPERATIONS AFTER THE CLOSING OF THE SALE

            The Company intends to operate as an independent behavioral managed
care organization ("BMCO") under the name Integra, providing employee assistance
programs and managed care services to employers and health maintenance
organizations ("HMOs") after the Closing Date of the Sale. The behavioral
managed care market is a $3.5 billion market and covered lives in this market
have been growing at average annual rate of 14% since 1993. The Company intends
to leverage its existing care outcomes protocols and clinical data systems
developed by Integra to compete aggressively for greater market share.

BUSINESS

            Integra has a portfolio of agreements with managed care
organizations and corporations to provide inpatient and outpatient behavioral
health services. Revenues are primarily generated by capitated managed
behavioral health and employee assistance programs. The fees are defined by
contract and are primarily calculated on a fixed per-member per month fee.
Revenues under these contracts are recorded in the month for which the member is
entitled to services. Generally, these membership contracts are on a one to
three year basis subject to cancellation by either party without cause at any
time with thirty to ninety days written notice. Integra had approximately
600,000, 425,000 and 350,000 covered lives at December 31, 1997, 1996 and 1995,
respectively.

            The Company estimates the cost of providing services under these
agreements, including a reserve for services incurred, but not reported, based
upon authorized services, past claim payment experience for member groups and
other factors. The Company typically does not subcapitate the risk of providing
services under these contracts, but arranges discounted fee-for-service rates
with independent inpatient and outpatient behavioral health providers, which the
Company manages. Integra utilizes certain Apogee outpatient behavioral health
practices as part of the provider network. The Company anticipates that where
practicable, it will continue to utilize these outpatient behavioral health
practices as network providers at the existing or comparable rates which it
believes are at fair market. The Company believes there is a ready supply of
service providers in these markets, and accordingly, is not dependant on the
Apogee outpatient behavioral health practices for the delivery of service to
these contracts.

            Under capitated contracts, the Company is responsible for ensuring
appropriate access to care and bears the risk for utilization levels and pricing
of the cost of services performed under these contracts. The Company believes
the future revenues under these contracts will exceed the costs of services it
will be required to provide under the terms of the contracts. An underestimation
in the utilization or price of services for these contracts could result in
material losses to the Company. Historically, Integra has managed these
capitated contracts profitably. The Company maintains no re-insurance against
the risk of loss under these contracts, however the Company maintains
malpractice and errors and omission insurance coverage for all professionals and
facilities that perform services on behalf of the Company.

MANAGEMENT

            The Integra division currently has sufficient experienced operations
management, clinical management, information systems and network management
resources to implement the planned business strategy. In addition, management
has experience in pricing and managing contracts on a capitated basis.
Historically, Integra has managed capitated
<PAGE>   15
                                                                             15


contracts profitably. Once the Sale is completed, the Company's corporate
finance and senior management personnel will be consolidated with the Integra
division to form the Company's management team. The Company plans to add sales
and marketing personnel as well as clinical research staff once the Sale is
completed.

MARKETING

            Integra expects to expand the promotion of its proprietary clinical
outcomes data system, Compass(TM), as a differentiator of its "core EAP" and
managed care products. Compass(TM) is one of the few clinical outcomes data
systems available with the ability to provide data concurrent with treatment.
The Company has hired additional sales personnel and expects to add additional
staff, during 1998. The Company will focus on large Fortune 1000 customers and
HMOs which desire quality managed behavioral care and clinical data driven
decision making in their employee benefit plans. In addition, Integra will
attempt to expand the use of Compass(TM) in other venues such as pharmaceutical
data sharing and reseller agreements with health care information software
companies.

ACQUISITIONS

            Once the Sale is completed, the Company expects to pursue
acquisitions of smaller EAP and privately owned BMCO organizations on a
selective basis. These candidates will fit an acquisition criteria which
includes a clinical philosophy compatibility, anticipated ease of consolidation
into Integra's operations and a complementary customer mix.


Year 2000 Compliance

        The Company is in the process of assessing the effects of Year 2000
software issues on its present information technology structure. As of December
31, 1997, that assessment, including a determination of the exposure of the
Company's business processes to these issues and the need for, and estimated
costs associated with, any necessary conversions had not been completed. 
<PAGE>   16
                                                                              16
Item 8.  Financial Statements and Supplementary Data.


                                 APOGEE, INC.
                         CONSOLIDATED BALANCE SHEETS
                  (Dollars in thousands, except share data)


    Assets
                                                         December 31,
                                                      ------------------
                                                      1997          1996
                                                      ----          ----

Current assets:

    Cash and cash equivalents                        $ 2,154       $ 2,299

    Accounts receivable, net of allowance for
     doubtful accounts                                 5,939        11,096

    Other accounts receivable                          1,455         1,643

    Other current assets                                 410         1,407
                                                     -------       -------
    Total current assets                               9,958        16,445

Property and equipment, net                            2,426         3,359

Intangible assets and excess cost over fair 
  value of net assets acquired, net                   31,031        77,381

Other assets                                             185           598
                                                     -------       -------
                                                     $43,600       $97,783
                                                     =======       =======
    LIABILITIES AND STOCKHOLERS' EQUITY

Current liabilities:

    Current portion of long-term debt                $13,891       $ 4,584

    Accounts payable                                   2,283         2,196

    Accrued expenses and other current liabilities    21,430        16,767
                                                     -------       -------
    Total current liabilities                         37,604        23,547

Long-term debt                                           809         8,224

Other long-term liabilities                              128           485

Deferred income tax liability                            346           346
                                                     -------       -------
                  Total liabilities                   38,887        32,602
                                                     -------       -------
Commitments and contingencies

Stockholders' equity:

    Common stock, $.01 par value, 20,000,000
    shares authorized; issued and outstanding
    10,029,325 in 1997 and 9,822,570 in 1996             100            98

    Capital in excess of par value                    86,349        85,624

    Accumulated deficit                              (81,707)      (20,489)

    Deferred compensation                                (29)          (52)
                                                     -------       -------
                  Total stockholders' equity           4,713        65,181
                                                     -------       -------
                                                     $43,600       $97,783
                                                     =======       =======


  The accompanying notes are an integral part of these financial statements
<PAGE>   17
                                                                              17


                                  APOGEE, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
             (Dollars in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                                 ------------------------
                                                              1997           1996           1995
                                                              ----           ----           ----
<S>                                                    <C>            <C>            <C>        
Net revenues:
      Patient service revenue                          $    59,719    $    72,495    $    63,760
      Premium revenue                                       10,425          6,232          4,509
                                                       -----------    -----------    -----------
         Total net revenues                                 70,144         78,727         68,269
                                                       -----------    -----------    -----------
Cost of revenues:

      Patient service costs                                 48,383         56,700         48,619

      Premium service costs                                  5,819          3,387          1,913
                                                       -----------    -----------    -----------

         Total cost of revenues                             54,202         60,087         50,532
                                                       -----------    -----------    -----------

Gross profit                                                15,942         18,640         17,737

Selling and administrative expenses                         10,447         11,179          9,839

Provision for doubtful accounts                              4,226          3,886          3,408

Amortization of intangible assets and
  excess cost over fair value of net assets acquired         2,441          2,301          1,814

Writedown of assets                                         38,400

Restructuring and other charges                             20,100         14,100          5,600
                                                       -----------    -----------    -----------

Loss from operations                                       (59,672)       (12,826)        (2,924)

Non-operating expenses (income):

      Interest expense                                       1,474            763            498

      Interest income                                          (30)          (116)        (1,078)

      Other expenses                                                                          30
                                                       -----------    -----------    -----------

Loss before income taxes                                   (61,116)       (13,473)        (2,374)

Provision for income taxes                                     102            121             77
                                                       -----------    -----------    -----------

Net loss                                               ($   61,218)   ($   13,594)   ($    2,451)
                                                       ===========    ===========    ===========

