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



                                 FORM 10-K/A-2



[x]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED APRIL 30, 1997

                                       OR

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



                        Commission File Number:  0-16235



                           PHP HEALTHCARE CORPORATION
                           --------------------------
             (Exact name of registrant as specified in its charter)



         Delaware                                  54-1023168
         --------                                  ----------
(State or other jurisdiction of                  (I.R.S. Employer
incorporation or organization)                   Identification Number)



 11440 Commerce Park Drive
    Reston, Virginia                                 20191
    ----------------                                 -----
(Address of principal office)                      (zip code)



    (Registrant's Telephone Number, Including Area Code):  (703) 758-3600


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



Title of each class:                  Name of each exchange on which registered:
--------------------                  ------------------------------------------
COMMON STOCK, $0.01 PAR VALUE,        NEW YORK STOCK EXCHANGE
WITH ASSOCIATED PREFERRED STOCK 
PURCHASE RIGHTS



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 that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.   Yes  X      No
                                         ---          

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

The aggregate market value of the voting stock held by nonaffiliates of the
registrant (based on the closing price of such stock as reported on June 30,
1997 through the New York Stock Exchange) was approximately $128 million.  There
were 11,474,139 shares of common stock, $0.01 par value per share, outstanding
as of June 30, 1997.
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The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its annual report on Form 10-K by
restating such portions in their entirety as set forth in the pages attached
hereto:
    
Part I, Item 1 and Part II, Items 6, 7 and 8      

PART I

ITEM 1.  BUSINESS

PHP Healthcare Corporation was organized as a Delaware corporation in 1986 and
succeeded to the business of a predecessor corporation by merger in March 1986.
The predecessor of PHP Healthcare Corporation was originally organized under
Delaware law in 1976 and reincorporated under Missouri law in 1981. (Unless the
context requires otherwise, the terms "Company" and "PHP" include PHP Healthcare
Corporation, its subsidiaries and its predecessor corporation.)

Overview

PHP develops, consolidates and manages integrated health care delivery networks.
Through its networks of affiliated group and independent physician associations
("IPAs"), physicians, hospitals and ancillary health care providers, the Company
markets and provides primary and specialty health care services to third party
payors, self-insured employers and government agencies. As of April 30, 1997,
PHP operated in 75 markets in 26 states and was affiliated with approximately
4,000 physicians, including 500 in group practices and 3,500 through IPA
relationships, providing health care resulting in over two million patient
visits per year.

PHP is comprised of two divisions:  the Commercial Managed Care Division and the
Government Managed Care Division.  The Commercial Managed Care Division
currently services the needs of third party payors, self-insured employers and
providers through its integrated health care delivery networks and includes the
operations of its Medicaid health maintenance organizations ("HMOs"), D.C.
Chartered Health Plan, Inc. ("CHP") and Virginia Chartered Health Plan, Inc.
("VACHP").  The operations of its Government Managed Care Division include the
management of hospitals (both acute care and psychiatric), skilled nursing
facilities, staffing services, outpatient surgery, and primary care settings.

PHP was originally founded as a company focusing on the provision of health care
services to government agencies.  In 1992, however, the Company began applying
the knowledge, expertise and skills which it had acquired in managing health
care providers for government agencies to the commercial managed care market.
Since that time, PHP has expanded its Commercial Managed Care revenue from $1.3
million in 1992, representing 1% of total revenue to $135 million in 1997
representing 58% of total revenue. The Company currently manages 17 integrated
health care delivery networks on behalf of insurers, employers and providers and
has an additional two under development. The Company also manages inpatient and
outpatient health care services under 17 government contracts.

PHP affiliates with physicians, hospitals and other providers who are seeking
the expertise and resources necessary to function effectively in health care
markets which are evolving from fee-for-service to managed care payor systems.
Centered around the organization and management of primary care physicians, the
Company creates a network of associated providers such as hospitals,
specialists, ancillary services, and pharmacies. The Company manages the
operation of the network by centralizing administrative functions and providing
operating information systems to coordinate and integrate the delivery of heath
care through clinical protocols, utilization review, outcomes measurement and
financial reporting. PHP has historically established such integrated health
care delivery networks on behalf of third party payors and self-insured
employers. PHP is compensated for its services in a variety of methodologies
including cost plus fee, percentage of revenue, percentage of savings, fee-for-
service, capitation, or some combination of the foregoing.

In addition, PHP has begun to target less penetrated managed care markets which
have fragmented provider delivery systems by introducing provider sponsored
integrated health care delivery networks which involve equity participation by
certain affiliated providers. Under this arrangement, equity participation in
the network is generally shared among prominent hospitals, selected physicians
and PHP, with PHP retaining the role as the manager of the integrated health
care delivery network. In addition to its standard network management
responsibilities, PHP is also responsible for marketing the network as a package
of

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health care services as well as conducting all contract negotiations between the
network and its customers, such as HMOs, insurers, self-insured employers, and
government agencies.  This provider sponsored network structure provides
physicians with the opportunity to operate under a variety of payor arrangements
and provides hospitals additional market share through low capital intensive
affiliation with a sufficient number of networked physicians, while aligning the
incentives of all network participants through equity participation.  In
addition to its equity position for its participation and management of the
provider sponsored network, PHP typically receives an ongoing management fee
based on a percentage of revenues.

PHP offers medical group practices and independent physicians a range of
affiliation models.  These affiliations include the acquisition of physician
practice assets, equity participation in an enterprise or by affiliation on a
contractual basis.  Generally, the Company enters into a long-term practice
management agreement with the affiliated physicians that permits the Company to
manage physician practices while maintaining the clinical independence of the
physicians.  The Company also has typically entered into long-term contracts
with the affiliated hospitals and other ancillary providers which are part of
its integrated networks.

Despite widespread consolidation in the hospital and physician communities,
these markets remain highly fragmented.  In most markets, integrated heath care
delivery networks do not exist and the operational aspects of health care
delivery often lack the centralized management and scale efficiencies enjoyed by
large, well-managed service businesses.  In addition, the physician community
generally does not have access to capital or the integrated information systems
that are necessary to effectively enter into risk sharing arrangements and to
provide financial and clinical information desired by payors.  Likewise,
hospitals generally do not have such integrated information systems and are
generally unwilling to assume risk for utilization they do not control.  The
environment has become increasingly complex for both physicians and hospitals
with growing control by payors over practice patterns and patient flows and with
cost pressures that cause payors to seek greater operational efficiencies.
Additionally, the desire by payors to share financial risk with physicians and
hospitals has increased the need for management, information systems, capital
and scale.

Industry

The Health Care Financing Administration estimates that national health care
spending in 1995 was in excess of $1 trillion, with physicians controlling more
than 80% of the overall expenditures.  The American Medical Association reports
that approximately 565,000 physicians are actively involved in patient care in
the United States, with a growing number participating in multi-specialty or
single-specialty groups.  Expenditures directly attributable to physicians is
estimated at $200 billion.

Concerns over the cost of health care have resulted in the increasing prominence
of managed care.  As markets evolve from traditional fee-for-service medicine to
managed care, HMOs and health care providers confront market pressures to
provide high quality health care in a cost-effective manner. Employer groups
have begun to bargain collectively in an effort to reduce premiums and to bring
about greater accountability of HMOs and providers with respect to
accessibility, choice of provider, quality of care and outcome management and
other indicators of consumer satisfaction. The focus on cost-containment and
outcome management has placed small to mid-sized physician groups and solo
practices at a disadvantage because they typically have higher operating costs
and little purchasing power with suppliers, they often lack the capital to
purchase new technologies that can improve quality and reduce costs, and they do
not have the cost accounting and quality management networks necessary for entry
into sophisticated risk-sharing contracts with payors.

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Industry experts expect that the medical delivery system may evolve into a
system where the primary care physician manages and directs health care
expenditures.  As a result of these developments, primary care physicians have
increasingly become the conduit for the delivery of medical care by acting as
"case managers" and directing referrals to certain specialists, hospitals,
alternate-site facilities and diagnostic facilities.  By contracting directly
with payors, organizations that control primary care physicians are able to
reduce the cost of delivering medical services.

As a result of the trends toward increased HMO enrollment and physician
membership in group medical practices, health care providers have sought to
reorganize themselves into health care delivery networks that are better suited
to the managed care environment.  Physician groups and IPAs are joining with
hospitals, pharmacies and other institutional providers in various ways to
create vertically integrated delivery networks that provide medical and hospital
services ranging from community-based primary medical care to specialized
inpatient services.  These health care delivery networks agree with HMOs to
provide hospital and medical services to enrollees pursuant to full risk
contracts.  Under these contracts, providers assume the obligation to provide
both the professional and institutional components of covered health care
services to the HMO enrollees.

The Company believes many physicians are concluding that in order to compete
effectively in such an emerging environment, they must obtain control over the
delivery and financial impact of a broader range of health care services through
global capitation.  To this end, groups of independent physicians and medium to
large medical groups are taking steps to assume responsibility and risk for
health care services that they do not provide, such as hospitalization.
Physicians and other providers are increasingly abandoning traditional private
practice in favor of affiliations with larger organizations, such as the
Company, that offer skilled and innovative management, sophisticated information
systems and capital resources. Many payors and their intermediaries, including
governmental entities and HMOs, are increasingly looking to outside providers of
physician and hospital services to develop and maintain quality outcomes,
management programs and patient care data. While the acceptance of greater
responsibility and risk provides the opportunity to retain and enhance market
share and operate at a higher level of profitability, medical groups and
independent physicians are concluding that the acceptance of global capitation
carries with it significant requirements for infrastructure, information
systems, capital, network resources and financial and medical management. As a
result, providers are increasingly turning to organizations such as the Company
to provide the resources necessary to function effectively in a managed care
environment.

Strategy

The Company's strategy is to meet the needs of a changing health care market by
developing and managing integrated health care delivery networks on behalf of
providers, third party payors and self-insured employers which the Company
believes enables it to deliver high quality, cost effective medical services in
a managed care environment.  In essence, the Company serves as an outsourcing
option for both payors and providers who do not possess the network management
skills, capital and independence to develop and manage an integrated health care
delivery network. The key elements of this strategy include: (i) focus on
managed care; (ii) create and develop fully integrated health care delivery
networks; (iii) utilize information systems to enhance cost effectiveness and
clinical outcomes; (iv) focus on primary care physicians who represent the
initial point of access into an integrated health care delivery network; (v)
design patient oriented programs; and (vi) develop new markets through selective
acquisitions and joint ventures.

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Focus on Managed Care.  The Company designs physician and hospital networks in a
particular local market to meet the needs of HMOs and other managed care payors
in specified service areas, identifying and recruiting primary and specialty
care physicians and integrating such physicians with hospitals into a network
that provides comprehensive medical coverage to enrollees. The Company seeks to
benefit from the movement among employers and payors to reduce health care costs
and the trend toward prepaid managed health care. The Company believes that its
network structure and management techniques enable it to effectively contain
costs and negotiate favorable capitation and risk-sharing arrangements through
implementation of information networks, utilization and quality management
networks, referral procedures, risk management programs, and assistance with
physician credentialing and contracting with payors.

Create and Develop Fully Integrated Health Care Delivery Networks.  The Company
designs and develops provider networks and physician practice management
capabilities centered around the primary care provider. Each multi-specialty
provider network is designed to meet the specific medical needs of a targeted
community. The Company believes that these networks can (i) provide physicians
and hospitals with greater access to managed care contracts by facilitating
contractual relationships with multiple HMOs, (ii) establish a single point of
entry into an integrated heath care delivery network for HMOs and other payors,
and (iii) offer patients a comprehensive range of medical care in convenient
locations through primary and specialty providers conveniently located in target
markets.

Utilize Information Systems.  The Company's information systems enable
physicians, nurses, hospitals, insurance companies, administrators and others
involved in patient care to share information on a timely basis without
duplication. Information is collected on all aspects of each patient encounter
within the integrated health care delivery network, including measures
reflecting clinical outcomes, access, service availability, cost-efficiency, and
patient satisfaction. Physicians are directly assisted in the exam room with an
automated patient record that is electronically updated with progress notes and
other data, such as laboratory results. An outcomes tracking system provides
information on patient satisfaction, patient health status and ambulatory care
and hospital outcomes. The utilization review/case management system provides
critical information regarding the need for referrals and the management of high
cost episodes of care. Finally, a data warehouse/repository provides physicians
with a longitudinal medical record, containing complete medical records of all
patients. It provides administrators with complete clinical and financial
records of each encounter of every member of the integrated health care delivery
network, which allows both fixed and ad hoc reporting capabilities for comparing
physician performance within the network, as well as "benchmark" comparisons of
financial and clinical performance of the integrated health care delivery
network to other health care plans.

Focus on Primary Care Physicians.  The Company's strategy is to affiliate (on an
exclusive basis where appropriate) with primary care physicians which the
Company believes are increasingly the principal determinants of the location of
patient care and the amount and degree of ancillary services, including
referrals to specialists.  The primary care physician represents the initial
point of access into a fully integrated health care delivery network in which,
in many cases, the primary care physician is capable of providing similar levels
of quality of care for significantly less cost than specialist providers. PHP's
integrated health care delivery network models are based on a foundation of
primary care physicians and related care-givers who are employed or managed by
the Company, and who deliver care at Company-owned or managed primary care
facilities and offices. These centers provide laboratory, radiology and pharmacy
services in addition to primary care physician and nursing services. Purchasing,
billing, payroll and all administrative functions are performed and managed by
experienced executive and administrative personnel, freeing physicians and other
care-givers to devote their time to patient care.

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Design Patient Oriented Programs.  PHP's integrated health care delivery
networks are constructed with the recognition that the need and demand for
costly health care services are, to a large degree, generated by the decisions
and actions of patients.  PHP has the ability to manage patient-oriented
educational programs.  Disease-specific offerings, wellness training, prevention
programs, decision assist programs, after hours nurse triage and other
components are all integrated into the network.  The result is an integrated
health care delivery network that empowers patients to become knowledgeable and
active participants who, in partnership with their providers, optimize decisions
affecting resource utilization, as well as individual health and productivity.

Develop New Markets.  The Company's growth strategy is based on actively
developing existing and new markets, and making selective acquisitions and joint
ventures in such markets.  The Company develops existing markets by: (i)
capturing additional revenues from existing practices as patients migrate from
traditional fee-for-service plans to capitated managed care programs, (ii)
adding new physicians to existing networks and (iii) contracting with payors to
expand the number of capitated lives within existing physician practices. In
addition, the Company grows by developing new physician and hospital networks in
identified markets to serve managed care organizations, self-insured employers,
health care providers and provider networks and government agencies through
selected acquisitions and joint ventures and by serving as an integrator.

Development

PHP was founded in 1975. At that time, the Company's primary focus was the
provision of health care services to government agencies. The Company's
government contracts required the Company to manage health care providers in a
variety of delivery sites. These sites include hospitals (both acute care and
psychiatric), skilled nursing facilities, and, most significantly, primary care
settings.  In 1992, management realized that the knowledge, expertise and skills
which the Company had acquired in managing health care providers for government
agencies could also be applied to serve the commercial managed care market. At
the same time, management supplemented the Company's existing competencies with
additional skills and capabilities in order to take full advantage of the
opportunities available in commercial managed care. Over the past several years,
therefore, PHP invested resources to (i) acquire enhanced capabilities in
benefit design, network development and medical management, (ii) develop health
care information systems capable of supporting integrated health care delivery
networks, and (iii) employ and retain executives with experience in the
commercial managed care environment.

In 1993, PHP acquired EastWest Research Corporation, a consulting firm
specializing in the design, development, and maintenance of provider networks.
The EastWest acquisition provided the Company with the capabilities necessary to
identify specialists and inpatient facilities to complement PHP's primary care
centers and create a total care network within a community. A second key
acquisition was the acquisition in September 1993 of Health Cost Consultants,
Inc., a consulting firm engaged in the design and implementation of utilization
management systems, case management techniques, and medical protocols that can
be applied at point-of-service and from remote locations. This system permits
support personnel and primary care physicians to make the necessary decisions
for each patient on-site and to coordinate care with specialists and hospitals
directly. In addition, over the past two years the Company has actively
recruited and hired additional medical personnel with managed care expertise
including several former executive employees of Fortune 500 companies and large
insurance companies. With the addition of these resources, the Company believes
it has acquired the means necessary to integrate and manage health care
providers in networks suitable to meet the needs of commercial managed care
entities as well as third party payors. With this added expertise, PHP has
expanded its commercial business so that, in fiscal 1997, its commercial
business accounted for 58% of total revenues.

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In 1994, PHP established a Company-owned integrated health care delivery network
to provide services to beneficiaries of CHP, the Company's Medicaid HMO in the
District of Columbia, and announced the formation of a limited liability company
with St. Vincent's Health Services Corporation that has established and manages
an integrated health care delivery network in Fairfield County, Connecticut. The
Company also incorporated VACHP in the Commonwealth of Virginia and received a
license from the Commonwealth's Bureau of Insurance to operate an HMO in August
of 1995. Initial enrollment began in Richmond and the Tidewater area in October
1995, and currently there are 14,500 enrollee members. The Company has modeled
VACHP on CHP. VACHP is supported, pursuant to a management contract, by the
corporate services of CHP which provides the necessary management functions to
develop and manage an integrated health care delivery network for VACHP. In
January 1996, the Company sold a 30% interest in VACHP to University Health
Services, Inc., a non-stock corporation created by Virginia Commonwealth
University.

Operations

Until fiscal 1994, PHP operated almost exclusively as a provider of health care
services to federal, state and local government agencies. During the past four
fiscal years, however, the Company has invested significant resources to refocus
its business from that of a government contractor to that of a full service
managed care company. To better serve the needs of the commercial and government
health care marketplace, the Company has realigned its operations into two
related but distinct divisions: Commercial Managed Care Division and Government
Managed Care Division. The Commercial Managed Care Division currently services
the needs of third party payors and self-insured employers through its
integrated health care delivery networks and includes the operations of its
Medicaid HMOs, CHP and VACHP. The operations of the Government Managed Care
Division reflect the Company's historical roots of providing customized
solutions to meet the health care service needs of government agencies.

Commercial Managed Care

Blue Cross and Blue Shield of New Jersey.  In March 1994, PHP entered into an
agreement with Medigroup, Inc., a wholly owned subsidiary of Blue Cross and Blue
Shield of New Jersey, Inc. ("BCBSNJ") to provide ten complete integrated health
care delivery networks for beneficiaries throughout the State of New Jersey.
Under this contract, PHP designed, built and managed ten family-health-center-
based integrated health care delivery networks throughout New Jersey. As part of
the management agreement, PHP recruited physicians and other center staff,
developed an integrated referral network of medical and surgical specialists,
and designed the utilization, case management and quality assurance systems.

In December, 1996, PHP entered into an agreement to purchase from BCBSNJ ten
primary care facilities located throughout New Jersey. Closing on this
transaction occurred on February 28, 1997. The health centers serve as the
cornerstone of a provider sponsored integrated health care delivery network
operated on a non-exclusive basis for BCBSNJ, and other third party payors,
including HMOs. These networks resemble the networks managed by PHP in
Connecticut and Georgia, which align the Company with local hospitals and
physician partners.

Under the purchase agreement, the six centers owned by BCBSNJ were acquired by a
real estate investment trust subsidiary in which PHP owns a minority interest.
These six centers, as well as the

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other four centers leased by BCBSNJ, were leased by PHP.  In addition, the
physicians employed at the health centers were employed by a professional
medical group affiliated with PHP.  Also, PHP and BCBSNJ entered into a network
provider agreement pursuant to which PHP arranges for the provision of certain
health care services to enrolled BCBSNJ beneficiaries through global capitation
based on market rates.  Under the network provider agreement, BCBSNJ guarantees
that the aggregate global capitation payments from BCBSNJ to PHP will be (i) at
least $29 million for the year ending June 30, 1997, (ii) at least $21 million
for the year ending June 30, 1998, and (iii) at least $15 million for the year
ending June 30, 1999, subject to certain adjustments. The health centers
currently provide health care services to approximately 30,000 BCBSNJ
beneficiaries.

Connecticut Health Enterprises.  In 1995, PHP entered into a venture with St.
Vincent's Health Services, Inc., an affiliate of the Daughters of Charity
National Health System East, Inc. ("Daughters of Charity") to establish and
manage Connecticut Health Enterprises, L.L.C. ("Connecticut Health
Enterprises"), an integrated health care delivery network being established in
Fairfield County, Connecticut.  Connecticut Health Enterprises is an alliance of
Fairfield County physicians, PHP, St. Vincent's Medical Center, St. Joseph's
Medical Center, and other hospitals and ancillary providers.  Connecticut Health
Enterprises is jointly owned by PHP and St. Vincent's Medical Center, and has
been initially funded with $20 million in capital from the Daughters of Charity.
The agreement grants to PHP the exclusive right to develop and manage integrated
health care delivery networks in all other regions of the state of Connecticut
with St. Vincent's and the Daughters of Charity. PHP has entered into several
third party payor contracts, including with Oxford Health Plan, a national HMO
based in Norwalk, CIGNA and Physician Health Services. The Daughters of Charity
is the largest not-for-profit health network in the United States and is third
only to Columbia/HCA Healthcare Corporation and Tenet Healthcare in the number
of hospital beds it operates.

Connecticut Health Enterprises has recently expanded its network of
participating hospitals, physicians and payors. In January 1997, Connecticut
Health Enterprises entered into a joint venture with Stamford Health Systems,
Inc. to establish and manage Stamford Health Enterprise, L.L.C. ("SHE"), an
integrated health care delivery network in Stamford, Connecticut. SHE will be
jointly owned by Stamford Health Systems, Inc. (70%) and Connecticut Health
Enterprises (30%). In connection with the formation of SHE, Stamford Health
System acquired an interest in Connecticut Health Enterprises, which is jointly
owned by PHP (30%), St. Vincent's (30%), the Daughters of Charity (35%), and
Stamford Health Systems (5%). As a result of these arrangements, Connecticut
Health Enterprises' physician network has grown to more than 375 affiliated
physicians, and its hospital providers will include St. Vincent's Medical
Center, St. Joseph's Medical Center and Stamford Hospital.

Georgia Health Enterprise.  On April 17, 1996, PHP executed definitive
agreements with St. Mary's Health Care System, Inc., of Athens, Georgia, and
their subsidiaries and the parties have fully capitalized a $7 million network
for Northeast Georgia.  PHP and St. Mary's have formed a limited liability
company called the Georgia Health Enterprise, which develops markets and manages
integrated health care delivery networks to HMOs, insurers, government agencies
and large employers within the region.  The 16-county region served by the
Georgia Health Enterprise includes a population of approximately 200,000
spending about $540 million annually on health care.  PHP receives a management
fee of 2.5% of gross revenues and maintain a one-third equity position.

Corporate Health Centers.  The Company has introduced key elements of its
integrated health care delivery network to self-insured employers through its
contracts to deliver employer-sponsored health care at primary care facilities
developed and operated by PHP. The Company's corporate health center contracts
generally provide for PHP to design, construct, equip and operate the centers.
In late 1992, PHP

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commenced operations on two contracts at two assembly facilities to provide
occupational health care services for Chrysler Corporation employees. In June
1993, the Company opened two family practice centers in the Tampa/Clearwater,
Florida service area for GTE Corporation ("GTE"), and one family health venture
for Bethlehem Steel Corporation ("Bethlehem") near its Pennsylvania
headquarters. The GTE centers provide primary medical care to approximately
45,000 GTE employees, retirees and their families and the Bethlehem facility
serves approximately 37,000 Bethlehem employees, retirees and their families. In
addition, the Company has developed a network of area medical and surgical
specialists to assist the other GTE health care professionals in providing
comprehensive health care services to the GTE beneficiaries. In February 1995,
PHP commenced operations of a family health center for Northwestern Steel & Wire
Company ("Northwestern") providing medical services for approximately 10,000
Northwestern employees, retirees and dependents in Sterling, Illinois. PHP also
developed an outside provider network of medical and surgical specialists to
complement the primary care services offered in the center. The Company's
corporate health center contracts provide for payment based on a cost-
reimbursement-plus-fixed-fee, or fixed-rate per labor hour basis and generally
contain terms ranging from three to five years. The initial term of the GTE
contract expired on December 31, 1995 and is operating on a month-to-month basis
while a proposed renewal of the agreement is under discussion.

D.C. Chartered Health Plan, Inc. CHP was formed in August 1988 and was acquired
by PHP in August 1993.  CHP was a pioneer in the development of managed health
care for Medicaid beneficiaries receiving Aid to Families with Dependent
Children ("AFDC").  Currently, approximately 22,000 AFDC recipients and
approximately 1,000 commercial employees and their dependents are enrolled in
CHP.  The District of Columbia first started providing managed care for Medicaid
beneficiaries in 1988.  CHP was one of the first to offer managed care to
Medicaid beneficiaries in the District.  Approximately 44,000 Medicaid
beneficiaries are currently enrolled in managed care plans (over 50% of whom are
CHP members).

Each member enrolled in CHP is assigned a primary care physician. CHP has over
650 physicians under contract, including 58 primary care physicians (eight of
whom exclusively support CHP). CHP's members receive prescriptions, health
education, nutrition counseling, transportation to and from appointments, and,
when necessary, referrals to specialists and hospital services. Following CHP's
acquisition by PHP, the Company installed key elements of its integrated health
care delivery network to support the health plan, including network development,
utilization review and quality assurance services. As PHP's integrated health
care delivery networks continued to evolve, additional capabilities have been
implemented at CHP, including the Company's information systems. In March 1995,
PHP opened a primary care health center in the District of Columbia. The
Chartered Family Health Center ("Health Center") is modeled on PHP's integrated
health care delivery network model. CHP also contracts with nine D.C. hospitals
which are included in the network. The Health Center has a full-time staff of
board certified family, pediatric, obstetrics/gynecology and internal medicine
physicians. CHP's staff also includes nurses, radiology and laboratory
technicians, pharmacists and medical assistants.

Under a provider agreement with the D.C. Department of Human Services (the
"Department"), CHP receives a monthly fixed, per capita fee divided between a
risk and non-risk portion for services provided to AFDC and AFDC-related
Medicaid enrollees. Under the agreement, the capitated fee is allocated to a
non-risk portion covering physician, outpatient, and other services and a risk
portion covering inpatient hospital services. At the end of each contract
period, for the non-risk portion, CHP must provide an accounting of its costs
and services to enable the Department to determine the final amount due to CHP
or the Department under the agreement. The non-risk portion of the

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capitation fee may not exceed the federal fee-for-service upper payment limit
for covered Medicaid services. CHP assumes full financial risk for inpatient
hospital services and assumes all gains or losses from the provision of such
services. The agreement requires CHP to maintain an escrow account in an amount
based on its estimated expenditures, which the Department may use to recover
capitation payments and the cost of care for enrollees in the event of a
default. The Department reserves the right to terminate the agreement if a
default occurs. The agreement is subject to annual renewal.

Prior to April 1996, the terms of the Company's contracts with the Department
provided that the final settlements would be on a non-risk basis, calculated in
part on a cost-based methodology. However, in April 1996, the United States
Congress enacted legislation which required these contracts to be settled
retroactively on a capitated-rate-per-enrollee or "risk" basis for the period
October 1, 1991 through October 1, 1999. Following the enactment of this
legislation, the Company entered into negotiations with the District of Columbia
in an attempt to agree on the retroactive amounts due for the 1992 through 1994
contract periods. The Company and the District of Columbia were unable to agree
on the capitation rates to be applied to the Company's contract during this
period. The Company claimed that it was entitled to approximately $37.5 million
in additional capitation payments, based on the capitation rates set by
actuaries for the Department and the Health Care Financing Administration and
actually paid by the District of Columbia to other managed care organizations
during fiscal 1994. The District of Columbia, however, took the position that
the Company was entitled to use capitation rates based upon a retroactive cost
study completed in 1996. In February 1997, the Company and the District of
Columbia agreed to settle outstanding claims related to the 1992 to 1994
contract periods for $18.9 million. Although the settlement agreement was signed
by representatives of the Company and the Commission on Health Care Finance, the
District of Columbia's Chief Financial Officer ("DCCFO") has refused to approve
the payment. Instead, the DCCFO offered the Company $6.2 million, which is
substantially less than the amount to which the Company believes it is entitled.
As a result of the impasse, for the third quarter of fiscal 1997, the Company
determined to recognize reserves of $9.8 million against its receivables from
the District of Columbia, principally related to services provided during the
1992 to 1994 contract periods. The Company intends to pursue vigorously all
remedies available to it in connection with this matter, including litigation.
However there can be no assurance that such remedies will be successful. The
Company does not believe the ultimate resolution of this matter will have a
material adverse effect on the Company's business, financial condition or
results of operations.

The District of Columbia is mandating Medicaid enrollees into HMOs effective
November 1, 1997. CHP has signed a contract with District of Columbia to provide
managed health care and to be the No. 1 default contractor under this program.
As the No. 1 default provider, two-thirds of the enrollees will be assigned to
CHP, if they do not select CHP or one of the three other HMOS providing care. On
July 29, 1997, the District of Columbia Financial Advisory Board announced that
this contract had been approved.

CHP's business strategy lies in its fundamental commitment to promoting access
and emphasizing prevention and health maintenance, as well as treatment.  CHP
focuses on increasing access to its services by (i) improving knowledge and
awareness of benefits, (ii) providing extensive wellness and preventative health
care services, and (iii) directly providing transportation to and from health
care appointments. Management believes that this commitment enhances CHP's
ability to control cost, and improves accountability within the network.

Virginia Chartered Health Plan, Inc.  PHP began operating VACHP in October of
1995 in the Richmond and Tidewater areas of Virginia. By joining with University
Health Services, the Medical College of Virginia hospitals and other network
hospitals, PHP provides its HMO beneficiaries with high quality, cost-effective
services.  VACHP is modeled after CHP and is supported by management services of
PHP and CHP to capitalize on their experience, management networks, data
information services and other resources.

Effective January 31, 1996, PHP completed the sale of a 30% interest in VACHP to
University Health Services, an affiliate of Medical College of Virginia, for $3
million.  In addition, the Company has completed an extensive provider network
agreement to utilize Medical College of Virginia hospitals and staff physicians
in patient care and medical management.  VACHP was originally

                                       10
<PAGE>
 
capitalized by PHP in October of 1995 for $3.7 million.  Total capitalization
following the sale to University Health Services remains at $3.7 million.

Strategic Alliance with HIP of New Jersey. On July 24, 1997, the Company
announced a strategic alliance with HIP of New Jersey. The Company will acquire
the assets of HIP of New Jersey's 18 health care centers and its ancillary
services, such as pharmacy and optical. The Company will provide and manage
health care services for HIP of New Jersey's 200,000 members through a 20-year
exclusive global capitation arrangement. These members will have access to a
consolidated network of more than 3,000 community physicians and an additional
10 health care centers in the Company's existing network. The consideration
payable for these transactions totals approximately $73 million. The Company
intends to finance this transaction through a combination of debt and equity.
Completion of the transaction is subject to, among other things, receipt of all
necessary consents and regulatory approvals. There can be no assurance that the
transaction will be completed.

Government Managed Care Division

PHP provides a wide variety of health care services under various contracts with
government agencies. Under its government contracts, the Company provides
managed care services in five service groups: (i) ambulatory care - outpatient
primary care for defined populations; (ii) medical staffing - the recruitment
and provision of qualified medical, nursing and mental health specialists and
technicians; (iii) mental health - inpatient and outpatient psychiatric services
for certain defined populations; (iv) long-term care - the management of skilled
and intermediate care nursing facilities; and (v) total managed care -
comprehensive health care programs for defined beneficiary populations. The
Company's government contracts are generally awarded for a base period of less
than one year, have two to four one-year renewals at the option of the
government agency and generally may be modified or terminated for the
convenience of the government agency at any time during the contract.

Ambulatory Care.  PHP provides managed outpatient primary care services for
various defined populations. Included in the Company's Ambulatory Care service
group are its PRIMUS and NAVCARE programs. PHP contracts with the U.S.
Departments of the Army, Navy and Air Force to provide managed outpatient health
care services to military dependents, retired military personnel and their
dependents, and in certain circumstances, active military personnel, as part of
the Army and Air Force PRIMUS programs and the Navy NAVCARE program. PHP
established the first PRIMUS center in 1985 and is a leading provider of these
services to the military. Pursuant to these contracts, the Company designs,
equips, staffs and manages primary care centers which provide a wide variety of
medical and pharmaceutical services to the eligible population. These services
include the provision of physicians, nurses, pharmacists and technical and
support staff. These services are generally provided in Company-owned and
Company-operated facilities consistent with the basic plan of the PRIMUS/NAVCARE
program. All of the Company's PRIMUS and NAVCARE centers meet the standards for
accreditation established for ambulatory care clinics by the Joint Commission on
Accreditation of Healthcare Organizations, an independent commission which
conducts voluntary accreditation programs. The centers provide various
preventive services, including physical examinations, pharmaceutical products,
orthopedic and other medical services, including minor surgery, for pediatric
and adult populations. The PRIMUS and NAVCARE centers are designed with
laboratory and radiology equipment on location and are open 365 days per year
with extended hours Monday through Friday. All military beneficiaries entitled
to receive care at military treatment facilities are eligible for care at the
PRIMUS and NAVCARE centers at no cost to them.  These types of contracts are
generally awarded on a unit-price and/or fixed fee basis. The units of service
upon which payments are based are outpatient visits, with the amount of the
contractual payment per visit varying depending on the type of service provided.
The fixed fee portion is generally a per month amount to cover basic operating
costs.