Basic and diluted net loss per common share            ($     6.17)   ($     1.39)   ($     0.26)
                                                       ===========    ===========    ===========

Weighted average shares outstanding,
  basic and diluted                                      9,921,374      9,786,599      9,414,839
                                                       ===========    ===========    ===========
</TABLE>

    The accompanying notes are an integral part of these financial statements
<PAGE>   18
                                                                              18


                                  APOGEE, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                 (In thousands)

<TABLE>
<CAPTION>
                                  Common Shares
                               ------------------
                                                     Capital in             
                                                     excess of  Accumulated   Deferred    
                                Number   Par value   par value    deficit   compensation  Total
                               --------  ---------   ---------  ---------   ------------  ------     
<S>                             <C>      <C>         <C>         <C>         <C>         <C>     

Balance at December 31,
1994                            9,277    $     93    $ 79,008    ($ 4,444)   ($    96)   $ 74,561

Common stock issued in
connection
  with acquisitions              458           4       6,491                                6,495

Exercise of stock options                                  2                                    2

Common stock issued for
services
  rendered                         6                     111                                  111

Amortization of deferred
  compensation                                                                    21          21

Net loss                                                          (2,451)                 (2,451)
                            --------    --------    --------    --------    --------    --------

Balance at December 31,
1995                           9,741          97      85,612      (6,895)        (75)     78,739

Common stock issued in
connection
  with acquisitions              122           1         743                                 744

Common stock reversal            (40)                   (731)                               (731)

Amortization of deferred
  compensation                                                                    23          23

Net loss                                                         (13,594)                (13,594)
                            --------    --------    --------    --------    --------    --------

Balance at December 31,
1996                           9,823          98      85,624     (20,489)        (52)     65,181

Common stock issued in
connection
  with acquisitions              206           2         725                                 727

Amortization of deferred
  compensation                                                                    23          23

Net loss                                                         (61,218)                (61,218)
                            --------    --------    --------    --------    --------    --------

Balance at December 31,
1997                          10,029    $    100    $ 86,349    ($81,707)   ($    29)   $  4,713
                            ========    ========    ========    ========    ========    ========
</TABLE>

    The accompanying notes are an integral part of these financial statements
<PAGE>   19
                                                                              19


                                  APOGEE, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                           YEARS ENDED DECEMBER 31,
                                                       --------------------------------
                                                           1997       1996        1995
                                                         ------     ------       -----
<S>                                                  <C>        <C>        <C>     
Cash flows from operating activities:
  Net loss                                            ($61,218)   ($13,594)   ($ 2,451)
  Adjustments to reconcile net loss to net cash
    provided by operations:
    Depreciation and amortization                        3,289       3,309       2,554
    Provision for doubtful accounts                      4,226       3,886       3,408
    Non cash portion of asset write down,
      restructuring and other charges                   58,500      11,507       4,400

  Changes in assets and liabilities, net of
    effects of businesses acquired:
    Increase in accounts receivable                       (657)     (3,989)     (6,211)
    Decrease (increase) in other current assets            626        (548)     (1,506)
    Increase in accounts payable                            87         739         603
    (Decrease) increase in accrued expenses and
      other current liabilities                         (3,090)      1,829       3,516
    Increase (decrease) in other assets and
      other liabilities                                     29        (608)        (77)
                                                      --------    --------    --------
    Net cash provided by operating activities            1,792       2,531       4,236
                                                      --------    --------    --------

Cash flows from investing activities:
  Acquisition of business:
    Payments for acquisition of businesses, net of
    cash acquired
      of $524 in 1996, $795 in 1995                                 (4,108)    (10,102)
    Additional payments for businesses acquired in
    prior years                                         (2,590)     (6,770)     (5,964)
                                                      --------    --------    --------
      Net cash outlay for acquisition of businesses     (2,590)    (10,878)    (16,066)

  Disposition of businesses                                100
  Purchases of property and equipment                   (1,293)     (1,345)     (2,515)
                                                      --------    --------    --------
      Net cash used in investing activities             (3,783)    (12,223)    (18,581)
                                                      --------    --------    --------

Cash flows from financing activities:
  Proceeds from issuance of common stock                                           111
  Proceeds from exercise of common stock options                                     2
  Proceeds from issuance of notes payable                6,420       6,650         275
  Principal payments on long-term obligations           (4,574)     (6,608)     (3,375)
                                                      --------    --------    --------
      Net cash provided by (used in) financing
      activities                                         1,846          42      (2,987)
                                                      --------    --------    --------
Net decrease in cash and cash equivalents                 (145)     (9,650)    (17,332)
Cash and cash equivalents at beginning of period         2,299      11,949      29,281
                                                      --------    --------    --------
Cash and cash equivalents at end of period            $  2,154    $  2,299    $ 11,949
                                                      ========    ========    ========
Supplemental disclosures of cash flow information:
  Interest paid                                       $  1,403    $    694    $    431
                                                      ========    ========    ========
  Income taxes paid                                   $    210    $    234    $    269
                                                      ========    ========    ========
</TABLE>
 
    The accompanying notes are an integral part of these financial statements
<PAGE>   20
                                                                              20


                                  APOGEE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (Dollars in thousands, except share and per share data)

Note 1 - Organization and Operation

      Apogee, Inc. ("Apogee" or the "Company"), a Delaware corporation, was
formed to provide behavioral health services and commenced operations on March
15, 1991. The Company operates multi-disciplinary outpatient behavioral health
group practices, principally at free standing clinics and is one of the largest
providers of outpatient behavioral health services in the United States. The
Company currently operates behavioral health clinics located in 13 states and
the District of Columbia. At December 31, 1997, Apogee's outpatient operations
were principally concentrated in Florida, Maryland, New Jersey, Pennsylvania,
Virginia and Wisconsin.

      Largely through its Integra Division ("Integra"), the Company also
provides managed behavioral health services through full and shared risk
arrangements with employers and managed care organizations to perform behavioral
health services on a capitated, sub-capitated and case rate basis. In addition,
the Company provides an array of managed behavioral health services including:
employee assistance programs; third party clinical case management and claims
adjudication.

      During December 1997, the Company announced it plans to sell and divest
its outpatient behavioral health group practice operations. The Company entered
into an agreement to sell substantially all of the assets of the outpatient
behavioral health group practice business (hereafter referred to as the "Sale"),
except for practices located in the Western region of the United States, which
the Company plans to divest. The consummation of the Sale will result in the
divestiture by the Company of substantially all the assets and business of the
Company's outpatient behavioral health practices. As of December 31, 1997, the
outpatient behavioral health practice business accounted for approximately
eighty-four percent (84%) of the assets of the Company (before the impact of the
write down of assets held for sale and the impact of the restructuring charges);
and for the year ended December 31, 1997 approximately eighty-three percent
(83%) of the Company's net revenues. After the closing date, the Company will no
longer operate outpatient behavioral health practices and its primary business
activity will be managed behavioral healthcare through its Integra Division. As
a result of the Sale, the Company will be a significantly smaller company in
terms of revenues and assets.

      The Company's Board of Directors believes the terms of the sale are fair
to and in the best interest of the Company and its shareholders for the
long-term growth of the Integra business. In making its recommendation to exit
the outpatient behavioral health practice business, the Company considered the
recent operating results, future prospects and strategic direction of the
outpatient behavioral health practice business. The Company also considered the
current constraints on its ability to finance future growth and the positive
effect the sale of assets and the repayment of debt would have on the Company's
ability to obtain additional financing.

      The above Sale and effect on the Company is further described in Notes 3
and 12. If the Sale is not consummated, the Company will pursue other strategic
alternatives and will be required to refinance its revolving Credit Facility
(see Note 4).