Also included in the Company's Ambulatory Care service group is the TRICARE
PRIME program.  TRICARE PRIME is a new managed care program involving the U.S.
Departments of the Army, Navy and Air Force.  The TRICARE PRIME program is a
pilot program started in the Tidewater area of Virginia and is designed to serve
the greater than 420,000 eligible military beneficiaries in that area.  PHP was
awarded a fixed unit-price subcontract effective October 1995; the primary
contractor is Sentara Health Systems.  The initial contract period was the year
ended in September 1996, with four one year options exercisable at the federal
government's discretion.  There are a total of nine facilities under the primary
contract with Sentara; of those, PHP operates five, four of which are owned by
the government and one of which is owned by the Company.  Under this
subcontract, PHP provides managed outpatient

                                       11
<PAGE>
 
health care services to military dependents, retired military personnel and
their dependents, and active military personnel.  Services are primarily
provided on an enrollment basis; however, non-enrollees may use the facilities
utilizing allotted "pool visits", if available.  The services that PHP provides
include, but are not limited to: primary care; coordination of specialty
referrals and hospitalization; emergency care; X-ray, laboratory and pharmacy
services; and, routine health care exams.  The facilities are open 365 days per
year, with extended hours Monday through Friday.

A new service offered to enrollees through the TRICARE PRIME program is the
Telephone Triage Service (TTS), through which nurses provide medical advice 24
hours per day, 365 days per year.  The TTS is the "gatekeeper" of this contract,
performing demand management and ensuring patients who do not need physician
services are provided self-care advice or are provided over the counter
medications at the clinic without seeing a physician.  In addition to medical
advice, the TTS also performs patient scheduling for all TRICARE PRIME clinics.

Medical Staffing. The military has turned to private sector contractors, such as
PHP, to provide medical staff and management support to military hospitals.
Through its national recruiting network and program staffing experience, PHP
recruits qualified medical, nursing and mental health specialists and
technicians to augment military health care staff on a long-term basis. PHP
currently provides staff to render social work services for 34 Army bases
located in over 19 states. PHP also provides physicians, dentists, pharmacists,
nurses, and other technical and health care professionals to render a variety of
health care services under a contract with the Department of Immigration Health
Services ("D.I.H.S."). This project commenced operations in fiscal year 1997 and
PHP is currently providing staff at 10 of the total 17 D.I.H.S. sites stipulated
in the contract. These types of contracts are generally awarded on a fixed-rate-
labor hour and cost reimbursement plus fee basis.

Mental Health. The Company staffs and manages inpatient and outpatient
psychiatric services for the Army at the William Beaumont Army Medical Center at
Fort Bliss, Texas.  These types of contracts are generally awarded on a fixed-
price or unit-price basis. For contracts awarded on a unit-price basis, the
payment is based upon inpatient beds per day.

Long-Term Care.  In late November 1996, PHP made the strategic decision to
terminate its long-term care line of business. Effective December 31, 1996, PHP
secured a release from a contract with the Alabama Department of Veteran Affairs
for the management of three skilled and intermediate nursing facilities. PHP
continues to operate a 220 bed skilled and intermediate care facility for
veterans under a contract with the South Carolina Department of Mental Health,
and three 150 bed skilled and intermediate care facilities for veterans under a
contract with the State Veterans Affairs Commission of Mississippi. These
contracts provide for payment based on inpatient beds per day. PHP is obligated
under the South Carolina contract until December 2000, and under the Mississippi
contract for up to another three years.

Total Managed Care.  PHP provides specialized comprehensive managed health care
programs for maximum, medium and minimum security correctional facilities.
Correctional facilities are complex and unique environments for delivering
medical and mental health care services. The Company incorporates into its
correctional facilities programs its understanding of how these facilities must
be managed and how security and other special issues affect program design and
administration. The Company was awarded a contract in July 1991 which was
completed on June 30, 1997, to provide such a program for the Arkansas
Department of Corrections. This unit-price contract provided for payments based
on the average number of inmates per month.

                                       12
<PAGE>
 
In July 1996 the Company began operating a similar contract with the Maryland
Department of Corrections with an initial term of one year and two one-year
options.

Government Contract Backlog. As of April 30, 1997 and 1996, the approximate
aggregate amounts of the remaining portions of the then current terms of the
Company's government contracts and all related renewal options were $276 million
and $411 million, respectively. Of the $276 million for the period ended April
30, 1997, $76 million represents the portion reasonably expected to be completed
within the current fiscal year. The $276 million includes $206 million of
currently unexercised renewal options. The Company has included the renewal
options because the Company's experience has been that the government usually
awards a health services contract for a base period of up to one year with two
to four annual renewal options, and that the option periods are very typically
exercised. Consequently, the full contract value is the best measure of the
Company's future book of business. There can be no assurance that these
contracts will not be terminated early by the government or that the renewal
options under any of the Company's government contracts will be exercised. The
realization of these potential revenues is dependent upon the ordering by the
government entity of the estimated contract quantities and a variety of contract
and other contingencies, many of which are beyond the control of the Company.
See "--Government Contracting Regulation." With respect to the Company's
Commercial Managed Care Division, due to the nature of these contracts, the
Company does not believe that backlog is a meaningful indicator of its future
results."

Government Contracting Regulation

During the fiscal year ended April 30, 1997, approximately 42% of the Company's
revenues were derived from 28 separate contracts and subcontracts with various
government agencies to provide health care to various government sponsored
populations.  During the same period, the Company received approximately 21% of
its total revenues under 20 contracts and subcontracts with agencies of the
federal government.  The approximate percentages of government contract revenues
realized by the Company during fiscal 1996 by type of revenue were as follows:
unit-price contracts, 72.2%; fixed-price contracts, 22.8%; fixed-rate-labor hour
contracts, 4.3%; and cost-reimbursement-plus-fee contracts, 0.7%. The Company's
contracts with government agencies generally provide for payment by the agencies
on a monthly or bi-weekly basis and do not involve reimbursement to the Company
under the Medicare or Medicaid programs or direct payment to the Company by
patients.

The Company's contracts with government agencies are obtained primarily through
the competitive bidding process as governed by applicable federal and state
statutes and regulations. Contracts are generally awarded for a base period of
less than one year and corresponding with the government agency's fiscal year,
having two to four one-year renewals at the option of the government agency, and
are subject to appropriation of funds annually by the appropriate legislative
body. There is, therefore, no assurance that the Company will be able to retain
its contracts or, if retained, that all of such contracts will be fully funded.

Under the competitive bidding process, unsuccessful bidders may protest the
award of a contract to another bidder in accordance with a government appeals
process if they believe the award was improper. Such protests could result in
the rebidding, delay or loss of contracts.

The Company generally performs services under fixed-price, unit-price, cost-
reimbursement-plus-fee and fixed-rate-labor hour contracts. Under fixed-price
contracts, the government agency pays the Company an agreed upon price for
services rendered. Under unit-price contracts, the Company receives a fixed
dollar amount per unit of service provided, intended to cover direct costs,
related indirect costs and fee. Under cost-reimbursement-plus-fee contracts, the
government agency reimburses the Company for allowable costs incurred and pays
the Company a negotiated fixed fee, up to contract funding amounts. Under fixed-
rate-labor hour contracts, the Company receives a fixed hourly rate intended to
cover salary costs, other direct costs, related indirect costs and fee.

                                       13
<PAGE>
 
Under fixed-price, unit-price and fixed-rate-labor hour contracts, the Company
realizes benefits or detriments resulting from unanticipated cost variances.
Under unit-price contracts, the Company also realizes benefits or detriments
occasioned by unanticipated variances in unit quantities and resulting revenues.

Under the Truth in Negotiations Act, the U.S. Government is entitled for three
years after final payment on certain negotiated contracts or contract
modifications to examine all of the Company's cost records with respect to such
contracts to determine whether the Company furnished complete, accurate, and
current cost or pricing data to the Government in connection with the
negotiation of the price of the contract or modification. The U.S. Government
also has the right after final payment to seek a downward adjustment to the
price of a contract or modification if it determines that the contractor failed
to disclose complete, accurate, and current data.

Section 31 of the Federal Acquisition Regulation governs the allowability of
costs incurred by the Company in the performance of U.S. Government contracts to
the extent that such costs are included in its proposals or are allocated to its
U.S. Government contracts during performance of those contracts. In the opinion
of management of the Company, costs proposed, incurred, and billed to the U.S.
Government in connection with the Company's performance of its U.S. Government
contracts complied with Section 31 of the Federal Acquisition Regulation in all
material respects.

The Company's U.S. Government contracts are subject to possible termination,
reduction or modification as a result of changes to or reductions in the
Government's requirements or budgetary resources. Contracts may be modified or
terminated for the convenience of the U.S. Government at any time during the
term of the contract. If a contract is modified, the price of the contract would
be equitably adjusted to reflect the change or reduction. If a contract were to
be terminated for convenience, the Company would be reimbursed for its
allocable, reasonable and allowable costs incurred through the date of
termination and would be paid a reasonable profit or fee on the work actually
performed. If it is determined that the terminated contract would have been in a
loss position if fully performed, a "loss ratio" will be applied to reduce the
Company's recovery of incurred costs so that the recovery will reflect a
proportionate amount of that anticipated loss. In either event, the Company
would be entitled to recover the costs incurred directly as a result of the
termination of the contracts, such as filing a settlement proposal.

The Company believes that it has complied in all material respects with
applicable government requirements. In certain circumstances in which a
contractor has not complied with the terms of a contract or with regulations or
statutes, the contractor may be debarred or suspended from obtaining future
contracts for a specified period of time.  Moreover, pursuant to recent statutes
and regulations, a suspension or debarment from obtaining future federal
contracts will also result in a reciprocal suspension or debarment from
participation in non-procurement federal programs, such as Medicare, Medicaid,
and other federally-funded grant programs.  Any such suspension or debarment of
the Company could have a material adverse effect upon the Company's business.

State governments with which the Company contracts have statutory or regulatory
provisions relating to government contracting which are generally comparable to
those of the U.S. Government.

Limitations on Reimbursement

A major portion of the Company's revenues is derived from third party payors,
such as governmental programs, private insurance plans and managed care
organizations. In particular, for the year ended April 30, 1997, approximately
20% of the Company's revenues were derived from the Medicaid

                                       14
<PAGE>
 
program, a cooperative state-federal program for medical assistance to the
needy. Reflecting a trend in the health care industry, third party payors
increasingly are negotiating with health care providers such as the Company
concerning the prices charged for medical services, with the goal of lowering
reimbursement and utilization rates. There can be no assurance that any future
reduction in reimbursement rates would be offset through enhanced operating
efficiencies, or that any such enhancement of operating efficiencies would
occur. Third party payors may also deny reimbursement if they determine that a
treatment was not performed in accordance with the cost-effective treatment
methods established by such payors, was experimental, or for other reasons. In
addition, funding for governmental programs, such as Medicaid, is under
increased scrutiny.

Congress continues to make cutbacks in the Medicare and Medicaid programs
following its failure to enact a budget reconciliation bill providing for
reductions in the rate of spending increases in the Medicare and Medicaid
programs. These cutbacks, budgetary constraints at both the federal and state
levels, and increasing public and private sector pressures to contain health
care costs are likely to continue to lead to significant reductions in
government and other third party reimbursements for medical charges which could
adversely affect the Company.

Government Regulation

Regulatory Environment.  Virtually all aspects of the health care industry are
subject to extensive federal and state regulation relating to licensure, conduct
of operations, acquisition of existing facilities, additions of new services,
reimbursements for services rendered and prices for services. The Company has
attempted to structure its operations so as to comply with these regulations.
However, there can be no assurance that regulatory authorities will not
challenge the conduct or structure of the Company's operations in the future. In
addition, changes in applicable laws and regulations or new interpretations of
existing laws and regulations could have an adverse effect on licensure, conduct
of operations, acquisition of existing facilities, additions of new services,
reimbursements for services rendered or prices for services. Also, the failure
to maintain or renew any required regulatory approvals or licenses could prevent
the Company from offering existing services or from obtaining reimbursement.

Because of the uniqueness of the structure of the relationships between the
Company and  its affiliated physicians, hospitals and ancillary health care
providers, there can be no assurance that review of the Company's business by
courts or health care, tax, labor or other regulatory authorities will not
result in determinations that could adversely affect the operations of the
Company, or that the health care regulatory environment will not change in a
manner that would restrict the Company's existing operations or limit the
expansion of the Company's business or otherwise adversely affect the Company.

Fraud and Abuse Statute.  Anti-fraud and abuse amendments codified under the
Social Security Act of 1935, as amended (the "Fraud and Abuse Statute"),
prohibit certain business practices and relationships that may affect the
provision and cost of health care services reimbursable under the Medicare and
Medicaid programs.  These amendments include anti-kickback provisions
prohibiting the solicitation, payment, receipt or offering of any direct or
indirect remuneration for the referral of Medicare or Medicaid patients or for
the ordering or providing of Medicare or Medicaid covered services, items or
equipment.  The federal courts have held that an arrangement violates the Fraud
and Abuse Statute if one purpose of a transaction which results in the payment
of remuneration (including the distribution of profits) is to induce the
referral of patients covered by the Medicare and Medicaid programs, even if
another purpose of the payment is to compensate an individual for professional
services.  Violations of this statute can result in criminal penalties, civil
monetary penalties and exclusion from the Medicare and Medicaid programs.  In an
attempt to clarify which arrangements are exempt from program exclusion, civil
sanctions or criminal

                                       15
<PAGE>
 
prosecution under the Fraud and Abuse Statute, the Department of Health and
Human Services published in 1991 a set of "safe harbor" regulations outlining
practices that are deemed not to violate the statute.  Although compliance with
one of the safe harbors assures participants that an arrangement does not
violate the statute, failure of an arrangement to fit within a safe harbor
provision does not necessarily mean that arrangement violates the statute.

Although the Company seeks to arrange its business relationships so as to comply
with these laws, there can be no assurance that regulatory authorities might not
assert a contrary position or that new laws, or the interpretation of existing
laws, might not adversely affect relationships established by the Company with
physicians or other health care providers or result in the imposition of
penalties or sanctions on the Company or its facilities.

Federal and State Anti-Referral Laws.  Section 1877 of the Social Security Act
(the "Stark Law") restricts physician referrals to certain providers, including
hospitals, with which they have a financial arrangement.  Unless excepted, a
physician may not make a referral of a Medicaid or Medicare patient to any
clinical laboratory services provider with whom he or she has a financial
relationship, and any provider who accepts such a referral may not bill for the
service provided pursuant to the referral. Sanctions for violation of the Stark
Law include civil money penalties and exclusion from the Medicare and Medicaid
programs. Unlike the Fraud and Abuse Statute in which an activity may fall
outside a safe harbor and still not violate the law, a referral under the Stark
Law that does not fall within an exception is strictly prohibited. In August
1993, Congress passed legislation ("Stark II") that, effective January 1, 1995,
expanded the self-referral ban to include a number of health care services
provided by entities with which the physicians may have an ownership interest or
a financial relationship. The laws of some states also prohibit physicians from
splitting fees with non-physicians and prohibit non-physician entities from
practicing medicine. These laws vary from state to state, have been subject to
limited judicial and regulatory interpretation, and are enforced by the courts
and by regulatory authorities with broad discretion. Although the Company seeks
to structure its operations and arrange its business relationships so as to
comply with these laws, there can be no assurance that the Company's present or
future operations will not be successfully challenged as violating, or
determined to have violated, such laws. Any such result could have an adverse
effect on the Company.