Note 2 - Summary of Significant Accounting Policies

Principles of consolidation

      The consolidated financial statements include the accounts of the Company
and all wholly owned and beneficially owned subsidiaries. Because of corporate
practice of medicine laws in certain states in which the Company operates, the
Company does not own the professional corporations which operate the
professional and clinical aspects of the outpatient behavioral healthcare
practices in those states, but instead has the contractual right to designate,
in its sole discretion and at any time, the licensed professional who is the
owner of the capital stock of the professional corporation at a nominal cost
("Nominee Arrangements"). In addition, the Company enters into exclusive
long-term management services agreements ("Management Services Agreements") with
the professional corporations. Through the Management Services Agreements, the
Company has exclusive authority over decision making relating to all major
ongoing operations of the underlying professional corporations with the
exception of the professional aspects of the practice of psychiatry, psychology
and other professional behavioral healthcare services as required by certain
state
<PAGE>   21
                                                                              21


                                  APOGEE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (Dollars in thousands, except share and per share data)

laws. Under the Management Services Agreements, the Company establishes annual
operating and capital budgets for the professional corporations and compensation
guidelines for the clinical professionals. The Management Services Agreements
generally have initial terms of ten years or greater. The method of computing
the management fees varies by contract. Management fees are based on either (i)
billings of the affiliated practice less the amounts necessary to pay
professional compensation and other professional expenses or (ii) a license fee
per location, reimbursement of direct costs, reimbursement of marketing costs
plus a markup, and a flat administrative fee or (iii) a percentage of gross
receipts of the affiliated practice. In all cases, these fees are meant to
compensate the Company for expenses incurred in providing covered services plus
a profit. These interests are unilaterally saleable and transferable by the
Company and fluctuate based upon the actual performance of the operations of the
professional corporations.

      Through the Nominee Arrangements, the Company has a significant long-term
financial interest in the affiliated practices and, therefore, according to
Emerging Issues Task Force No. 97-2 "Application of FASB Statement No. 94,
Consolidation of All Majority-Owned Subsidiaries, and APB Opinion No. 16,
Business Combinations, to Physician Practice Management Entities and Certain
Other Entities with Contractual Management Arrangement", the Company must
consolidate the results of the affiliated practices with those of the Company.
Because the Company must present consolidated financial statements, net revenues
are presented in the accompanying Consolidated Statements of Operations. All
significant intercompany accounts and transactions, including management fees,
have been eliminated.

Reclassification

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

Use of estimates

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

Cash and cash equivalents

      Cash and cash equivalents include cash on hand and short-term investments
with original maturities of 90 days or less.

Revenue recognition

      Patient service revenue is reported when earned at time of service at the
estimated amounts to be realized through payments from patients, third party
payors and others for services rendered. Third party reimbursement in initially
billed at "usual, customary and reasonably" market rates. When recorded,
aggregated billings are adjusted to reflect the estimated amounts realizable
from third party payors based on the Company's historical experience and
contractual rates established with the payors. Patient service revenue
represents billings of the Company's operations other than its behavioral
managed care division, Integra, which are principally comprised of the
outpatient group practice business and long-term care behavioral health business
which the Company exited in December 1996.

      Premium revenue pertains to the Company's Integra Division and are
primarily generated by capitated managed behavioral health and employee
assistance programs. The fees are defined by contract and are primarily
calculated on a fixed per-member per-month fee. Capitated revenues are recorded
in the month for which the member is entitled to services (see Note 13).

Property and equipment

      Property and equipment are stated at cost less accumulated depreciation
and amortization. Additions and betterments are capitalized and maintenance and
repairs are charged to current operations. The cost of assets retired or
otherwise disposed of and the related accumulated depreciation and amortization
are removed from the accounts
<PAGE>   22
                                                                              22


                                  APOGEE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (Dollars in thousands, except share and per share data)

and the gain or loss on such dispositions is reflected in current operations.
Depreciation is provided using the straight-line method. Estimated useful lives
of the assets are:

<TABLE>
<CAPTION>

<S>                                                   <C>  
                     Furniture and fixtures ......    5 to 7 years
                     Office equipment ............    3 to 5 years
</TABLE>

Long lived and intangible assets

      Identifiable assets and liabilities acquired in connection with business
combinations accounted for under the purchase method are recorded at their
respective fair values. Deferred taxes have been recorded to the extent of
differences between the fair value and the tax basis of the assets acquired and
liabilities assumed. The excess of the purchase price over the fair value of
tangible net assets acquired is amortized on a straight-line basis over the
estimated useful life of the intangible assets. Allocation of intangible assets
between identifiable intangibles and goodwill was performed by Company
management with the assistance of independent appraisers. Intangible assets
other than goodwill include patient lists and covenants not to compete which are
amortized over one and five years, respectively.

      After the completion of the Sale and divestiture, the Company will be
substantially smaller in terms of both assets and net revenues. In light of the
repositioning of the Company as a managed behavioral healthcare company and
continuing changes in the managed health care industry, the Company in the
fourth quarter of 1997, changed its estimated useful life for the excess of cost
over fair value of assets acquired from 40 years to 25 years. Amortization
expense increased approximately $300 in the fourth quarter as a result of this
change in estimate.

      Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"), which
establishes accounting standards for the impairment of long-lived assets,
certain identified intangible assets and goodwill related to those assets to be
held and used and for long-lived assets and certain intangible assets to be
disposed of. In accordance with SFAS 121, the Company reviews the realizability
of long-lived assets, certain intangible assets and goodwill whenever events or
circumstances occur which indicate recorded cost may not be recoverable. The
Company also reviews the overall recoverability of goodwill based primarily on
estimated future undiscounted cash flows. 

      If the expected future cash flows (undiscounted) are less than the
carrying amount of such assets, the Company recognizes an impairment loss for
the difference between the carrying amount of the assets and their estimated
fair value. In estimating future cash flows for determining whether an asset is
impaired, and in measuring assets that are impaired, assets are grouped by
geographic region.

Financial instruments

      The carrying value of cash and cash equivalents, accounts receivable and
payable and accrued liabilities approximates fair value due to the short-term
maturities of these assets and liabilities.

Income taxes

      The Company accounts for certain items of income and expense in different
time periods for financial reporting and income tax purposes. Provisions for
deferred income taxes are made in recognition of such temporary differences,
where applicable. A valuation allowance is established against deferred tax
assets unless the Company believes it more likely than not that the benefit will
be realized.

Earnings per share

      The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128") which establishes new standards for
computing and presenting earnings per share by replacing the presentations of
weighted shares outstanding, inclusive of common stock equivalents, with a dual
presentation of basic and diluted
<PAGE>   23
                                                                              23


                                  APOGEE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (Dollars in thousands, except share and per share data)

earnings per share. Basic earnings per share includes no dilution and is
computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the dilutive effect of all stock options, shares
contingently payable in connection with certain acquisitions and convertible
debentures. All prior period earnings per share information has been restated in
accordance with SFAS 128.

Note 3 - Sale of Outpatient Business to PsychPartners, LLC

      On December 26, 1997, the Company entered into an agreement of Purchase
and Sale (the "Purchase Agreement") with PsychPartners MidAtlantic, Inc.,
PsychPartners, Inc., and PsychPartners, LLC (collectively "PsychPartners" or the
"Purchasers"). Pursuant to the Purchase Agreement, the Company will sell to the
Purchasers substantially all of the assets and business of the Company's
outpatient behavioral healthcare business, which consists of (i) all of the
capital stock of one of the subsidiaries of the Company (the "Subsidiary Stock")
operating two outpatient behavioral health practices and (ii) substantially all
of the assets (the "Assets") relating to 20 of the Company's outpatient
behavioral health practices (the 22 practices are collectively, the
"Practices"). In consideration for the sale of the Practices, the Purchasers
will pay to the Company a purchase price consisting of (a) $27,000 in cash, (b)
a warrant contingently issuable to purchase 400,000 Common Units of
PsychPartners at a purchase price of $.05 per Common Unit (the "Warrant") and
(c) the assumption of certain liabilities of the Company and the Practices
(collectively, the "Purchase Price"). The Purchase Price is subject to certain
adjustments. The Purchase Price may be adjusted if the cash, accounts
receivable, deposits and prepaid expenses of the Practices are less than the
liabilities and future contingent payment obligations of the Practices. As of
December 31, 1997 the net amount of assets which would be acquired less
liabilities which would be assumed is approximately $1,700. The estimated future
earnout payments to be assumed by PsychPartners are approximately $1,850. As of
December 31, 1997, the Company would have a net asset adjustment to reduce the
Purchase Price by $150. The Company believes that any adjustment, if required,
would not exceed $500.

      The Warrant entitles the Company to purchase 400,000 Common Units of
PsychPartners during the five (5) year period following the Closing Date. The
issuance of the Warrant to the Company is contingent on the achievement of
certain future operating profit thresholds of two of the Practices during a
one-year period after the closing of the Sale as defined in the agreement. The
Company will not assign a value to the Warrant until the contingency is resolved
and the Warrant is issued. Neither the Warrant nor the Common Units underlying
the Warrant have been registered under the Securities Act of 1933, as amended,
and the Warrant does not provide for either the Warrant or the Common Units to
be registered by PsychPartners.

      The Sale will close as soon as is practicable after the approval of the
Purchase Agreement by the holders of a majority of the outstanding shares of
Company Common Stock at the Special Meeting (the "Closing Date"). The
Company anticipates the closing date will be in the second quarter of 1998.

      The respective obligations of the Company and the Purchasers to close the
Sale are subject to the satisfaction on or prior to the Closing Date of various
closing conditions. Such conditions include, among others, the approval and
adoption of the Purchase Agreement by the holders of a majority of the
outstanding shares of Company Common Stock, the correctness in all material
respects of the representations and warranties of the parties to the Purchase
Agreement and the Company having complied with the agreements and conditions set
forth in the Purchase Agreement. Certain of these conditions (other than the
approval and adoption of the Purchase Agreement by the Company's shareholders)
may be waived by PsychPartners and the Purchasers. If the Company's shareholders
do not approve the Sale, the Company's Board of Directors will pursue other
strategic options.

      The Purchase Agreement may, under certain specified circumstances, be
terminated and the sale abandoned at any time prior to the Closing,
notwithstanding approval of the Purchase Agreement by the shareholders of the
Company. The Company may terminate the Purchase Agreement (i) with the mutual
written consent of the Purchasers, in the event a condition to the Company's or
the Purchasers' obligation to the Closing has not been met or waived on or prior
to April 30, 1998 or (ii) because the Board of Directors of the Company
determines, in the exercise of its judgment as to its fiduciary duties to the
shareholders after consultation with counsel, that such termination is required
<PAGE>   24
                                                                              24


                                  APOGEE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (Dollars in thousands, except share and per share data)

by reason of any competing proposal to purchase all or any significant portion
of the Subsidiary Stock or the Assets, or any similar transaction (a "Competing
Transaction").

      Pursuant to the Purchase Agreement, at the Closing, the Purchasers, the
Company and certain of its subsidiaries will enter into an Interim Services
Agreement pursuant to which the Company and the subsidiaries will assist the
Purchasers in obtaining certain consents in connection with the Sale and will
provide certain management and other services, including billing services to the
Purchasers to operate and manage the Practices in connection with the transition
of the Practices to the Purchasers.

      Based on the fair market value established by the Purchase Agreement, the
Company recorded a charge of $38,400 to write down the carrying amounts of these
businesses to their estimated fair value less cost to sell. Net revenues for all
the Company's outpatient group practices, including Western region practices,
were approximately $58,056, $61,237 and $48,349 and recorded income (loss) from
operations of ($2,696), ($783), and $836 in 1997, 1996 and 1995, respectively,
excluding the above write down of assets and restructuring and other charges.

Note 4 - Liquidity, Capital Resources and Use of Proceeds

      At December 31, 1997, the Company had a working capital deficit of
$27,646. This deficit is primarily attributable to the current classification of
the Company's Credit Facility and accrued liabilities of $9,018 which pertain to
the Company's sale and exit of outpatient behavioral group practice business and
reserves established for its long-term care operations which were discontinued
in 1996.

      The Company anticipates that the net proceeds from the sale to
PsychPartners will primarily be used to repay bank debt, fund payment of
acquisition notes (See Note 9) and contingent consideration (See Note 6), and
for settlement of the Florida Medicare review (See Note 13). The Company
estimates that approximately $4,000 of the net proceeds of the sale will be
available to the Company for general corporate purposes and to invest in future
growth. The Sale is expected to close in the second quarter of 1998. The Company
intends to establish a new credit facility with the bank after the original
Credit Facility is repaid. The Company expects this facility will provide
between $7,000 and $10,000 in borrowings availability in future periods.

      If the Sale is not consummated, the Company will be required (i) to either
continue operating the outpatient behavioral healthcare business or attempt to
locate another buyer for the outpatient behavioral healthcare business, and (ii)
to refinance its revolving Credit Facility (See Note 9). The Company is
currently party to a credit agreement with PNC Bank that includes a $15,000 term
loan, of which PNC Bank retains discretion for borrowings in excess of $12,000.
Borrowings outstanding under the Credit Facility were approximately $12,100 as
of December 31, 1997, and $14,300 as of March 15, 1998. The Company is currently
in technical default of certain covenants contained in the Credit Facility. PNC
Bank has temporarily waived these covenants and authorized borrowings in excess
of the $12,000, both of which are contingent upon consummation of the Sale. The
Company estimates additional cash needs of approximately $7,000 will be required
during 1998 for contingent payments, seller notes and for restructure related
activities. The Company has obtained a letter of intent from PNC Bank indicating
their present intention to keep the existing Credit Facility in place and to
expand the Credit Facility to $22,000. The preceding letter of intent would be
subject, among other things, to PNC Bank obtaining guarantees to partially
collateralize the Credit Facility. The Company has entered into an agreement
with certain investment funds which are significant stockholders of the Company
and are managed by Foster Management Company, an affiliated party, to obtain
their commitment to guarantee the additional $7,000 of financing. In return, the
investment funds will receive the following: (i) a commitment fee of 2% of the
guaranteed amount; (ii) a draw down fee of 2% on borrowings in excess of
$15,000; (iii) an unused commitment fee of 1/2% per annum; and (iv) warrants to
purchase 400,000 shares of Apogee common stock at a price of $0.05 per share or,
in the event the Sale is not consummated, a transaction fee of the greater of
$3,500 or an amount that would equate to an internal rate of return of 50% on
the maximum amount drawn down under the increased portion of the Credit
Facility, payable on or before April 30, 1999. In recognition of the Company's
need to evaluate other potential guarantors and the terms they may offer, the
Company was given the right to accept proposals from other potential guarantors.
In the event the Company terminates the investment funds' obligations because it
has secured more favorable financing arrangements, the Company shall be
obligated to pay such investment
<PAGE>   25
                                                                              25


                                  APOGEE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (Dollars in thousands, except share and per share data)

funds the commitment fee described in clause (i) above. In addition, the Company
shall be obligated to pay (a) 30% of the warrants if such termination occurs on
or after March 30 and before April 6, 1998, (b) 60% of the warrants if such
termination occurs on or after April 6, 1998 and before April 13, 1998 and (c)
90% of the warrants if such termination occurs thereafter.

      The Company believes that the cash flow generated by the Company's
operations, together with its existing cash and either the proceeds from the
Sale, or in the event the Sale is not consummated the availability of additional
borrowings under the expanded bank Credit Facility, will be sufficient to meet
the Company's cash requirements in 1998.