Applicability of Insurance Regulations.  The laws in most states also regulate
the business of insurance and the operation of HMOs. Many states also regulate
the establishment and operation of networks of health care providers. The HMO
industry is highly regulated at the state level and is highly competitive.
Although the Company seeks to structure its operations so as to comply with
these laws in the states in which it does business, there can be no assurance
that future interpretations of insurance laws and health care network laws by
the regulatory authorities in these states or in the states into which the
Company may expand will not require licensure or a restructuring of some or all
of the Company's operations or joint ventures. Additionally, the HMO industry
has been subject to numerous legislative initiatives within the past several
years. Certain aspects of health care reform legislation may have direct or
indirect consequences for the HMO industry. There can be no assurance that
developments in any of these areas will not have an adverse effect on the HMOs
in which the Company has ownership interests or other financial involvement.

The Company's Medicaid HMO in the District of Columbia is subject to the
licensure and other regulatory requirements set forth in the District of
Columbia's Health Maintenance Organization Act of 1996 (the "Act"). The Act
became effective on April 9, 1997.

                                       16
<PAGE>
 
Pursuant to the Act, the Company is required to apply for licensure as an HMO in
the near future. The Company is currently preparing such licensure application
for submission. While the Company expects that its Medicaid HMO will be granted
a license to operate as an HMO in the District of Columbia, no assurance can be
given that such license will be granted or that future HMO legislation or
regulation in the District of Columbia or in other states will not have an
adverse effect on the Company's business, financial condition or results of
operation. The District of Columbia has not adopted final regulations
implementing the Act, and, therefore, no assurance can be given as to the
effect, if any, such regulations may have on the Company's business or
operations. The Company's inability to obtain a license to operate as an HMO in
the District for any reason could have an adverse effect on the Company.

Antitrust Laws.  The health care industry is receiving increased scrutiny under
antitrust laws as the integration and consolidation of health care delivery
increases and affects competition.  The current structure of the Company's
integrated health care delivery networks, and its participants may be subject to
a range of antitrust laws which prohibit anti-competitive conduct, including
price fixing, concerted refusals to deal and division of market.  The Company
intends to comply with such state and federal laws as may affect the development
of its integrated health care delivery networks, but there can be no assurance
that a review of the Company's business by courts or regulatory authorities will
not result in a determination that could have an adverse effect on the Company's
operations or require the Company to restructure its operations.

Federal and State Investigations.  As part of the pervasive regulation of the
health care industry by federal and state governments, these governments have
begun intensive investigations and audits of health care providers to determine
whether the providers are overcharging on medical services and procedures for
Medicare and Medicaid patients. Recently, Congress, as part of the Health
Insurance Portability and Accountability Act of 1996, significantly expanded the
funding for such investigations. In cases in which the overcharging is deemed
intentional and meets other criteria, the federal or state government may seek
criminal, civil, or administrative sanctions against health care providers. This
could result in exclusion from the Medicare and Medicaid programs and, under the
reciprocity provisions discussed above, could result in suspension or debarment
from government contracts. Any such exclusion of the Company could have a
material adverse effect upon the Company's business.

In addition, private individuals have been allowed to bring whistleblower suits,
known as qui tam actions, if they believe a provider has committed fraud in
Medicare or Medicaid programs, or in providing medical services under a
government contract.  Finally, private medical insurance companies and other
private payors have begun to investigate and audit health care providers.  These
private payors have, on occasion, filed RICO and common law actions if they
believe the provider has overcharged or mischarged them for medical services to
covered individuals.

Uncertainty Related to Health Care Reform.  Political, economic and regulatory
influences are subjecting the health care industry in the United States to
fundamental change.  Although Congress has failed to pass comprehensive health
care reform legislation thus far, there are currently numerous initiatives on
the federal and state levels for comprehensive reforms affecting the payment for
and availability of health care services, including a number of proposals that
would significantly limit reimbursement under Medicare and Medicaid. It is not
clear at this time what proposals, if any, will be adopted or, if adopted, what
effect such proposals would have on the Company's business. Aspects of certain
of these health care proposals, such as cutbacks in the Medicare and Medicaid
programs, containment of health care costs on an interim basis by means that
could include a short-term freeze on prices charged by health care providers,
and permitting greater state flexibility in the administration of Medicaid,
could adversely affect the Company. There can be no assurance that currently
proposed or future health care legislation or other

                                       17
<PAGE>
 
changes in the administration or interpretation of governmental health care
programs will not have an adverse effect on the Company or that payments under
governmental programs will remain at levels comparable to present levels or will
be sufficient to cover the costs allocable to patients eligible for
reimbursement pursuant to such programs. Concerns about the potential effects of
the proposed reform measures has contributed to the volatility of prices of
securities of companies in health care and related industries, and may similarly
affect the price of the Company's Common Stock in the future.

Competition

The Company has numerous competitors who compete with the Company for contracts
to provide health care services to federal, state and local government agencies
and to employers and others in the private sector. The competition for a
particular contract may consist of national, regional and/or local providers,
depending on the type of health care services involved. A number of these firms
are larger and have greater financial resources and larger technical staffs than
the Company. Federal, state and local government agencies also can be considered
to be in competition with the Company, in that they may provide services of a
similar nature to those provided by the Company. It is not possible to predict
the extent of competition which present or future activities of the Company will
encounter because of changing competitive conditions, government requirements,
government budgeting, technological developments and other factors.

Insurance

The Company maintains property, general liability and medical malpractice
insurance in amounts, and with coverages and deductibles, which are deemed
appropriate by management, based upon historical claims, industry standards and
the nature and risks of its business.  The cost and availability of such
insurance coverage has varied widely in recent years.  While the Company
believes its insurance policies are adequate in amount and coverage for its
current operations, there can be no assurance that the insurance coverage
maintained by the Company will be sufficient to cover all future claims or that
such insurance will continue to be available in adequate amounts or at
reasonable cost.

Employees

As of June 30, 1997, the Company, including its affiliated professional
entities, employed approximately 3,100 people approximately 2,000 of whom were
employed on a full-time equivalent basis. The Company considers its relations
with its employees to be excellent.

Risk Factors

In addition to the other information contained in this report or incorporated by
reference herein, the following factors should be considered carefully in
evaluating the Company and its business.

Government Regulation

Regulatory Environment.  Virtually all aspects of the health care industry are
subject to extensive federal and state regulation.  Various federal and state
laws, which are interpreted and enforced by courts

                                       18
<PAGE>
 
and regulatory authorities with broad discretion, regulate the relationships
between the Company and its affiliated physicians, hospitals and ancillary
health care providers.  These laws include (i) the anti-fraud and abuse
provisions of the Medicaid and Medicare statutes, which prohibit certain
business practices and relationships that may affect the provision and cost of
health care services reimbursable under the Medicaid and Medicare programs,
including the solicitation, payment, receipt or offering of any direct or
indirect remuneration for the referral of patients or for the provision of goods
or services; (ii) the anti-kickback provisions of the Social Security Act, which
restrict physician referrals to certain providers, including hospitals, with
which the physician has a financial arrangement; (iii) the laws of some states,
which prohibit physicians from splitting fees with non-physicians and prohibit
non-physician entities from engaging in the practice of medicine; (iv) the laws
of most states, which regulate the business of insurance and the operation of
HMOs; (v) federal antitrust laws, which prohibit anti-competitive conduct,
including price fixing, concerted refusals to deal and division of market; and
(vi) federal and state civil and criminal statutes which prohibit health care
providers from fraudulently or wrongfully overcharging governmental or other
third party payors for health care services. Violations of these laws could
result in substantial civil or criminal penalties, exclusion from the Medicaid
and Medicare programs, and suspension or debarment from obtaining government
contracts. Although the Company seeks to structure its operations and arrange
its business relationships so as to comply with all applicable legal
requirements (including the laws and regulations mentioned above), there can be
no assurance that, upon review of the Company's business, courts or regulatory
authorities might not adopt or assert a contrary position, that the Company's
present or future operations might not be successfully challenged as violating,
or determined to have violated, such legal requirements, or that new laws and
regulations, or the interpretation or existing laws and regulations, might not
require the Company to restructure some or all of its operations or adversely
effect the Company's business relationships. Any such result could have a
material adverse effect on the Company. See "Business--Government Regulation."

Federal and State Investigations.  As part of the pervasive regulation of the
health care industry by federal and state governments, these governments have
begun intensive investigations and audits of health care providers to determine
whether the providers are overcharging on medical services and procedures for
Medicare and Medicaid patients.  In cases in which the overcharging is deemed
intentional and meets other criteria, the federal or state government may seek
criminal, civil, or administrative sanctions against health care providers.
This could result in exclusion from the Medicare and Medicaid programs and could
result in suspension or debarment from government contracts.  Any such
exclusion, suspension or debarment of the Company could have a material adverse
effect upon the Company's business.  See "Business--Government Regulation."

Uncertainty Relating to Health Care Reform.  Political, economic and regulatory
influences are subjecting the health care industry in the United States to
fundamental change.  Although Congress has failed to pass comprehensive health
care reform legislation thus far, there are currently numerous initiatives on
the federal and state levels for comprehensive reforms affecting the payment for
and availability of health care services, including a number of proposals that
would significantly limit reimbursement under Medicare and Medicaid. It is not
clear at this time what proposals, if any, will be adopted or, if adopted, what
effect such proposals would have on the Company's business. There can be no
assurance that currently proposed or future health care legislation or other
changes in the administration or interpretation of governmental health care
programs will not have an adverse effect on the Company. See "Business--
Government Regulation."

                                       19
<PAGE>
 
Dependence on Certain Contracts

For the year ended April 30, 1997, 33.5% of the Company's revenues, and an even
greater percentage of the Company's gross profits, were derived from two
contracts.  These contracts are with the DCDHS (concerning the Company's
Medicaid HMO in the District of Columbia) and with Medigroup, Inc., a wholly
owned subsidiary of BCBSNJ (related to the provision of health care services to
BCBSNJ beneficiaries under a global capitation arrangement), and accounted for
19.8% and 13.7%, respectively, of the Company's revenues in fiscal 1997. The
loss of either of these contracts would have an adverse effect on the Company's
business, financial condition and results of operations.

The Company's accounts receivable as of April 30, 1997 include amounts due from
the DCDHS and the United States Department of Health and Human Services as
follows: approximately $10 million related to cost settlements for the three-
year contract period ended September 30, 1994, and the contract period beginning
October 1, 1994. The Company cannot predict when or whether these amounts will
be paid. The failure of the Company to collect these amounts would have an
adverse effect on the Company's business, financial condition and results of
operations.

For several years the Company engaged in on-going good faith discussions and
negotiations with the District regarding the amounts due for the 1992 through
1994 contract periods. In February 1997, that process ultimately resulted in an
agreement to settle these amounts due the Company for $18.9 million. The
agreement was signed and approved by two different departments in the District
government, but required approval for payment by the District's Chief Financial
Officer. In early March 1997, through comments in the local press, the Company
learned that the Chief Financial Officer was not going to approve payment.
Consequently, in light of the clearly prolonged timeframe to resolve the issues
surrounding payment of these receivables, and in particular to receive a formal
response from the District providing substantiation for the denial of payment,
the Company has determined to recognize reserves of $9.8 million against its
Medicaid receivables from the District of Columbia, principally relating to
services provided during the 1992 to 1994 contract periods. The Company remains
committed to pursuing its contractual rights for the amounts it is due from the
District.

Capitated Nature of Revenue

The Company provides a portion of its services on a capitated basis, and the
Company intends to negotiate additional capitated agreements with managed care
organizations or assume such contracts in connection with its affiliation with
primary care practices.  Such contracts, typically referred to as "risk sharing"
contracts, are arrangements between the Company and a managed care organization
under which the Company agrees to provide certain health care services, as
required by members of such managed care organization, in exchange for a fixed
fee per member per month. Under these contracts, the Company bears the risk that
the cost of the services it is required to provide will exceed the fixed fees it
is entitled to receive. In order for such risk sharing contracts to be
profitable for the Company, the Company must effectively manage the utilization
rate of primary care services, specialty physician services, and hospital
services delivered to members of the managed care organization. There can be no
assurance that the Company will receive fees under such risk sharing
arrangements which will permit it to recover the costs of the health care
services it will be required to provide. The percentage of revenue attributable
to capitated care arrangements was 41%, 38% and 30% for the years ended April
30, 1997, 1996 and 1995, respectively. Based on existing agreements, the Company
anticipates that 45-50% of revenue will result from these arrangements in the
current year.

                                       20
<PAGE>
 
Dependence on Primary Care Physicians

Primary care physicians are a key operating component of the Company's
integrated health care delivery networks.  The Company competes for exclusive
primary care physician affiliations with a variety of networks including group
practices, IPAs, HMOs, practice management companies and hospitals.  Most
primary care physicians have traditionally practiced independently or in small
single specialty groups. The competitive and operational disadvantages to the
physician of this type of practice structure have compelled many of these
physicians to evaluate alternatives. The process of negotiating these
affiliations is often competitive, complex and time consuming. There can be no
assurance that the Company will continue to be able to identify and secure
affiliations with a sufficient number of primary care physicians to operate its
integrated health care delivery networks effectively.

Limitations on Reimbursement

A major portion of the Company's revenues is derived from third party payors,
such as governmental programs, private insurance plans and managed care
organizations. In particular, for the year ended April 30, 1997, approximately
20% of the Company's revenues were derived from the Medicaid program, a
cooperative state-federal program for medical assistance to the needy.
Reflecting a trend in the health care industry, third party payors increasingly
are negotiating with health care providers such as the Company concerning the
prices charged for medical services, with the goal of lowering reimbursement and
utilization rates. There can be no assurance that any future reduction in
reimbursement rates would be offset through enhanced operating efficiencies, or
that any such enhancement of operating efficiencies would occur. See "Business--
Limitations on Reimbursement."

Management Information Systems

The Company's management information networks are critical to its ability to
manage care efficiently and to be competitive in the market.  The Company relies
on these networks to support practice operations and to facilitate the
management and monitoring of clinical performance.  Clinical guidelines,
practice protocols, case management and utilization review networks are all
essential to the Company's ability to secure, and operate profitably under,
capitated and risk sharing contracts. There can be no assurance that the Company
will be able to refine and enhance these networks to keep them current and
competitive.

Dependence on Government Contracts

Contracts with various federal, state and local government agencies (excluding
agreements concerning the Company's Medicaid HMO in the District of Columbia)
account for approximately 42% of the Company's revenues.  These contracts are
obtained primarily through the competitive bidding process as governed by
applicable federal and state statutes and regulations, and generally may be
modified or terminated for the convenience of the government agency at any time
during the term of the contract. Contracts are generally awarded for a base
period of less than one year and corresponding with the government agency's
fiscal year, have two-to-four one-year renewals at the option of the government
agency, and are subject to appropriation of funds annually by the appropriate
legislative body. There is, therefore, no assurance that the Company will be
able to retain its contracts or, if retained, that all of such contracts will be
fully funded.

Under the competitive bidding process, unsuccessful bidders may protest the
award of a contract to another bidder in accordance with a government appeals
process if they believe the award was improper.

                                       21
<PAGE>
 
Such protests could result in the rebidding, delay or loss of contracts.  In
addition, contracts with government agencies are generally complex in nature and
subject contractors to extensive regulation under federal, state and local law.
For example, government contractors are subject to audits which can result in
adjustments to contract costs and fees.

The Company believes that it has complied in all material respects with
applicable government regulations.  In certain circumstances in which a
contractor has not complied with the terms of a contract or with regulations or
statutes, the contractor may be debarred or suspended from obtaining future
contracts for a specified period of time.  Moreover, pursuant to recent statutes
and regulations, a suspension or debarment from obtaining future federal
contracts will also result in a reciprocal suspension or debarment from
participation in non-procurement federal programs, such as Medicare, Medicaid,
and other federally-funded grant programs.  Any such suspension or debarment of
the Company could have a material adverse effect upon the Company's business.

Dependence on Key Personnel

The Company is highly dependent on the skill and efforts of its senior
management. The loss of key management personnel or the inability to attract,
retain and motivate sufficient numbers of qualified management personnel could
adversely affect the Company's business.

Competition

The managed care industry is highly competitive and is subject to continuing
changes in how services are provided and how providers are selected and paid.
Increased enrollment in prepaid health care plans due to health care reform or
for other reasons, increased participation by physicians in group practices and
other factors may attract new entrants into the managed care industry and result
in increased competition for the Company.  Certain of the Company's competitors
are significantly larger, have access to substantially greater financial,
management and other resources, provide a wider variety of services, have
greater experience in providing health care management services and may have
longer established relationships with payors than the Company. There can be no
assurance that the Company will be able to compete effectively, that additional
competitors will not enter the market, or that such competition will not make it
more difficult to develop, consolidate and manage integrated health care
delivery networks on terms beneficial to the Company.