Note 5 - Receivables and Third Party Reimbursements

      Accounts receivable consist of the following:

<TABLE>
<CAPTION>
                                                                December 31
                                                          ---------------------
                                                              1997         1996
                                                              ----         ----
<S>                                                        <C>           <C>    
Accounts receivable, net of contractual
         allowances                                        $13,287       $20,402

Less: Allowance for doubtful accounts                        7,348         9,306
                                                           -------       -------

                                                           $ 5,939       $11,096
                                                           =======       =======
</TABLE>

      The Company's services are primarily reimbursed by third party payors,
including Medicare, Medicaid, managed care organizations and commercial
insurance companies. Approximately 7%, 16%, and 21% of the Company's net
revenues for 1997, 1996 and 1995, respectively, were directly billed to Medicare
which is subject to Federal regulation. The Company believes the allowance for
doubtful accounts is adequately estimated based on its ongoing review of
collectibility.

      As further explained in Notes 11 and 13, the Company has been undergoing
post payment review of selected billings to Medicare patients in long-term care
facilities in the States of Florida and California. During the pendency of this
review, the Florida intermediary has suspended all long-term care Medicare
payments to the Company. At December 31, 1997, the above amounts include $1,818
in net billings which have been suspended for which the Company has established
a full allowance. At December 31, 1996 the above amounts included $4,216 in
long-term care billings for which the Company established an allowance for
doubtful accounts of $2,139 primarily as a result of the above matters. In
addition the Company also had allowances of $1,924 and $1,817 at December 31,
1997 and 1996, respectively, associated with outpatient locations which the
Company has shut down.

Note 6 - Business Acquisitions

      During 1996 and 1995, the Company acquired 6 and 19 businesses,
respectively. No businesses were acquired during 1997. These acquisitions have
been accounted for using the purchase method of accounting. The results of
operations of the acquired practices are included in the consolidated financial
statements from the respective dates of acquisition.
<PAGE>   26
                                                                              26


                                  APOGEE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (Dollars in thousands, except share and per share data)

      The following unaudited pro forma consolidated results of operations of
the Company, including restructuring and other charges, give effect to the 1996
acquisitions as if they had occurred on January 1, 1996:

<TABLE>
<CAPTION>
                                                    Year Ended
                                                    December 31,
                                                       1996
                                                  ---------------
                                                    (Unaudited)
<S>                                                  <C>     
Net revenues ................................        $ 83,383

Loss from operations ........................         (12,391)

Net loss ....................................         (13,367)

Net loss per common share ...................        ($  1.35)
</TABLE>

      The above pro forma information is not necessarily indicative of the
results of operations that would have occurred had the acquisitions been made as
of the beginning of the respective periods or of the results which may occur in
the future.

      Information with respect to businesses acquired are as follows:

<TABLE>
<CAPTION>
                                                                              Years Ended
                                                                              December 31,
                                                                          --------------------
                                                                              1996      1995
                                                                              ----      ----
<S>                                                                        <C>       <C>    
Cash paid (net of cash acquired) .......................................   $ 4,108   $10,102

Common stock issued ....................................................       191     5,424

Subordinated promissory notes issued ...................................     1,205     3,640

Other deferred purchase price ..........................................        --     1,570
                                                                           -------   -------

                                                                             5,504    20,736

Liabilities assumed ....................................................       819     3,329
                                                                           -------   -------

                                                                             6,323    24,065

Fair value of assets acquired, principally accounts receivable, property
and equipment and certain identified intangible assets .................       630     4,467
                                                                           -------   -------

         Cost in excess of fair value of net assets acquired ...........   $ 5,693   $19,598
                                                                           =======   =======
</TABLE>

      In connection with certain acquisitions, the Company has entered into
contractual arrangements whereby additional shares of the Company's common stock
and cash may be issued to former owners of acquired companies
<PAGE>   27
                                                                              27


                                  APOGEE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (Dollars in thousands, except share and per share data)

upon attainment of specified financial criteria (i.e. contingent consideration)
over periods of two to four years as set forth in the respective agreements. The
number of shares of common stock to be issued cannot be determined until the
earn-out periods expire and the attainment of criteria is established. If such
criteria are attained, but not exceeded, the Company will be obligated to make
cash payments of approximately $4,925 and issue approximately 244,507 shares of
common stock over the next three years. A lesser amount of cash would be paid
and a lesser number of shares of common stock would be issuable under certain
acquisition agreements if the financial criteria are not met and a greater
amount of cash would be paid and a greater number of shares of common stock
would be issuable under certain acquisition agreements if the financial criteria
are exceeded. Under the terms of the Purchase and Sale Agreement with
PsychPartners, the Company's obligation for contingent consideration for periods
subsequent to the closing date for the practices acquired will be assumed by
PsychPartners.

      The Company paid $2,590, $2,829 and $1,492 in cash and issued 206,755,
86,408 and 61,733 shares of common stock in 1997, 1996 and 1995, respectively,
in connection with businesses acquired in prior years. This consideration was
accounted for as additional goodwill.

Note 7 - Property and Equipment

<TABLE>
<CAPTION>
                                                                 December 31,
                                                             -------------------
                                                               1997        1996
                                                             ------      ------
<S>                                                          <C>         <C>   
Furniture, fixtures and equipment.......................     $3,679      $5,201
         Less: Accumulated depreciation ................      1,253       1,842
                                                             ------      ------
                                                             $2,426      $3,359
                                                             ======      ======
</TABLE>

      Depreciation expense was $848, $1,008 and $791 for 1997, 1996 and 1995,
respectively.

Note 8 - Intangible Assets

<TABLE>
<CAPTION>
                                                                 December 31,
                                                             -------------------
                                                               1997        1996
                                                             ------      ------
<S>                                                            <C>       <C>    
          Excess cost over fair value of net assets acquired   $36,044   $80,951

          Patient lists ....................................        75        92

          Covenants not to compete .........................       364       368
                                                               -------   -------

                                                                36,483    81,411

          Less: Accumulated amortization ...................     5,452     4,030
                                                               -------   -------

                                                               $31,031   $77,381
                                                               =======   =======
</TABLE>

      As further described in Note 3, the Company recorded a charge of $38,400
to write down the carrying amount of the assets to be sold to PsychPartners. In
addition, the Company wrote down $10,287 of intangible assets pertaining to the
exit of the Western Region practices (See Note 11). In accordance with SFAS 121,
these charges are primarily reflected as a reduction of goodwill at December 31,
1997.
<PAGE>   28
                                                                              28


                                  APOGEE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (Dollars in thousands, except share and per share data)

Note 9 - Borrowings

      Note payable to bank

            In April 1996, the Company entered into an agreement with a bank to
establish a revolving credit facility ("Credit Facility") for up to a maximum of
$15,000. Borrowings availability under this Credit Facility are based on the
Company's earnings before interest, income taxes, depreciation and amortization,
and the value of selected assets, principally accounts receivable and property
and equipment; subject to various financial and non-financial covenants; and
secured by substantially all of the assets of the Company. Borrowings under this
facility bear interest at the bank's prime rate plus 1.0% or LIBOR plus 2.85%.
The weighted average interest rate on outstanding borrowings at December 31,
1997 was 8.8%. The proceeds of this Credit Facility are available for future
acquisitions, working capital and general corporate purposes. In March, 1997,
the Credit Facility was amended to reset various financial covenants to reflect
the Company's restructuring and other non-recurring charges incurred in 1996. In
addition, the bank retained discretion for borrowings in excess of $12,000.

            At December 31, 1997, the Company was in default of certain
financial covenants contained in the Credit Facility. The bank has waived the
covenant violations and extended the additional borrowings contingent upon
consummation of the Sale to PsychPartners at which point the Company has agreed
to repay all existing bank debt with proceeds from the sale. Through March 15,
1998, total advances under the Credit Facility were $14,300 and are payable at
the earlier of April 30, 1998 or the closing date of the sale to PsychPartners.
The advances under this Credit Facility are classified as a current liability in
the accompanying financial statements. See Note 4 for the Company's discussion
of liquidity, capital resources and use of proceeds.

            In 1994, the Company issued $2,550 of subordinated convertible
debentures at 5% - 6% in connection with business acquisitions. The debentures
are convertible, at the option of the holders, into shares of the Company's
common stock at conversion prices ranging from $16 to $18 a share. The
debentures are redeemable, in whole or in part, at the option of the Company.
These debentures were fully repaid in 1997.
<PAGE>   29
                                                                              29


                                  APOGEE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (Dollars in thousands, except share and per share data)

Long- term debt

<TABLE>
<CAPTION>
                                                                 December 31,
                                                           ---------------------- 
                                                                1997       1996
                                                               -----      -----
<S>                                                       <C>         <C>    
5.0% - 9.0% subordinated promissory notes
issued in connection with business
acquisitions, payable through 2000 .....................     $ 2,624     $ 6,251

Revolving Credit Facility (prime rate plus 1.0%
or LIBOR plus 2.85% expiring November 1998) ............      12,070       5,650

Subordinated convertible debentures, payable
through 1997 ...........................................                     825

Various installment loans payable through
October 1998, interest rates from 7.0% to
9.5% ...................................................           6          82
                                                             -------     -------

                                                              14,700      12,808

         Less: Amounts due within one year .............      13,891       4,584
                                                             -------     -------

                                                             $   809     $ 8,224
                                                             =======     =======
Minimum repayments of long-term debt are:

         1998 ..........................................     $13,891

         1999 ..........................................         778

         2000 ..........................................          31
                                                             -------
                                                             $14,700
                                                             =======
</TABLE>

         The carrying  amount of the  Company's  borrowings  under its long-term
revolving credit facility  approximates fair value. Based on the borrowing rates
currently  available to the Company for loans with similar  terms and  maturity,
the fair value of the Company's  remaining  debt at December 31, 1997,  and 1996
was $2,571 and $6,958, respectively.
<PAGE>   30
                                                                              30


                                  APOGEE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (Dollars in thousands, except share and per share data)

Note 10 - Income Taxes

         The  components of the provision for income tax expense for 1997,  1996
and 1995 are as follows:

<TABLE>
<CAPTION>
                                                                       Years Ended December
                                                                                31,
                                                              ---------------------------------------
                                                                 1997            1996         1995
                                                                 ----            ----         ----

Current:
<S>                                                            <C>               <C>           <C>
         Federal.............................................  ($56)             $204          $41
         State...............................................    158              135           36
                                                               -----              ---          ---
                                                                 102              339           77
                                                               -----              ---          ---
Deferred:
         Federal.............................................  -----            (169)        -----
         State...............................................  -----             (49)        -----
                                                               -----            -----        -----
                                                               -----            (218)        -----
                                                               -----            -----        -----

                                                               $102              $121          $77
                                                               ====              ====          ===
</TABLE>


Deferred tax assets (liabilities) comprise the following:

<TABLE>
<CAPTION>
                                                                      December 31,
                                                                 ----------------------
                                                                    1997         1996
                                                                    ------       -----
<S>                                                              <C>         <C> 
Net operating loss carryforwards ..............................   $  3,950    $    800
Accruals and reserves not currently deductible for tax purposes      1,073         181
Restructuring reserve .........................................     14,097       4,040
                                                                  --------    --------
Gross deferred tax assets .....................................     19,120       5,021
Valuation reserve .............................................    (16,349)     (5,021)
                                                                  --------    --------
Total deferred tax assets .....................................      2,771          --
Temporary differences pertaining to acquired companies ........     (3,117)       (346)
                                                                  --------    --------
Net deferred tax liabilities ..................................   ($   346)   ($   346)
                                                                  ========    ========
</TABLE>

The  reconciliation  of the federal statutory tax rate to the effective tax rate
is as follows:

<TABLE>
<CAPTION>
                                                                                           Years Ended December 31,
                                                                                --------------------------------------------
                                                                                   1997              1996               1995
                                                                                   ----              ----               ----
<S>                                                                               <C>               <C>                <C>  
Federal statutory tax rate....................................................... (34%)             (34%)              (34%)
State income taxes, less related federal tax benefit.............................   (2)               (4)                  2
Non-deductible amortization of excess cost over fair value of net assets
acquired.........................................................................                       2                 10
Business expense disallowance....................................................                       2                  2
Original issue discount..........................................................                                        (4)
Non-deductible portion of restructuring charge...................................    16                10                 26        
Loss for which no tax benefit was provided.......................................    20                25                 28
Net operating losses utilized....................................................                                       (27)
                                                                                   ----              ----             ------
                                                                                     0%                1%                 3%
                                                                                   ====              ====              =====

</TABLE>

<PAGE>   31
                                                                              31


                                  APOGEE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (Dollars in thousands, except share and per share data)


      At December 31, 1997, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $10,000. Their use is limited to
future taxable earnings of the Company and, as specified in the Internal Revenue
Code, use of certain of the net operating loss carryforwards is limited as they
were acquired by the Company in a purchase of the stock of other companies. The
carryforwards expire in varying amounts through 2012. A valuation reserve has
been established against the potential future benefit of the net operating loss
carryforwards.

Note 11 - Restructuring and Other Charges

<TABLE>
<CAPTION>
                                                                                       Years Ended December 31,
                                                                            --------------------------------------------
                                                                              1997              1996               1995
                                                                              ----              ----               ----
<S>                                                                          <C>                <C>                <C>   
         Restructuring charges.............................................. $14,200            $9,650             $5,600
         Long-term care reserves............................................   5,900             4,450
                                                                             -------           -------            -------
                                                                             $20,100           $14,100             $5,600
                                                                             =======           =======             ======
</TABLE>

Restructuring charges:

      In December 1997, the Company recorded a provision for restructuring
pertaining to the Company's decision to divest the outpatient group practices
which were not sold to PsychPartners and to reorganize corporate office
functions to reflect the exit of the outpatient business. The write-down of
assets includes a goodwill impairment charge of $10,287 associated with the
operations the Company is exiting. The remainder of the write down of assets
consists primarily of fixed assets related to the discontinued operations.
Contract termination costs pertain primarily to accrued costs for lease
termination and storage of clinical records. Employee severance costs include
the accumulation of benefits set forth in the Company's severance policy which
will be paid to approximately 200 of the Company's employees who will be
terminated as a result of the restructuring plan. The primary employee groups
affected include clinical and administrative personnel at Western Region clinic
locations and regional and corporate staff. The Company anticipates the
restructuring plan will be substantially completed in 1998. Subsequent to
completion of this plan and the Sale to PsychPartners, the Company's operations
will consist primarily of its Integra Division through which the Company
provides managed behavioral health services. The Company believes the benefit of
exiting the outpatient behavioral health business will be the opportunity to
focus full management and Company resources on Integra which historically has
been profitable and has generated strong same store revenue growth (see Note 12
for pro forma operating results of this division).