Exposure to Professional Liability

Due to the nature of the Company's business, there are asserted from time to
time medical malpractice lawsuits and other claims against the Company, some of
which are currently pending, which subject the Company to the attendant risk of
substantial damage awards. The most significant source of potential liability in
this regard is the negligence of physicians employed or contracted by the
Company. To the extent such physicians are employees of the Company or were
regarded as agents of the Company in the practice of medicine, the Company
would, in most instances, be held liable for their negligence. In addition, the
Company could be found in certain instances to have been negligent in performing
its management services under contractual arrangements, even if no agency
relationship with the physician were found to exist. In some cases, the
Company's contracts with hospitals and third party payors require the Company to
indemnify such other parties for losses resulting from the negligence of
physicians who were employed or managed by or affiliated with the Company.

                                       22
<PAGE>
 
The Company maintains professional and general liability insurance on a claims
made basis in amounts deemed appropriate by management, based on historical
claims and the nature and risks of its business.  There can be no assurances,
however, that an existing or future claim or claims will not exceed the limits
of available insurance coverage, that any insurer will remain solvent and able
to meet its obligations to provide coverage for any such claim or claims or that
such coverage will continue to be available or available with sufficient limits
and at a reasonable cost to adequately and economically insure the Company's
operations in the future.  A judgment against the Company in excess of such
coverage could have a material adverse effect on the Company.

Historical Losses

The Company reported net losses of $4.0 million, $4.0 million, $9.3 million and
$3.8 million for the fiscal years ended April 30, 1997, 1995, 1994 and 1993,
respectively. Although the Company was profitable for the fiscal year ended
April 30, 1996, there can be no assurance that it will operate profitably in the
future, or have earnings or cash flow sufficient to comply with the financial
covenants to which it is subject or to cover its fixed charges.  As a
consequence of the losses reported in fiscal 1993 and 1994, the Company failed
to comply with certain financial covenants under its credit agreement. The
Company obtained waivers for such noncompliance and the Company's bank modified
the applicable financial covenants. In the future, any failure by the Company to
comply with the financial covenants contained in its credit agreement (or in any
replacement credit facility) could result in a default under such facility which
could have an adverse effect on the Company's business, financial condition and
results of operations.

Substantial Indebtedness
    
The Company's indebtedness is substantial in relation to its stockholders'
equity.  At April 30, 1997, the Company's total long-term debt, net of current
portion, accounted for 73.6% of its total capitalization.      

Possible Volatility of Stock Price

The market price of the Common Stock has experienced a high degree of
volatility. There can be no assurance that such volatility will not continue or
become more pronounced. In addition, recently the stock market has experienced,
and is likely to experience in the future, significant price and volume
fluctuations which could adversely affect the market price of the Common Stock
without regard to the operating performance of the Company. The Company believes
that factors such as quarterly fluctuations in the financial results of the
Company or its competitors and changes in general conditions in the industry,
the overall economy and the financial markets could cause the price of the
Common Stock to fluctuate substantially.

Control by Management and Certain Stockholders

Certain of the Company's executive officers and directors and related entities
currently hold an aggregate of approximately 15.0% of the outstanding Common
Stock (24.9% including shares issuable upon the exercise of options or the
conversion of convertible securities held by such persons and exercisable or
convertible within 60 days) and may exercise a controlling influence over the
outcome of matters submitted to the Company's stockholders for approval.
Moreover, such executive officers, directors and related entities collectively
may have the power to delay, defer or prevent a change in control of the
Company.

                                       23
<PAGE>
 
Anti-Takeover Effect of Delaware Law and Charter and By-law Provisions

Certain provisions of the Company's certificate of incorporation, by-laws and
Delaware law could, together or separately, discourage potential acquisition
proposals, delay or prevent a change in control of the Company and limit the
price that certain investors might be willing to pay in the future for shares of
the Common Stock. These provisions include a classified Board of Directors, the
ability of the Board of Directors to authorize the issuance, without further
stockholder approval, of preferred stock with rights and privileges which could
be senior to the Common Stock, elimination of the stockholders' ability to take
any action without a meeting, and establishment of certain advance notice
procedures for nomination of candidates for election as directors and for
stockholder proposals to be considered at stockholders' meetings. In addition,
the Company has distributed preferred stock purchase rights which could cause
substantial dilution to a person or group that attempts to acquire a controlling
interest in the Company. The Company is also subject to Section 203 of the
Delaware General Corporation Law which, subject to certain exceptions, prohibits
a Delaware corporation from engaging in any of a broad range of business
combinations with any "interested stockholder" for a period of three years
following the date that such stockholder became an "interested stockholder."

                                       24
<PAGE>
 
ITEM 6. SELECTED FINANCIAL DATA

     The selected consolidated financial data set forth below with respect to
the Company's consolidated statements of operations and balance sheets is
derived from the Consolidated Financial Statements of the Company as audited by
Coopers & Lybrand L.L.P., independent public accountants, for the years ended
April 30, 1997, April 30, 1996 and April 30, 1995 and by KPMG Peat Marwick LLP,
independent public accountants for the years ended April 30, 1994 and April 30,
1993, and gives retroactive effect to the two-for-one stock split effected in
the form of a 100% stock dividend distributed on November 20, 1995 to
stockholders of record on November 1, 1995. The data presented below should be
read in conjunction with and is qualified by reference to the consolidated
financial statements of the Company and the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included herein. See Items 7 and 8.

<TABLE>    
<CAPTION>
                                                                                        Year Ended April 30,
                                                                                        --------------------
                                                                        1993       1994       1995(1)(2)   1996(2)    1997(2)
                                                                        ----       ----       -------      ----       ----
                                                                            (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S>                                                                   <C>        <C>        <C>          <C>        <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................................................          $126,026   $148,683   $197,251     $202,464   $232,369
Direct costs................................................           116,840    140,397    182,969      162,619    189,477
                                                                    ----------  ---------  ---------   ----------  --------- 
 Gross profit...............................................             9,186      8,286     14,282       39,845     42,892
General and administrative expenses.........................            13,201     16,936     19,660       27,220     30,846
Reserve for Medicaid receivables............................           --         --         --           --           9,822
Former chairman retirement..................................           --         --         --           --           2,275
Restructuring charges.......................................           --         --         --           --           2,550
                                                                    ----------  ---------  ---------   ----------  --------- 
 Operating income (loss)....................................            (4,015)    (8,650)    (5,378)      12,625     (2,601)
Other income (expense):
 Interest expense...........................................            (1,071)    (3,288)    (2,209)      (3,363)    (5,577)
 Interest income............................................                74        186        422        1,448      2,060
 Miscellaneous income (expense).............................              (325)      (504)     1,015           69       (222)
 Gain on sale of subsidiary stock...........................           --         --         --             2,247    -- 
 Minority interest in earnings (losses) of subsidiaries.....              (225)      (213)      (159)         212       (196)
                                                                    ----------  ---------  ---------   ----------  --------- 
 Earnings (loss) before income taxes........................            (5,562)   (12,469)    (6,309)      13,238     (6,536)
Income tax expense (benefit)................................            (1,806)    (3,135)    (2,271)       4,100     (2,487)
                                                                    ----------  ---------  ---------   ----------  --------- 
 Net earnings (loss)........................................          $ (3,756)  $ (9,334)  $ (4,038)    $  9,138   $ (4,049)
                                                                    ----------  ---------  ---------   ----------  --------- 
 
 
 
Net earnings (loss) per common share
 Primary....................................................            $(0.38)    $(0.93)    $(0.38)       $0.68     $(0.37)
                                                                    ----------  ---------  ---------   ----------  --------- 
 Fully diluted..............................................            $(0.38)    $(0.92)    $(0.38)       $0.66     $(0.37)
                                                                    ----------  ---------  ---------   ----------  --------- 
Weighted average number of common shares outstanding:
 Primary....................................................             9,996     10,085     10,537       13,429     11,038
                                                                    ----------  ---------  ---------   ----------  --------- 
 Fully diluted..............................................             9,996     10,117     10,537       13,873     11,038
                                                                    ----------  ---------  ---------   ----------  --------- 
<CAPTION>
                                                                                        At April 30,
                                                                                        ------------
                                                                        1993       1994     1995(2)   1996(2)   1997(2)
                                                                        ----       ----     ----      ----      ----
                                                                                       (IN THOUSANDS)
<S>                                                                     <C>       <C>      <C>      <C>       <C>
BALANCE SHEET DATA:
Working Capital...................................................      $20,753   $ 7,736  $10,433  $ 63,593  $ 29,966
Total Assets......................................................       73,821    87,111   65,570   127,579   148,373
Short-term debt...................................................        4,283     4,589    2,247       545    10,916
Long-term debt....................................................       28,888    39,643   24,454    67,529    69,996
Stockholders' equity..............................................       25,733    17,296   15,339    25,777    25,147
</TABLE>     
___________

(1)  Includes $22 million of non-recurring start-up and construction revenues
     related to the Company's BCBSNJ project.
    
(2)  Restated to reflect revised accounting for certain contract costs. See Note
     16 to the accompanying consolidated financial statements.      

                                       25
<PAGE>
 
         

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

The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the Company's
consolidated financial statements and related notes thereto included elsewhere
in this report.
    
Upon further review the company has revised its accounting treatment for two 
contracts entered into during fiscal years 1994 and 1995. The two contracts, a 
construction contract and a management contract, which were with the same party,
were previously combined for purposes of revenue recognition. The Company has 
restated previously issued financial statements to account for these two 
contracts separately. Accordingly, the Company has also revised the following 
Management's Discussion and Analysis.      

GENERAL

Over the past four years, the Company has altered its focus from an historic
dependence on government contracts to a focus on commercial managed care
markets. Prior to 1993, over 98% of PHP's revenue came from government-related
contracts. PHP's government service contracts required the Company to manage
health care providers in a variety of delivery settings. In 1992, management
realized that the knowledge, expertise and skills which the Company had acquired
in managing health care providers for government agencies could also be applied
to serve the commercial managed care market. At the same time, management
supplemented the Company's existing competencies with additional skills and
capabilities in order to take full advantage of the opportunities available in
commercial managed care. The Company added to existing capabilities by making
several key acquisitions, investing in information networks and recruiting
experienced managed care executives.

Revenues from the Commercial Managed Care Division have grown, in part as a
result of acquisitions, to $135.0 million or 58.1% of total revenues in 1997
from $1.3 million or 1% of total revenues in 1992. Operations in this division
consist of the Company's integrated health care delivery networks applied in
whole or in part to: (i) the Company's HMOs in the District of Columbia and
Virginia, primarily serving the government assisted Medicaid population, (ii)
the Company's statewide ISOC in New Jersey which contracts to provide services
with HMOs and insurance companies, and (iii) family health centers which are
operated on a contract basis for large employers. Also, in November 1995, PHP
and St. Vincent's Health Services Corporation ("St. Vincent's"), an affiliate of
the Daughters of Charity National Health System East, Inc. (the "Daughters of
Charity"), formed Connecticut Health Enterprises, L.L.C. ("Connecticut Health
Enterprises"), a limited liability company, for the purpose of developing a
provider sponsored integrated health care delivery network in Fairfield County,
Connecticut. Connecticut Health Enterprises commenced operations in April 1996
and functions as an alliance between PHP, St. Vincent's, Fairfield County
physicians and other hospitals and ancillary providers. These systems of health
care are marketed to insurers, HMOs, and government agencies, which contract for
a total health

                                       26
<PAGE>
 
care delivery system. In April 1996, the Company also agreed to form Georgia
Health Enterprise, L.L.C., a limited liability company, with St. Mary's Health
Care System, Inc., of Athens Georgia, for the purpose of developing a provider
service network in Athens, Georgia. The Company is compensated for its
commercial managed health care services in a variety of methodologies, including
cost plus fee, percentage of revenue, percentage of savings, fee-for-service,
capitation, or some combination of the foregoing.

Revenues from the Government Managed Care Division have decreased slightly from
a peak of $116.4 million in 1992 to $97.4 million in 1997. Operations in this
division consist of health care services provided to government agencies across
a diverse scope of service groups including ambulatory care, medical staffing,
mental health, long-term care, and total managed care. The Company generally
performs these services under unit-price, fixed-price, cost-reimbursement-plus-
fee, and fixed-rate-labor hour contracts.
    
The Company's revenues have increased from $118.0 million in 1992 to $232.4
million in 1997. Gross profit margins increased to 18% and 19% in 1997 and 1996,
respectively, after having decreased to 6% and 7% in 1994 and 1993,
respectively. The Company incurred a net loss of $4.0 million in 1997 after
earning net income of $9.1 million in 1996 and a net loss of $3.8 million in
1995. The 1997 loss resulted primarily from a $9.8 million reserve for Medicaid
receivables, $2.6 million in restructuring charges, and a $4.0 million charge
related to the retirement of the Company's former chairman. The 1995 loss
resulted primarily from a $8.0 million charge ($4.8 million, after tax) related
to costs in excess of cash receipts under the BCBSNJ contracts. In 1994 and 1993
the Company incurred losses of $9.3 million and $3.8 million, respectively, due
primarily to a decrease in gross profits resulting from some significant
nonrecurring events including certain contract receivable write-offs, increased
corporate staff costs and increased commercial business development costs.      

The following table sets forth, for the years indicated, certain items in the
Company's Consolidated Statements of Operations expressed as a percentage of
revenues:

<TABLE>     
<CAPTION> 
                                                         Year ended April 30,
                                                         --------------------

                                                         1997    1996    1995
                                                         ----    ----    ----
<S>                                                     <C>     <C>     <C> 
Revenues.............................................   100.0%  100.0%  100.0%

Direct costs.........................................    81.5    80.3    92.8
                                                        -----   -----   -----

Gross Profit.........................................    18.5    19.7     7.2
                                                                       
General and administrative expenses..................    13.3    13.4     9.9
                                                                       
Reserve for Medicaid receivables.....................     4.2      --      --
                                                                       
Former chairman retirement package...................     1.0      --      --
                                                                       
Restructuring charges................................     1.1      --      --
                                                         ----    ----     ---
                                                                       
Operating income (loss)..............................    (1.1)    6.3    (2.7)
                                                                       
Other income (expense)...............................    (1.7)    0.2    (0.5) 
                                                        -----   -----   -----
                                                                       
Earnings (loss) before income taxes..................    (2.8)    6.5    (3.2)
                                                                       
Income tax expense (benefit).........................    (1.1)    2.0    (1.2)
                                                        -----   -----   -----
                                                                       
Net earnings (loss)..................................    (1.7)    4.5    (2.0)
                                                        =====   =====   =====
</TABLE>     
 
                                       27
<PAGE>
 
The following table indicates revenues by the Company's service divisions and
the related percentage of total revenues:

<TABLE>     
<CAPTION> 
                                     Year ended April 30,
                                     --------------------

                          1997                1996             1995/(1)/     
                          ----                ----             ---------     
                                                                             
                         Revenues   %     Revenues     %     Revenues    %   
                         --------   -     --------     -     --------    -   
<S>                      <C>       <C>    <C>        <C>     <C>       <C> 
Division                                                                     
Government...........    $ 97,400   41.9   $ 96,424   47.6   $101,455   51.4 
Commercial...........     134,969   58.1    106,040   52.4     95,340   48.3 
Other................         ---    ---        ---    ---        456    0.3 
                         --------  -----   --------   ----   --------   ---- 
                                                                             
 TOTAL...............    $232,369  100.0   $202,464  100.0   $197,251  100.0 
                         ========  =====   ========  =====   ========  =====  
</TABLE>      

(1) Includes $22 million of non-recurring start-up and construction revenues
related to the Company's BCBSNJ project.

RESULTS OF OPERATIONS

Fiscal Year 1997 Compared to Fiscal Year 1996
    
The Company's revenues increased by $29.9 million or 14.8% to $232.4 million in
fiscal year 1997 compared to $202.5 million for the prior fiscal year. This
increase is due to a significant increase in the Commercial Managed Care
Division and a slight increase in the Government Managed Care Division.      
    
The Commercial Managed Care Division revenues increased by $29.0 million or
27.4% to $135.0 million in fiscal year 1997 compared to $106.0 million in 1996.
This net increase is the result of several increases and a decrease. The largest
increase in Commercial Managed Care Division revenue of $15.6 million resulted
from the BCBSNJ ISOC project. Effective July 1, 1996, this business relationship
was modified such that the Company began to provide services under a global
capitation arrangement which significantly increased the revenues the Company
earns as well as the scope of services and resultant cost of service. The second
largest increase, or $13.9 million, was provided by the Company's subsidiary,
Virginia Chartered Health Plan, Inc. ("VACHP"), a Medicaid HMO operating in
selected markets in the Commonwealth of Virginia. VACHP commenced operations in
November 1995 and therefore was only operating for less than half the year
during fiscal year 1996. In addition, since commencing operations, VACHP has
continually increased its membership enrollment. Commercial Managed Care
Division revenues also increased by $8.5 million as a result of the Company's
ISOC development, management and operations related to its strategic ventures,
primarily in Connecticut.      
    
These Commercial Managed Care Division increases were offset by a decrease in
revenues of $11.9 million at CHP, the Company's Medicaid HMO in the District of
Columbia. CHP's revenues decreased due to a decrease in enrollment resulting in 
a 20.0% decrease in member months and a 14.6% decrease in the contractual 
premium rate effective November 1, 1996.      

The Government Managed Care Division revenues increased by $1.0 million or 1.0%
to $97.4 million in fiscal 1997 compared to $96.4 million in 1996. This net
increase is the result of (1) a $14.3 million increase resulting from a
significant new total managed care correctional facilities project which
commenced operations in July 1996, (2) a $7.6 million increase resulting from
two new ambulatory care projects , one new mental health project and one new
medical staffing project, all of which commenced operations since the beginning
of the prior fiscal year, and (3) a $1.4 million increase resulting from an
increase in the number of inmates and in the per inmate reimbursement rate on an
existing total managed care correctional facilities project.

                                       28
<PAGE>
 
These revenue increases were almost entirely offset by decreases totaling $18.2
million related to the completion of seven ambulatory care projects, three
mental health projects, and one medical staffing project. The Government Managed
Care Division revenues also decreased by $4.2 million as a result of the
Company's restructuring decisions in the third quarter of fiscal 1997 which
included the Company's decision to terminate its long-term care line of business
in the Government Managed Care Division effective December 1, 1996. The results
of operations for these projects since December 1, 1996 are presented on the
Statement of Operations on the Restructuring Charges line item.
    
The Company's gross profit increased by 7.8% or $3.1 million, to $42.9 million
for fiscal year 1997 compared to $39.8 million for the prior year. As a
percentage of revenue, gross profit decreased to 18.5% for the current year
compared to 19.7% in fiscal 1996. Gross profit increased in the Commercial
Managed Care Division and decreased in the Government Managed Care Division.
         
The Commercial Managed Care Division gross profit increase of $4.4 million from
$29.7 million to $34.1 million resulted from: (1) a $4.5 million increase
resulting from the operations of VACHP which was operational a full year in 1997
and less than half a year in fiscal 1996, as discussed above, (2) a $1.9 million
increase resulting from the operations of the BCBSNJ ISOC, which became a global
capitation healthcare services contract effective July 1, 1996, and (3) a $2.1
million increase resulting from increased activity in the Company's development,
management, and operations related to its strategic provider-based ISOC
ventures, primarily in Connecticut. These gross profit increases were reduced by
a decrease of $3.6 million related to the CHP operations resulting from a 20.0%
decrease in membership enrollment and a 14.6% decrease in the premium rate
effective November 1, 1996.      

The Government Managed Care Division gross profit decreased by $1.4 million from
$10.2 million to $8.8 million due to (1) a $1.4 million decrease resulting from
the completion of three mental health projects since the beginning of the fiscal
year, (2) a $0.7 million decrease resulting from the re-award of an ambulatory
care project requiring a different scope of services and at a reduced gross
profit rate, (3) a $0.5 million decrease resulting from the completion of two
ambulatory care projects, and (4) a $0.3 million decrease resulting from the
Company's restructuring decisions in the third quarter of fiscal 1997 which
included the Company's decision to terminate its long-term care line of business
effective December 1, 1996. These gross profit decreases were tempered by an
increase of $1.2 million resulting from a significant new total managed care
correctional facilities project which commenced operations in July 1996, and an
increase of $0.6 million resulting from the commencement of operations on one
new mental health project.

General and administrative expenses increased 13.5% or $3.6 million to $30.8
million in fiscal 1997 from $27.2 million in fiscal 1996. This increase is
primarily related to the Company's Commercial Managed Care Division business and
is due to: (1) $1.7 million increase for additional general and administrative
expenses associated with the VACHP business which commenced operations in
November 1995, (2) a $1.3 million increase related to increased personnel and
facility expenses at CHP, (3) $0.5 million increase in facility expenses
associated with the expansion of the corporate headquarters space, and (4) $0.7
million increase in Commercial Managed Care Division development expenses. As a
percentage of revenue, general and administrative expenses decreased to 13.2%
for the current year compared to 13.4% in fiscal year 1996.

During the third quarter of fiscal 1997, the Company recorded a $9.8 million
reserve for Medicaid receivables associated with the Company's Medicaid
operations at CHP in the District of Columbia, principally relating to services
provided during the 1992 to 1994 contract years. For several years the Company
engaged in ongoing good faith discussions and negotiations with the District
regarding these amounts. During February 1997, that process ultimately resulted
in an agreement to settle these receivables due the Company for an amount
significantly in excess of what the Company had recorded. Subsequently, however,
it became evident to the Company, through recent comments in the local press,
that payment has been blocked. The Company remains committed to pursuing its
contractual rights for the amounts it is due from the District. However, in
light of the clearly prolonged timeframe to resolve these issues, the Company
determined to recognize this reserve.

During the third quarter of fiscal 1997, the Company recognized $2.3 million in
expense for the retirement package provided by the Board of Directors to the
Company's Founder, Chairman and Chief Executive Officer, Charles H. Robbins,
upon his retirement from the Company.

                                       29
<PAGE>
 
During the third quarter of fiscal 1997, the Company incurred restructuring
charges of $2.6 million. Within a broad restructuring effort, this charge
resulted from two specific decisions made by the Board of Directors.

In late November 1996, the Company made the strategic decision to terminate its
long-term care line of business in the Government Managed Care Division. The
Company determined that maintaining this capability internally was not essential
to its success in providing vertically integrated healthcare services, in whole
or in part, through the Company's ISOC products. In addition, the Company
determined that the relationship between the risk it assumed on these projects
and the opportunity for profit was not adequately balanced. The Company
recognized a net loss of $1.8 million related to the restructuring for the
termination of this line of business.

Effective January 31, 1997, the Company made the strategic decision to terminate
the Company's facilities development and maintenance function operated out of
the corporate offices through the Company's wholly owned subsidiary, Sterling
Communities Corporation. The elimination of these activities will allow the
Company to concentrate its resources and energy on its core missions. Future
building and facilities management needs will be fulfilled through outsourced
vendor relationships. The Company incurred a restructuring charge of $750,000
for severance and other termination costs associated with the elimination of
this function.
    
Operating income decreased by $15.3 million from $12.6 million in operating
income in fiscal 1996 to $2.6 million in operating losses in fiscal 1997.
Operating margin decreased to a loss of 1.1% from income of 6.2%. This decrease
is primarily related to the Medicaid receivables reserve, the restructuring
charges, and the retirement expense that was recognized in fiscal 1997.      

Interest expense increased 65.8%, or $2.2 million to $5.6 million for fiscal
year 1997 from $3.4 million for fiscal 1996. This increase is primarily a result
of the interest expense the Company incurs on the $69.0 million in convertible
subordinated debentures sold by the Company during fiscal 1996, in December
1995.

Interest income increased by $612,000 from $1,448,000 to $2,060,000 in fiscal
1996 and 1997, respectively. This increase is due to the additional interest
earned on the increase in available cash which resulted from the sale of $69.0
million in convertible subordinated debentures discussed above.

In fiscal 1996, the Company recognized a gain of $2.2 million related to the
sale of a 30% interest in its VACHP subsidiary for $3.0 million in cash.

The effective income tax rates of 38.0% and 31.0% for fiscal years 1997 and
1996, respectively, represent the combined federal and state income tax rates
adjusted as necessary. The gain resulting from the sale of a 30% interest in
VACHP is a non-taxable transaction and therefore no provision for income taxes
was included in the Company's results of operations for fiscal 1996. Exclusive
of this gain, the combined effective income tax rate for fiscal year 1996 would
have been 37.4%.

The Company's results of operations decreased by $13.1 million from net earnings
of $9.1 million to a net loss of $4.0 million for fiscal years 1996 and 1997,
respectively, resulting in primary losses per share of $0.37 in 1997 ($0.37
fully diluted), compared with primary earnings per share of $0.68 ($0.66 fully
diluted) in fiscal 1996.

Fiscal Year 1996 Compared to Fiscal Year 1995

                                       30
<PAGE>

    
The Company's revenue increased by 2.6% or $5.2 million to $202.5 million in
fiscal year 1996 compared to $197.3 million for the prior fiscal year. This
increase is the net result of an increase in the Commercial Managed Care
Division and a decrease in the Government Managed Care Division. The fiscal 1995
Commercial Managed Care Division revenues included $22.3 million of non-
recurring construction and start-up revenue on the BCBSNJ project.      
    
Exclusive of the non-recurring construction and start-up revenue earned on the
BCBSNJ project in fiscal year 1995, Commercial Managed Care Division revenue
increased by $4.7 million or 48.1% to $106.9 million in fiscal 1996 compared to
$102.2 million in fiscal 1995. This net increase is the result of several
increases and decreases. The largest increase in Commercial Managed Care
Division revenue of $13.1 million was due to an increase in operational revenue
on the BCBSNJ project which commenced operations in January 1995 and was
therefore operating throughout fiscal 1996 but only four months during fiscal
1995. The second largest increase in Commercial Managed Care Division revenue of
$12.2 million was provided by CHP, and resulted from a 27.0% increase in member
months and a 5.0% increase in the contractual premium rate which became
effective January 1, 1996. Additional revenue increases were as follows: (1) a
$5.1 million revenue increase resulting from revenue earned during fiscal 1996
for network development efforts related to strategic ventures in Connecticut,
Georgia, and other markets, (2) a $3.0 million revenue increase resulting from
the commencement of operations in November 1995 at VACHP, (3) a $3.3 million
increase resulting from increased utilization at two existing integrated health
care delivery network projects for large employers, (4) a $1.3 million increase
resulting from increased software sales at the Company's wholly owned
subsidiary, Health Cost Consultants ("HCC"), a case management and utilization
review services company, and (5) a $1.1 million increase resulting from the
commencement of operations at a new integrated health care delivery network
project for a large employer in January 1995.     
    
In addition to the Commercial Managed Care Division revenue decrease related to
the construction and start-up phases of the BCBSNJ project, a revenue decrease
of $2.2 million resulted from the sale of two outpatient surgery centers in
September 1994, and a revenue decrease of $2 million resulting from the non-
recurrence of construction and pre-operational revenues earned in the prior year
related to an integrated health care delivery network project for a large
employer which became operational in January 1995.      
    
Government Managed Care Division revenue decreased by $5.0 million to $96.4
million in fiscal 1996 compared to $101.5 million in fiscal 1995. This decrease
is primarily related to a $13.7 million decrease resulting from the completion
of seven ambulatory care projects, a $7.1 million decrease resulting from the
completion of two mental health projects, and a $3.0 million decrease resulting
from the completion of four medical staffing projects. Offsetting these revenue
decreases were revenue increases as follows: (1) a $5.9 million increase
resulting from the commencement of operations on two new long-term care nursing
home projects in June 1995, (2) a $5.3 million increase resulting from the
commencement of operations on a new ambulatory care project in October 1995, (3)
a $3.4 million increase resulting from the commencement of operations on a new
medical staffing project in January 1995, (4) a $1.8 million increase resulting
from an expanded inmate population and an increase in the contract rate on a
total managed care correctional facilities project, (5) a $1.3 million increase
resulting from an increased contract rate on a long-term care nursing home
project, and (6) a $1.0 million increase resulting from the expansion of
services and a corresponding increase in contract rate on one PRIMUS project.
         
The Company's gross profit increased by 178.3% or $25.5 million to $39.8 million
in fiscal 1996 compared to $14.3 million in fiscal 1995. As a percentage of
revenue, gross profit increased to 19.7% in fiscal 1996 compared to 7.2% in the
prior fiscal year. This overall gross profit improvement resulted from a
significant increase in the Commercial Managed Care Division as well as an
increase in the Government Managed Care Division.      
    
The Commercial Managed Care Division gross profit increase of $15.6 million to
$29.7 million from $14.1 million was primarily from a $8.0 million charge ($4.8 
million, after tax) related to costs in excess of cash receipts under a certain 
contract and is also attributable to a $10.5 million at CHP increase resulting
from a 27.0% increase in member months and a 5.0% increase in the contractual
premium rate which became effective January 1, 1996. Also, a gross profit     

                                       31
<PAGE>

     
increase of $3.9 million resulted from the commencement of activity on the
operating portion of the BCBSNJ project in January 1995, and a $0.8 million
increase resulted from the commencement of operations in December 1995 at VACHP.
These Commercial Managed Care Division gross profit increases were tempered by a
decrease of $0.8 million resulting from the sale of the remaining two outpatient
surgery centers in September 1994.      

The Government Managed Care Division gross profit increase of $2.4 million to
$10.2 million from $7.8 million was due to (1) a $1.3 million increase resulting
from an increased contract rate at a long-term care nursing home project, (2) a
$1.2 million increase resulting from increased utilization, improved cost
control, and higher award fee revenue at three ambulatory care projects with the
Navy, (3) a $0.9 million increase resulting from an expansion of services and a
corresponding increase in the contract rate on one PRIMUS project, and (4) a
$0.8 million increase resulting from an expanded inmate population and an
increased contract rate on a total managed care correctional facilities project.
Government Managed Care Division gross profits decreased by $3.5 million due to
the completion of certain projects as cited above for causing revenues to
decrease.
    
General and administrative expenses increased 38.1% or $7.5 million to $27.2
million in fiscal 1996 from $19.7 million in the prior year. As a percentage of
revenue, general and administrative expenses increased to 13.4% in fiscal 1996
compared to 9.9% during the prior year. The increase is primarily a function of
the Company's commercial managed care initiatives and is due to: (1) a $2.1
million increase associated with D.C. Chartered and its growing enrollment, (2)
a $2.7 million increase for additional general and administrative expenses
associated with the new VACHP subsidiary, (3) a $2.0 million increase in
increased corporate compensation costs related to the hiring and retention of
existing and additional management personnel and support staff, and (4) a $0.5
million increase in facility expenses resulting from the Company's new expanded
corporate headquarters office space.      
    
Operating income increased from $5.4 million loss in fiscal 1995 to $12.6
million profit for the current year. Operating margin increased to 6.2% from
2.7% loss. This increase was due to the increased gross profit margins, reduced
by increased general and administrative expenses.     

Interest expense increased 52.2%, or $1,154,000 to $3,363,000 for fiscal 1996
from $2,209,000 in fiscal 1995. This increase is primarily a result of the
interest on the $69 million in convertible subordinated debentures sold by the
Company in December 1995. Partially offsetting this increase is a decrease in
interest expense resulting from a decrease in the average outstanding long-term
debt of the Company resulting from the sale of the Reston office building in
July 1994, and the sale of the remaining two outpatient surgery centers in
September 1994.
    
Interest income increased by $1,026,000 from $422,000 in fiscal 1995 to
$1,448,000 in 1996. This increase is due to the interest earned on the
approximately $40 million in cash and cash equivalents currently available to
the Company resulting from the sale of $69 million in convertible subordinated
debentures in December 1995.      

In fiscal 1996 the Company recognized a gain of $2.2 million related to the sale
of a 30% interest in VACHP for $3 million in cash.

The effective income tax rates of 31.0% and 36.0% for fiscal years 1996 and
1995, respectively, represent the combined federal and state income tax rates
adjusted as necessary. The gain resulting from the sale of a 30% interest in
VACHP to University Health Services, Inc., is a non-taxable transaction, and
therefore no provision for income taxes was included in the Company's results of
operations for fiscal 1996. Exclusive of this gain, the combined effective
income tax rate for the year would have been 37.4%.