      During 1997, the Company also completed execution of the 1996
restructuring plan which discontinued the Company's long term care operations,
exited and consolidated underperforming outpatient locations and reduced
management and overhead costs. Under these plans, approximately 300 of the
Company's employees were terminated and the Company wrote off assets consisting
primarily of goodwill in the amount of $5,850 and fixed assets related to the
restructured operations.
<PAGE>   32
                                                                              32


                                  APOGEE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (Dollars in thousands, except share and per share data)

      During 1996, the Company completed the execution of the 1995 restructuring
plan which reorganized certain long term care operations and reduced management
and overhead costs. The Company completed the employee reduction program by
terminating 120 of the Company's employees and also wrote off assets consisting
primarily of goodwill in amount of $1,850 and fixed assets of $1,275.
<PAGE>   33
                                                                              33


                                  APOGEE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (Dollars in thousands, except share and per share data)

      The following summarizes the Company's restructuring activity:

<TABLE>
<CAPTION>
                                                         Amounts       Restructure                                    Restructure
                        1995              1996          Utilized in     Balance at       1997           Amounts        Balance at
                    Restructuring     Restructuring       1995 &       December 31,  Restructuring    Utilized in     December 31,
                      Provision         Provision         1996            1996        Provision         1997             1997
                   ----------------------------------------------------------------------------------------------------------------
<S>                    <C>               <C>            <C>               <C>           <C>           <C>                  <C> 
Write-down of
assets                 $4,400            $7,975         $11,272           $1,103        $11,622       $12,477              $248
Contract
termination costs         726               985             726              985          2,253           645             2,593
Employee
severance costs           474               690             549              615            325           563               377
                   ------------        ---------      ----------         --------      ---------    ----------          --------
                       $5,600            $9,650         $12,547           $2,703        $14,200       $13,685            $3,218
                       ======            ======         =======           ======       ========     =========            ======
</TABLE>

Long-term care reserves:

      At December 31, 1996, the Company established a reserve for potential
settlement of the Florida Medicare review of $1,300, which it believed to be
adequate based on the preliminary results of the review at the time. As further
explained in Note 13, the Company reached a tentative agreement of $3,000 to
settle this matter in December 1997. Accordingly, the Company has reserved an
additional $1,700 at December 31, 1997, to cover the anticipated settlement of
this review. The Company also reserved $1,400 against the suspended accounts
receivable with this Intermediary.

      In March 1998, the Company received notification that the Medicare
intermediary in California has completed a post payment medical review of
billings previously submitted and paid between 1990 and 1994. Based on the
results of their review, the Intermediary has requested a refund of
approximately $1,200. Services were denied primarily on the basis of medical
necessity and incomplete documentation. The Company has not yet completed its
review of the Intermediary's findings, but anticipates requesting an
administrative hearing. At December 31, 1997, the Company fully reserved the
above amount. In addition, the Company has recorded a reserve of $1,600 for
other potential exposures pertaining to long-term care services.

      During 1996, both the Florida and California Medicare Part B
Intermediaries adopted new payment review procedures for behavioral health
services performed in long-term care facilities. The Company, both individually
and in conjunction with coalitions of behavioral healthcare providers, requested
additional training and guidance on the revised payment review standards. The
Company believes it was unable to obtain adequate training and guidance on the
new standards despite the fact the Intermediaries were applying the new review
standards to the claims submitted by the Company. As further described above, in
the fourth quarter of 1996 the Company elected to discontinue its long-term care
operations. Concurrent with the exit of long-term care at December 31, 1996, the
Company has established a $3,150 reserve for denied claims, potential refunds,
and accounts receivable which the Company believes were impaired as a result of
the restructuring plan.

      Although management believes that established reserves for the above
claims are sufficient, it is possible that the final resolution of these matters
may exceed the established reserves by an amount which could be material to the
Company's results of operations. The Company does not believe the ultimate
outcome of these matters will have a material adverse effect on the Company's
overall financial condition, liquidity or operations.
<PAGE>   34
                                                                              34


                                  APOGEE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (Dollars in thousands, except share and per share data)

Note 12 - Integra Division

      Subsequent to the sale of the outpatient business to PsychPartners and the
shut down of the Western Region outpatient operations, the Company will be
substantially smaller in terms of both assets and net revenue. The Company's
primary line of business will be managed behavioral healthcare through the
Integra division which offers full and shared risk arrangements to employers and
managed care organizations to perform behavioral health services on a capitated,
sub-capitated and case rate basis. In addition, Integra provides other
behavioral health services including: employee assistance programs, third party
clinical case management and claims adjudication.

      The following unaudited pro forma results of operations were prepared as
if the discontinuation and sale of the Company's operations other than Integra
were effective January 1, 1996. This pro forma financial information is
presented for informational purposes only, and is not necessarily indicative of
the results that would have actually occurred or the results that may occur in
the future.

<TABLE>
<CAPTION>
                                                   Years Ended December 31,
                                                ---------------------------
                                                   1997           1996
                                                   ----           ----
                                                 (Unaudited)   (Unaudited)
<S>                                                <C>         <C>    
                   Net revenues ................   $10,425     $ 6,232
                   Income from operations ......     1,224          19
</TABLE>

Note 13 - Commitments and Contingencies

Operating leases

      The Company leases office and patient care facilities as well as equipment
under noncancellable operating leases which require future minimum annual
rentals as follows:

<TABLE>
<CAPTION>
                                     Practices
                                    to be Sold     Integra       Other       Total
                                    ----------     -------       -----       -----
                     <S>                 <C>      <C>          <C>          <C>    
                    1998 ...........  $2,275       $  344       $  478       $3,097
                    1999 ...........   1,651          347          387        2,385
                    2000 ...........   1,196          231          341        1,768
                    2001 ...........     689                       249          938
                    2002 ...........     155                        47          202
                                      ------       ------       ------       ------
                                      $5,966       $  922       $1,502       $8,390
                                      ======       ======       ======       ======
</TABLE>

      Practices to be sold represent the lease obligations associated with the
clinics sold and, under the terms of the Agreement of Purchase and Sale, these
obligations will be assumed by PsychPartners. The other lease obligations
pertain to clinics shut down and exited. The Company is currently in the process
of negotiating subleases or buyouts for these locations.
<PAGE>   35
                                                                              35


                                  APOGEE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (Dollars in thousands, except share and per share data)

      Certain of the leases contain renewal options and escalation clauses which
require payments of additional rent to the extent of increases in related
operating costs. Rent expense was $3,695, $3,800 and $2,918 for the years ended
December 31, 1997, 1996 and 1995, respectively.

Capitated contracts

      Integra has a portfolio of agreements with managed care organizations
and corporations to provide inpatient and outpatient behavioral health services.
Revenues are primarily generated by capitated managed behavioral health and
employee assistance programs. The fees are defined by contract and are primarily
calculated on a fixed per-member per month fee. Revenues under these contracts
are recorded in the month for which the member is entitled to services.
Generally, these membership contracts are on a one to three year basis subject
to cancellation by either party without cause at any time with thirty to ninety
days written notice. Integra had approximately 600,000, 425,000 and 350,000
covered lives at December 31, 1997, 1996 and 1995, respectively. Integra's
revenues were approximately 15%, 8%, and 7% of the Company's net revenues in 
1997, 1996 and 1995, respectively.
                                                     
      The Company estimates the cost of providing services under these
agreements, including a reserve for services incurred, but not reported, based
upon authorized services, past claim payment experience for member groups and
other factors. The Company typically does not subcapitate the risk of providing
services under these contracts, but arranges discounted fee-for-service rates
with independent inpatient and outpatient behavioral health providers, which the
Company manages. Integra utilizes certain Apogee outpatient behavioral health
practices as part of the provider network. The Company anticipates that where
practicable, it will continue to utilize these outpatient behavioral health
practices as network providers at the existing or comparable rates which it
believes are at fair market. The Company believes there is a ready supply of
service providers in these markets, and accordingly, is not dependant on the
Apogee outpatient behavioral health practices for the delivery of service to
these contracts.

      Under capitated contracts, the Company is responsible for ensuring
appropriate access to care and bears the risk for utilization levels and pricing
of the cost of services performed under these contracts. The Company believes
the future revenues under these contracts will exceed the costs of services it
will be required to provide under the terms of the contracts. An underestimation
in the utilization or price of services for these contracts could result in
material losses to the Company. Historically, Integra has managed these
capitated contracts profitably. The Company maintains no re-insurance against
the risk of loss under these contracts, however the Company maintains
malpractice and errors and omission insurance coverage for all professionals and
facilities that perform services on behalf of the Company.