                                       32
<PAGE>

     
Net earnings increased by $13.1 million, from a $4.0 million loss, to $9.1
million, for fiscal years 1995 and 1996, respectively, resulting in primary
earnings per share of $.68 in 1996 ($.66 fully diluted), compared with primary
and fully diluted earnings per share of (.38) and (.38)      

LIQUIDITY AND CAPITAL RESOURCES
    
Typically, the Company's principal sources of funds are operations and bank
borrowings. In December 1995, however, the Company issued $69 million of
convertible subordinated debentures resulting in net proceeds of $65.4 million.
From these proceeds approximately $25 million was used to repay all the then
outstanding bank debt and the Company used the remaining proceeds to fund the
expansion of its Commercial Managed Care Division.  At April 30, 1997, the
Company had outstanding bank and other debt in the amount of $14.9 million. For
a description of the material terms of these arrangements, see notes 4 and 5 of
the Notes to Consolidated Financial Statements included elsewhere in this
report.      
    
For the year ended April 30, 1997, $4.4 million in cash was used by operating
activities. This represents a decrease in cash provided by operations of $10.8
million compared with the $6.4 million provided by operations in the prior year.
The primary cause of this decrease in cash provided by operations was a $13.2
million decrease in earnings from $9.1 million in net earnings in 1996 to a net
loss of $4.0 million in 1997.      
    
The Company's number of days revenue in average outstanding receivables was 66
days in 1997 and 57 days in 1996. This increase results from an increase in
accounts receivable related to certain Commercial Managed Care Division ISOC
business ventures, and a new receivable related to a large total managed care
correctional facilities project in the Government Managed Care Division.      

Investing activities used $40.7 million in cash during 1997 compared to $400,000
used in 1996. In 1997, the cash used relates primarily to the purchase of
certain health centers from BCBSNJ on February 28, 1997. The cash used during
1996 was due to acquisitions of property and equipment reduced by proceeds from
the sale of stock in a subsidiary.
    
Financing activities provided $12.1 million in 1997 compared to $41.5 million
provided by financing activities during 1996. In December 1995 the Company sold
$69 million of convertible subordinated debentures resulting in net proceeds of
$65.4 million. With these proceeds the Company completely repaid all of the then
outstanding bank debt. The cash provided by financing activities in the current
year relates to borrowings on a revolving promissory note due in August 1997.
     
The Company believes that the current cash and cash equivalents, anticipated
cash flow generated by operations and its borrowing capabilities will be
sufficient for known future capital needs of the Company, other than the
completion of the HIP transaction, which will require additional financing. The
Company intends to finance the consideration payable in connection with the HIP
transaction through a combination of bank borrowings and the public or private
issuance of debt or equity securities, the availability of which will depend on
market conditions and other factors. In addition, there may be further expansion
opportunities which require additional external financing and the Company may,
from time to time, consider obtaining such funds through the public and private
issuance of equity or debt securities. There can be no assurance that the
additional financing required to complete the HIP transaction or take advantage
of further expansion opportunities will be available to the Company on
acceptable terms or at all. The Company has no material commitments for capital
expenditures at April 30, 1997.

                                       33
<PAGE>
 
IMPACT OF INFLATION

Inflation is considered in all contract proposals with contract terms in excess
of one year. The consideration of inflationary factors is particularly important
with respect to unit-price, fixed-rate-labor hour, and fixed-price contracts.
Historically, inflation has not had a significant impact on the operations of
the Company. While health care costs nationally are increasing, the Company's
primary exposure relating to this trend has been related to salaries of health
care professionals and costs of pharmaceuticals which the Company estimates and
prices into all of its long term contracts. The Company may however become
involved in future contracts where inflation and increasing health care costs
may be an important factor.


                                         PHP HEALTHCARE CORPORATION


    
Date: June 2, 1998                       By: /s/ Anthony M. Picini        
                                         -------------------------


                                         Anthony M. Picini          
                                         Executive Vice President and
                                         Chief Financial Officer     
                                  



                                      34
<PAGE>
 
                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                                                 Page
                                                                                                                -------
<S>                                                                                                             <C>  
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants.............................................................................    F-2
Consolidated Balance Sheets at April 30, 1997 and 1996........................................................    F-3
Consolidated Statements of Operations for the Years Ended April 30, 1997, 1996 and 1995.......................    F-4
Consolidated Statements of Stockholders' Equity for the Years Ended April 30, 1997, 1996 and 1995.............    F-5
Consolidated Statements of Cash Flows for the Years Ended April 30, 1997, 1996, and 1995......................    F-6
Notes to Consolidated Financial Statements....................................................................    F-7
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE:
Schedule II-Valuation and Qualifying Accounts, Years ended April 30, 1997, 1996 and 1995......................   F-25
</TABLE>

                                      F-1

<PAGE>
     
                       REPORT OF INDEPENDENT ACCOUNTANTS
 

To the Board of Directors
PHP Healthcare Corporation:

     We have audited the consolidated financial statements and the financial
statement schedule of PHP Healthcare Corporation and subsidiaries as listed in
the index on page F-1 of this Form 10-K as amended. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
PHP Healthcare Corporation and subsidiaries as of April 30, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended April 30, 1997, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.

     As discussed in note 16 to the consolidated financial statements, the
accompanying consolidated balance sheets as of April 30, 1997 and 1996, and the
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended April 30, 1997, have been restated
to reflect revised accounting for certain contract costs.


                                                       Coopers & Lybrand, L.L.P.

Washington, D.C.
July 25, 1997

     
                                      F-2
<PAGE>
 
                  PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                            APRIL 30, 1997 AND 1996
                       (IN THOUSANDS, EXCEPT SHARE DATA)
                                    RESTATED         
<TABLE>
<CAPTION>
                                                                                                   1997           1996
                                                                                               -------------  -------------
                                           ASSETS
Current assets:
<S>                                                                                            <C>            <C>
Cash and cash equivalents....................................................................      $ 15,765       $ 48,647
Accounts receivable, net (note 2)............................................................        45,800         38,802
Pharmaceutical and medical supplies..........................................................         1,460          1,039
Receivables from officers (note 12)..........................................................         4,442          3,263
Income tax receivable (note 6)...............................................................           882            410
Deferred income taxes (note 6)...............................................................         3,322            ---
Other current assets.........................................................................         4,273          3,638
                                                                                                   --------       --------
    Total current assets.....................................................................        75,944         95,799
Property and equipment, net (note 3).........................................................        58,444         22,685
Intangible assets, net of accumulated amortization of $1,236 in 1997 and $991 in 1996 (note           7,275          2,942
 1)..........................................................................................
Deferred income taxes (note 6)...............................................................           ---            543
Receivables from officers (note 12)..........................................................         1,202          1,072
Other assets (note 12).......................................................................         5,508          4,538
                                                                                                   --------       --------
                                                                                                   $148,373       $127,579
                                                                                                   ========       ========
 
                         LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Note payable to bank (note 4)................................................................      $  9,200   $        ---
Current maturities of notes payable-other (note 4)...........................................         1,716            545
Accounts payable.............................................................................        12,036          9,520
Claims payable-medical services..............................................................         8,739          9,154
Accrued salaries and benefits................................................................        13,219         11,228
Deferred income taxes (note 6)...............................................................           ---          1,515
Billings in excess of costs..................................................................         1,068            244
                                                                                                   --------       --------
    Total current liabilities................................................................        45,978         32,206
Notes payable-other, net of current maturities (note 4)......................................         3,964          1,921
Convertible subordinated debentures (note 5).................................................        66,032         65,608
Deferred income taxes (note 6)...............................................................         1,274            ---
Deferred gain on sale of building (note 11)..................................................           916          1,002
Other liabilities (note 13)..................................................................           759            520
                                                                                                   --------       --------
    Total liabilities........................................................................       118,923        101,257
                                                                                                   --------       --------
Minority interest (note 11)..................................................................         4,303            545
                                                                                                   --------       --------
Stockholders' equity (notes 7, 8, 11 and 12):
Preferred stock, $.01 par value, 500,000 shares authorized, none issued......................           ---            ---
Common stock, $.01 par value, 25,000,000 shares authorized, 14,369,849 shares issued in 1997
 and 14,203,987 shares issued in 1996........................................................           144            142
Additional paid-in capital...................................................................        33,946         30,529
Note receivable from sale of stock (note 7)..................................................          (900)          (900)
Retained earnings............................................................................        (1,471)         2,578
Treasury stock, 3,258,485 common shares in 1997 and 1996, at cost............................        (6,572)        (6,572)
                                                                                                   --------       --------
    Total stockholders' equity...............................................................        25,147         25,777
Commitments and contingencies (notes 2, 4, 11, 12 and 13)....................................
                                                                                                   $148,373       $127,579
                                                                                                   ========       ========
</TABLE>

         See accompanying notes to consolidated financial statements.


                                      F-3
<PAGE>
 
                  PHP HEALTHCARE CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                  Years Ended April 30, 1997, 1996, and 1995
                     (In thousands, except per share data)
                                    RESTATED         
 

<TABLE>     
<CAPTION>
                                                                                1997          1996          1995
                                                                            ------------  ------------  ------------
<S>                                                                         <C>           <C>           <C>
Revenues..................................................................     $232,369      $202,464      $197,251
Direct costs..............................................................      189,477       162,619       182,969
                                                                               --------      --------      --------
   Gross profit...........................................................       42,892        39,845        14,282
General and administrative expenses.......................................       30,846        27,220        19,660
Reserve for Medicaid receivables (note 2).................................        9,822           ---           ---
Former chairman retirement package (note 9)...............................        2,275           ---           ---
Restructuring charges (note 10)...........................................        2,550           ---           ---
                                                                               --------      --------      --------
   Operating income (loss)................................................       (2,601)       12,625        (5,378)
Other income (expense):
   Interest expense.......................................................       (5,577)       (3,363)       (2,209)
   Interest income........................................................        2,060         1,448           422
   Miscellaneous income (expense).........................................         (222)           69         1,015
   Gain on sale of subsidiary stock.......................................          ---         2,247           ---
   Minority interest in (earnings) losses of subsidiaries.................         (196)          212          (159)
                                                                               --------      --------      --------
   Earnings (loss) before income taxes....................................       (6,536)       13,238        (6,309)
Income tax expense (benefit)..............................................       (2,487)        4,100        (2,271)
                                                                               --------      --------      --------
   Net earnings (loss)....................................................     $ (4,049)     $  9,138      $ (4,038)
                                                                               ========      ========      ========
Net earnings (loss) per common share:
   Primary................................................................        $(.37)         $.68         $(.38)
                                                                               ========      ========      ========
                                                                                  $(.37)         $.66         $(.38)
   Fully diluted..........................................................     ========      ========      ========
 
Weighted average number of common shares outstanding:
   Primary................................................................       11,038        13,429        10,537
                                                                               ========      ========      ========
 
   Fully diluted..........................................................  ===========   ===========   ===========
                                                                                 11,038        13,873        10,537
                                                                               ========      ========      ========
</TABLE>      
 
         See accompanying notes to consolidated financial statements.



                                      F-4
<PAGE>
 
                  PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
    
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  YEARS ENDED APRIL 30, 1997, 1996, AND 1995
                                (In thousands)
                                   RESTATED               
<TABLE>
<CAPTION>
                                                                        
                                Shares    Amount  Additional     Note      Retained      Shares      Amount        Total
                                ------    ------   Paid-In    Receivable   Earnings      ------      ------    Stockholders'
                                                   Capital     From Sale   (Deficit)                               Equity
                                                   -------     Of Stock     -------                                ------        
                                Common Stock                   --------                 Treasury Stock
                                ------------                                            --------------         
 
<S>                             <C>       <C>     <C>         <C>          <C>          <C>          <C>       <C> 
Balances at April 30, 1994...     14,142    $141     $27,723  $      ---    $(2,522)        3,990    $(8,046)        $17,296
Shares issued to directors...        ---     ---          60         ---        ---           (26)        52             112
Exercise of stock options....          4     ---          14         ---        ---           ---        ---              14
Treasury stock issued in
 acquisition.................        ---     ---       1,079         ---        ---          (434)       875           1,954
 
Sale of treasury stock.......        ---     ---         497        (900)       ---          (200)       403             ---
Net earnings.................        ---     ---         ---         ---     (4,038)          ---        ---          (4,038)
                                  ------    ----     -------       -----    -------         -----    -------         -------
Balances at April 30, 1995...     14,146     141      29,373        (900)    (6,560)        3,330     (6,716)         15,338
Shares issued to directors...         21     ---         136         ---        ---           ---        ---             136
Exercise of stock options       
 including related income
 tax benefits................         37       1       1,020         ---        ---           (72)       144           1,165
Net earnings.................        ---     ---         ---         ---      9,138           ---        ---           9,138
                                  ------    ----     -------       -----    -------         -----    -------         -------
Balances at April 30, 1996...     14,204     142      30,529        (900)     2,578         3,258     (6,572)         25,777
Exercise of stock options
 including related income
 tax benefits................         76       1       1,018         ---        ---           ---        ---           1,019
Shares issued in acquisition.         90       1       2,399         ---        ---           ---        ---           2,400
Net loss.....................        ---     ---         ---         ---     (4,049)          ---        ---          (4,049)
                                  ------    ----     -------       -----    -------         -----    -------         -------
Balances at April 30, 1997...     14,370    $144     $33,946       $(900)   $(1,471)        3,258    $(6,572)        $25,147
                                  ======    ====     =======       =====    =======         =====    =======         =======
</TABLE>


         See accompanying notes to consolidated financial statements.


                                      F-5
<PAGE> 
    
                  PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
                     Consolidated Statements of Cash Flows
                  Years Ended April 30, 1997, 1996, And 1995
                                (In thousands)
                                   RESTATED                  
<TABLE>
<CAPTION>
                                                                                        1997        1996       1995
                                                                                      ---------  ----------  ---------
<S>                                                                                   <C>        <C>         <C> 
Cash flows from operating activities:
   Net earnings (loss)..............................................................  $ (4,049)   $  9,138   $ (4,038)
 Adjustments to reconcile net earnings (loss) to net cash provided by (used in)
  operating activities:
   Gain on sale of subsidiary stock.................................................       ---      (2,247)       ---
   Minority interest in earnings (losses) of subsidiaries...........................       196        (212)       159
   Depreciation and amortization....................................................     5,372       3,944      3,401
   Increase (decrease) in deferred income taxes.....................................    (3,020)      3,955     (2,424)
   Other items, net.................................................................       (86)        (83)      (378)
  Changes in operating assets and liabilities, net of effects from purchase/sale of
   subsidiaries:
    Increase in accounts receivable, net............................................    (6,029)    (13,123)      (511)
    Decrease (increase) in income tax receivable....................................      (471)        182      2,741
    Decrease in pharmaceutical and medical supplies.................................       209          50        264
    Increase in other current assets................................................      (636)     (1,539)      (499)
    Increase in other assets........................................................    (1,014)     (2,015)    (1,081)
    Increase (decrease) in accounts payable.........................................     2,516       2,199       (623)
    Increase (decrease) in claims payable...........................................      (415)      3,154       (388)
    Increase in accrued salaries and benefits.......................................     1,991       3,199        852
    Increase (decrease) in billings in excess of costs..............................       824        (475)    (1,465)
    Increase in other liabilities...................................................       239         247         63
                                                                                      --------    --------   --------
      Net cash provided by (used in) operating activities...........................    (4,373)      6,374     (3,927)
                                                                                      --------    --------   --------
Cash flows from investing activities:
   Acquisition of property and equipment............................................    (9,601)     (3,383)    (6,217)
   Net proceeds from the sale of property and equipment.............................       ---         ---     14,045
   Acquisition of subsidiaries, net of cash acquired (note 11)......................   (31,053)        ---       (811)
   Disposition of subsidiaries, net of cash conveyed (note 11)......................       ---         ---     10,790
   Sale of subsidiary stock.........................................................       ---       3,000        ---
                                                                                      --------    --------   --------
    Net cash provided by (used in) investing activities.............................   (40,654)       (383)    17,807
                                                                                      --------    --------   --------
Cash flows from financing activities:
   Net proceeds (repayments) under revolving promissory notes.......................  $  9,200    $(20,546)  $  6,590
   Borrowings on notes payable......................................................       241       1,918        751
   Repayments on notes payable......................................................      (568)     (5,607)   (20,845)
   Receivables from officers........................................................    (1,309)       (538)    (1,561)
   Issuance of treasury stock to directors..........................................       ---         136        112
   Proceeds from the exercise of stock options......................................     1,019         507         14
   Capital contributions from other shareholders in subsidiaries....................     3,562         ---        ---
   Distributions paid to limited partners...........................................       ---         ---       (133)
   Net proceeds from issuance of convertible subordinated debentures................       ---      65,608        ---
                                                                                      --------    --------   --------
    Net cash provided by (used in) financing activities.............................    12,145      41,478    (15,072)
                                                                                      --------    --------   --------
      Net increase (decrease) in cash and cash equivalents..........................   (32,882)     47,469     (1,192)
Cash and cash equivalents, beginning of year........................................    48,647       1,178      2,370
                                                                                      --------    --------   --------
Cash and cash equivalents, end of year..............................................  $ 15,765    $ 48,647   $  1,178
                                                                                      ========    ========   ========
Supplemental disclosure of cash flow information:
 Cash paid during the year for:
   Interest.........................................................................  $  4,987    $  1,876   $  1,922
   Income taxes.....................................................................       586          42         22
Supplemental disclosure of non-cash investing and financing activities (note 11):
   Sale of treasury stock for note receivable.......................................       ---         ---   $    900
   Forfeiture of acquisition note and corresponding excess cost over fair value of    
    assets acquired.................................................................       ---         ---   $     50 
</TABLE>
         See accompanying notes to consolidated financial statements.