Medicare Review

      During 1996, certain Medicare Part B and related co-insurance billings
previously submitted by one of the Apogee subsidiaries were selected for review
by the Office of the Inspector General of the Department of Health and Human
Services ("OIG") and the Department of Justice ("DOJ"). Apogee has been informed
by the DOJ that the review is a civil matter relating to billings for services
to Medicare patients in long-term care facilities in the State of Florida during
the period from approximately January 1994 through mid-1995. During the pendency
of this review, the Medicare intermediary has suspended all Medicare payments to
this subsidiary. It is the Company's policy to comply with all federal, state
and local laws; including those applicable to the Medicare program. In December
1997, the Company and representatives from the United States Attorney's office
have reached an agreement in principle that would settle all of the OIG's civil
claims against the Company relating to this
<PAGE>   36
                                                                              36


                                  APOGEE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (Dollars in thousands, except share and per share data)

matter for a payment of $3,000. This tentative agreement is subject to the final
approval by the appropriate officers of the DOJ and OIG. Throughout this
process, the Company has been fully cooperating with the review and anticipates
reaching a definitive agreement in 1998. The Company has established a reserve
for the above amount, which is included with Accrued Expenses and Other Accrued
Liabilities, in the accompanying 1997 Consolidated Balance Sheet. The final
agreement, when reached, is not expected to materially differ from the terms
outlined above.

Note 14 - Accrued Expenses and Other Current Liabilities

<TABLE>
<CAPTION>
                                                            December 31,
                                                        ---------------------
                                                           1997        1996
                                                          ------       -----
<S>                                                       <C>         <C>   
      Clinician fees and medical claims................   $3,291      $3,019
      Acquisition related costs........................    5,006       4,896
      Salaries and vacation............................    1,507       1,989
      Restructuring costs..............................    3,218       2,703
      Long-term care reserves..........................    5,800       1,300
      Other............................................    2,608       2,860
                                                         -------     -------
                                                         $21,430     $16,767
                                                         =======     =======
</TABLE>

      Acquisition related costs pertain to consideration payable to former
owners of acquired businesses based upon the resolution of purchase price
contingencies.

Note 15 - Mandatorily Redeemable Preferred Stock

      The Company's Board of Directors may, without further action of the
Company's stockholders, direct the issuance of shares of redeemable preferred
stock. Satisfaction of dividend preferences on preferred stock would reduce the
amount of funds available for the payment of dividends on the Company's common
stock. Holders of preferred stock would be entitled to preference payments in
the event of any liquidation, dissolution or winding-up of the Company. At
December 31, 1997, 10,000 of such shares were authorized and none were issued.

Note 16 - Benefit Plans

   Stock Option Plan

      Effective April 19, 1994, the Company's Board of Directors ratified and
approved the establishment of an employee stock option plan ("the Plan") under
which options to purchase up to 400,000 shares of the Company's common stock may
be granted to employees, officers and directors. Each option granted under the
Plan must be exercised within a fixed period which may not exceed 10 years and
may not be for a price which is less than the fair market value on the date of
grant. Options granted vest over four years and, at December 31, 1997, the
weighted average remaining contractual life of the outstanding options was 8
years.

<PAGE>   37
                                                                              37


                                  APOGEE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (Dollars in thousands, except share and per share data)

      The following summarizes the activity of the stock option plan:

<TABLE>
<CAPTION>
                                                           Years Ended December 31,
                                                           ------------------------
                                                          1997         1996     1995
                                                          ----         ----     ----
Options:
<S>                                                     <C>          <C>      <C>   
     Outstanding at beginning of year................   157,170      83,875   62,225  
     Granted.........................................   101,000      104,350     39,750
     Exercised.......................................   -------          200        150
     Canceled........................................   106,220       30,855     17,950
                                                        -------      -------     ------
     Outstanding at end of year......................   151,950      157,170     83,875
                                                        =======      =======     ======

Option Price Per Share Ranges:
     Outstanding at beginning of year................  $4.25-        $12.25-     $12.25
                                                       $14.75        $14.75
     Granted.........................................  $3.25-$4.13   $4.25-$4.75 $12.25-
                                                                                 $14.75
     Exercised.......................................  ------        $4.75       $12.25
     Outstanding at end of year......................  $3.25-        $4.25-      $12.25-
                                                       $14.75        $14.75      $14.75
     Options exercisable at end of year..............  55,520        54,304      33,010
     Exercisable option price ranges.................  $3.25-        $4.25-      $12.25-
                                                       $14.75        $14.75      $14.75
     Options available for grant at end of year under
     the 1994 Stock Option Plan...................... 247,700       242,480      315,975
</TABLE>

      The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), but applies Accounting Principles Board Opinion No.
25 and related interpretations in accounting for the plan. The table below sets
forth the pro forma information as if the Company had adopted the compensation
recognition provisions of SFAS 123:

<TABLE>
<CAPTION>
                                     Years Ended December 31,
                                  ----------------------------
                                     1997       1996     1995
                                     ----       ----     ----
<S>                               <C>        <C>        <C>  
    Increase to:
        Net loss ..............   $   127    $   112    $  50
        Net loss per share ....   $   .01    $   .01       --
    Assumptions:
        Expected life (years) .       4.0        4.0      4.0
        Risk-free interest rate       6.5%       6.3%     5.1%
        Volatility ............      37.0%      40.0%    68.0%
        Dividend yield ........        N/A        N/A      N/A
</TABLE>

      The weighted average fair value of the stock options, calculated using the
Black-Scholes option pricing model, granted in 1997, 1996 and 1995 were $1.56,
$1.78 and $8.13, respectively.

   Retirement Plan

      The Company has a defined contribution 401(k) plan covering substantially
all of its employees. In general, eligible employees may contribute up to 6% of
their compensation to this plan. Effective July 1, 1995, employee contributions
are matched at the rate of 15% and Company matching contributions were $136,
$115 and $49 for 1997, 1996 and 1995, respectively.
<PAGE>   38
                                                                              38


                                  APOGEE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (Dollars in thousands, except share and per share data)

Note 17 - Related Party Transactions

      Commencing July 1993, the Company leased space from an affiliated entity.
The rent expense under this lease is equal to the amount paid by the affiliated
party under the leasehold agreement and was $129, $168 and $104 for 1997, 1996
and 1995, respectively. In addition, the Company provides services under an
Employee Assistance Plan to an affiliated entity. The revenues from this
contract were $526, $460 and $519 in 1997, 1996 and 1995, respectively.

      The Company has entered into an agreement with certain investment funds,
which are significant stockholders of the Company, to obtain their commitment to
guarantee additional financing. Under the terms of the agreement, these funds
will receive warrants to purchase 400,000 shares of Apogee common stock (See
Note 4).
<PAGE>   39
                                                                              39

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors of
Apogee, Inc.

In our opinion, the accompanying consolidated financial statements listed in the
index appearing under Item 14(a)(1) in page 62 present fairly, in all material
respects, the financial position of Apogee, Inc. and its subsidiaries at
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

As explained in Notes 3 and 11, in December 1997 the Company announced plans to
sell and divest its outpatient behavioral health practice business. Shareholder
approval of an agreement of purchase and sale authorizing the Company to sell
substantially all of its outpatient behavioral health practice business is
required. The Company has recorded a loss of $58.5 million for the write down of
assets, restructuring and other charges for the year ended December 31, 1997.
Management's plans with respect to the consummation of the proposed Sale are
described in Note 4.

Price Waterhouse LLP

Philadelphia, PA
March 23, 1998
<PAGE>   40
                                                                              40

                                   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.

Dated:  June 9, 1998

                              APOGEE, INC.


                     By     /s/ Lawrence M. Davies
                          ------------------------
                                Lawrence M. Davies
                                President,
                                Chief Operating Officer
                                and Director


<PAGE>   41
                              INDEX TO EXHIBITS                      PAGE
                              -----------------                      ----


               Exhibit 23    Consent of Independent Accountant