                                      F-6
<PAGE>
 
                  PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         April 30, 1997, 1996 AND 1995
                                        
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Organization and Business

PHP Healthcare Corporation and its subsidiaries (the Company) operate in a
single industry providing health care and related support services primarily on
a contractual basis to federal, state and local government agencies, and
commercial entities.

In fiscal 1992, the Company commenced the management of ambulatory surgery
centers acquired or developed through its majority owned subsidiary, Paragon
Ambulatory Surgery, Inc. (Paragon). In fiscal 1995, the Company acquired the
remaining ownership interest in Paragon. Immediately thereafter, the Company
sold all of its interest in the remaining two ambulatory surgery centers managed
by Paragon.

In fiscal 1994, the Company acquired the operations of a health maintenance
organization, D.C. Chartered Health Plan, Inc. (CHP), serving the District of
Columbia Medicaid and Aid for Families with Dependent Children (AFDC) residents.

In November 1995, the Company formed and commenced operating Virginia Chartered
Health Plan, Inc. (VACHP), a Medicaid HMO operating in select markets in
Virginia.

(b) Principles of Consolidation

The consolidated financial statements include the accounts of PHP Healthcare
Corporation and its majority owned subsidiaries. All significant intercompany
account balances and transactions have been eliminated in consolidation.

The Company consolidates the financial statements of affiliated physician
practices owned by nominee shareholders where the Company can change the nominee
shareholder at its own discretion at nominal value.  These affiliated practices
perform healthcare services in the Company's facilities under exclusive
contractual arrangements.

(c) Use of Estimates

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

(d) Revenue Recognition

The Company engages in fixed-price, unit-price, cost-reimbursement-plus-fee, and
fixed-rate-labor hour contracts. Revenue on fixed-price contracts and unit-price
contracts is recognized using either the percentage-of-completion method or as
services are performed based on contracted rates. The percentage-of-completion
method measures revenue principally by comparing the cost of services performed
to date with the total estimated cost of services required through completion
applied to the entire estimated contract value. Revenue on cost-reimbursement-
plus-fee contracts is recognized on the basis of direct and indirect costs
incurred during the period plus the fee earned. Revenue on fixed-rate-labor hour
contracts is recognized as services are performed based on contractual rates.

Billings in excess of costs represents amounts billed in accordance with
contract provisions for which future contract services are to be performed.

Costs to complete estimates are reviewed periodically and revised as required.
Provisions are made for the full amount of anticipated losses, if any, on all
contracts in the period in which they are first determinable.



                                      F-7
<PAGE>
 
Costs under cost-reimbursement contracts with the federal government are subject
to government audit upon contract completion. Therefore, all contract costs,
including direct and indirect expenses, are potentially subject to adjustment
prior to final reimbursement. Management believes that adequate provisions for
such adjustments, if any, have been made in the accompanying consolidated
financial statements. All indirect expense recovery rates for fiscal year 1990
and prior have been approved by the U.S. government.

Revenue on prepaid Medicaid HMO contracts is recognized based on premiums earned
during the period in which the HMO is obligated to provide services, including
estimated amounts relating to final settlements upon contract completion, if
applicable.

Revenue on prepaid global capitation healthcare services contracts is recognized
based on premiums earned during the period in which the Company is obligated to
provide services.

Patient service revenue is reported at the estimated net realizable amounts from
patients, third party payors, and others for services rendered primarily based
on contractually determined rates.

The percentages of the Company's revenues derived from individual customers
comprising more than 10% of consolidated revenues were as follows: 21%, 24% and
33% for 1997, 1996 and 1995, respectively, from the federal government; 20%, 28%
and 22% for 1997, 1996 and 1995, respectively, from the District of Columbia;
14%, 10% and 14% for 1997, 1996 and 1995, respectively, from Blue Cross/Blue
Shield of New Jersey.

    
The Company's net accounts and contract settlement receivables related to the
individual customers noted above are $5.3 million, $12.1 million, and $0.5
million from the federal government, the District of Columbia, and Blue
Cross/Blue Shield of New Jersey, respectively, at April 30, 1997, and $6.1
million, $19.1 million, and $0.7 million at April 30, 1996, respectively.      

(e) Cash Equivalents

For purposes of the statement of cash flows, the Company considers all highly
liquid investments with original maturities of 3 months or less to be cash
equivalents. Cash equivalents consist of money market accounts, certificates of
deposit and debt instruments amounting to $13.4 million and $46.0 million at
April 30, 1997 and 1996, respectively.

(f) Property and Equipment

Property and equipment are stated at cost. Depreciation on buildings, furniture
and fixtures, and equipment is computed on a straight-line or accelerated method
over estimated useful lives of 3 to 30 years. Leasehold improvements and
equipment under capital lease are amortized using the straight-line method over
the shorter of the lease term or estimated useful lives of the assets.

Construction in progress consists of all construction related costs, excluding
land acquisition cost, incurred for property under development. Depreciation on
these properties commences when construction is complete and the assets are
placed into service.

Property held for sale, consisting of land and equipment, are stated at the
lower of cost or net realizable value. Property held for sale is included as
other current assets.

(g) Intangible Assets

Intangible assets primarily represent the excess of the purchase price of
acquisitions over the fair value of the net assets acquired. Such excess costs
are being amortized on a straight-line basis over periods of estimated benefit
of 10 to 40 years. The Company assesses the recoverability of goodwill by
determining whether the balance can be recovered through estimated undiscounted
future operating cash flows of the acquired operation. The amount of impairment,
if any, is measured based on projected discounted future operating cash flows.
Intangible assets also represent costs allocated to network


                                      F-8
<PAGE>

     
agreements, physician practices and other specifically identifiable assets
arising from business acquisitions. These assets are amortized on a straight-
line basis over their estimated useful lives which range from 3 to 4 years.
     
(h) Precontract Costs and License Acquisition Costs

Recoverable costs directly related to contracts incurred prior to commencement
of services are capitalized as precontract costs and amortized to contract
expense over the estimated period of benefit, generally 1 to 2 years and are
included as other current assets. Direct costs associated with obtaining health
care regulatory licensure are capitalized and amortized over the estimated
period of benefit, not to exceed 5 years, and are included as other assets.

(i) Income Taxes

Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

(j) Health Care Services Expense and Claims Payable

Medical health care services expense includes claims paid and payable and
capitation payments paid to certain providers. Claims payable are estimated
based on actuarial evaluations of providers' claims submitted and include
provisions for incurred but not reported claims. Health care services expense is
included as direct costs.

(k) Sales of Subsidiary Stock

Gains or losses related to the sales of stock by a subsidiary are included in
the statements of operations.

(l) Additional Paid-In Capital

The Company realizes a tax benefit from the exercise of certain stock options.
This benefit results in a decrease in current income taxes payable and an
increase in additional paid-in capital.

(m) Treasury Stock

The Company uses the cost method of accounting for treasury stock. Issuances of
treasury stock are relieved from treasury at the then weighted average cost per
share. The difference between the issuance value of the shares and the weighted
average cost per share is recorded as additional paid-in-capital.

(n) Earnings (Loss) Per Common Share

Earnings per common share is computed by dividing net earnings by the weighted
average number of common shares outstanding, which are adjusted for the assumed
exercise of stock options, stock warrants, and convertible debt, if dilutive.
Common share equivalents, which include dilutive stock options and warrants, are
computed using the treasury stock method. Loss per common share is computed
excluding common share equivalents because they are antidilutive. The
convertible debt is computed using the "if converted" method.

                                      F-9
<PAGE>
 
(2) ACCOUNTS RECEIVABLE

     Accounts receivable, net includes the following at April 30 (in thousands):

<TABLE>
<CAPTION>
                                                                                             1997          1996   
                                                                                             ----          ----   
     <S>                                                                                    <C>           <C>         
     Contract receivables:                                                                                        
     Billed:                                                                                                      
     Contracts in process.............................................................      $ 9,087       $10,844 
     Final billings on completed contracts............................................          168           --- 
                                                                                            -------       ------- 
                                                                                              9,255        10,844 
                                                                                            =======       ======= 
                                                                                                                  
     Unbilled:                                                                                                    
     Incurred costs and accrued profits...............................................       23,596        12,066 
     Retainages.......................................................................          468           468 
                                                                                            -------       ------- 
                                                                                             24,064        12,534 
                                                                                            -------       ------- 
     Contract settlement..............................................................       21,841        14,397 
     Less reserve for Medicaid receivable.............................................       (9,822)          --- 
                                                                                            -------       ------- 
                                                                                             12,019        14,397 
                                                                                            -------       ------- 
     Total contract receivables.......................................................       45,338        37,775 
        Patient service receivables...................................................          226           276 
        Other receivables.............................................................          423           945 
                                                                                            -------       ------- 
     Total............................................................................       45,987        38,996 
        Less allowance for doubtful accounts receivable...............................         (187)         (194)
                                                                                            -------       ------- 
     Accounts receivable, net.........................................................      $45,800       $38,802 
                                                                                            =======       =======  
</TABLE>

     Substantially all net receivables are expected to be collected within one
year.

                        CONTRACT SETTLEMENT RECEIVABLE

CHP, a wholly-owned health maintenance organization, earns substantially all of
its revenue as a prepaid Medicaid contractor with the D.C. Department of Human
Services (DCDHS) providing health care services to Medicaid recipients in the
District of Columbia. The Medicaid program is jointly funded by the District of
Columbia and Health Care Finance Administration (HCFA) of the Department of
Health and Human Services (HHS).

CHP receives interim payments on an estimated basis with a final settlement
occurring at the end of the contract period for the difference between amounts
earned and the interim payments received. The final settlement process with
DCDHS and HCFA is subject to defined upper payment limits and requires an audit
of CHP's activities. Due to the unique nature of these contracts, DCDHS has not
undergone a final settlement process for this type of contract.

In April 1996, the U.S. Government enacted a law, the effect of which requires
the Company's contracts with DCDHS to be settled retroactively on a capitated-
rate-per-enrollee basis. Prior to the enactment of the law, the terms of the
contracts provided that the final settlements would be on a non-risk basis,
calculated in part on a cost-based methodology.

For several years the Company engaged in on-going good faith discussions and
negotiations with the District regarding the amounts due for the 1992 through
1994 contract periods. In February 1997, that process ultimately resulted in an
agreement to settle these amounts due the Company for $18.9 million. The
agreement was signed and approved by two different departments in the District
government, but required approval for payment by the District's Chief Financial
Officer. In early March 1997, through comments in the local press, the Company
learned that the Chief Financial Officer was not going to approve payment.
Consequently, in light of the clearly prolonged timeframe to resolve the issues
surrounding payment of these receivables, and in particular to receive a formal
response from the District providing substantiation for the denial of payment,
the Company recognized reserves of $9.8 million against its Medicaid receivables
from the District of Columbia, principally relating to services provided during
the 1992 to 1994 contract periods. The Company remains committed to pursuing its
contractual rights for the amounts it is due from the District.

                                      F-10
<PAGE>
 
The Company believes that the final settlement of these contracts under the
method prescribed by the new law may result in payments to the Company
materially in excess of the $12.0 million and $14.4 million in receivables
recorded at April 30, 1997 and 1996, respectively, which amounts have been
consistently estimated based on the Company's conservative interpretation of
amounts due based on the methods in effect prior to the enactment of the new
law.

(3) PROPERTY AND EQUIPMENT

     Property and equipment consist of the following at April 30 (in thousands):

<TABLE>
<CAPTION>
                                                                1997             1996  
                                                                ----             ----  
     <S>                                                      <C>             <C>      
     Land.................................................... $  9,491        $  3,969 
     Buildings...............................................   25,597           9,227 
     Leasehold improvements..................................   13,385           7,644 
     Equipment...............................................   20,509          13,363 
     Furniture and fixtures..................................    4,958           4,236 
     Vehicles................................................      228             182 
     Construction in progress................................      126             --- 
                                                              --------        -------- 
                                                                74,294          38,621 
     Less accumulated depreciation and amortization..........  (15,850)        (15,936)
                                                              --------        -------- 
     Property and equipment, net............................. $ 58,444        $ 22,685 
                                                              ========        ========  
</TABLE>

As of April 30, 1997 and 1996, $1.1 million in furniture and fixtures and
related accumulated depreciation of $787,000 and $627,000, respectively, were
financed by capital leases. As of April 30, 1997, $3.5 million in equipment and
related accumulated depreciation of $148,000 were financed by capital leases.

Depreciation and amortization expense for property and equipment totaled $4.6
million, $3.7 million and $3.1 million for the years ended April 30, 1997, 1996
and 1995, respectively.

(4) NOTES PAYABLE

(a) Note Payable to Bank

The note payable to bank at April 30, 1997 is a revolving promissory note due
August 28, 1997, collateralized by all of the Company's assets, with a maximum
credit line of $12.2 million, and interest due monthly at 1.5% above LIBOR.

The revolving promissory note contains a letter of credit facility whereby the
bank will issue for the account of the Company, irrevocable stand-by letters of
credit in connection with certain contract performance requirements. The amount
of outstanding stand-by letters of credit reduces the amount of funds available
under the revolving note agreement. Under this agreement, the Company had issued
stand-by letters of credit amounting to approximately $3.0 million and $1.1
million at April 30, 1997 and 1996, respectively. The revolving promissory note
functions similar to a line of credit with daily advances and repayments.
Accordingly, revolving promissory note activity is presented as a net amount in
the consolidated statements of cash flows.

The Company's credit agreement, as amended, contains certain covenants which, in
addition to other restrictions, limit the amount of capital expenditures and
additional borrowings. The Company is also precluded from the payment of cash
dividends without the bank's approval, and is required to maintain certain
financial ratios.

                                      F-11
<PAGE>
 
(4) NOTES PAYABLE (CONTINUED)

(b) Notes Payable-Other

The notes payable-other consists of the following at April 30 (in thousands):

<TABLE>
<CAPTION>
                                                                                                             1997         1996   
                                                                                                             ----         ----    
     <S>                                                                                                  <C>           <C>    
     Collateralized term note of $1.4 million, interest at 10.5%, monthly payments of principal and                            
      interest of $31,000, due October 2000.........................................................       $ 1,079      $1,321 
     Insurance note of $242,000, monthly payments of principal and interest of $25,000, interest at                            
      5.4%, due January 1998........................................................................           218         --- 
     Obligations under capital leases, for certain equipment and fixtures, monthly payments of                                 
      principal and interest of $58,000, interest from 4.1% to 8.4%, due February 2001..............         3,883         645 
     Convertible promissory notes of $500,000, interest due annually on April 30 at 7%, convertible    
      into common stock at $4.50 per share commencing September 1995, due September 1999 (notes        
      7(b) and 11(a))...............................................................................           500         500      

                                                                                                           -------      ------ 
     Total notes payable-other......................................................................         5,680       2,466 
     Less current maturities........................................................................        (1,716)       (545)
                                                                                                           -------      ------ 
     Notes payable-other, net of current maturities.................................................       $ 3,964      $1,921 
                                                                                                           =======      ======  
</TABLE>

Scheduled maturities of notes payable-other at April 30, 1997 are as follows (in
thousands): $1,716 in 1998, $1,183 in 1999, $1,763 in 2000, $1,018 in 2001, and
none in 2002.

The Company's weighted average interest rate on short-term borrowings
outstanding at April 30, 1997 and 1996 was 7.2% and 7.0%, respectively.

(5) CONVERTIBLE SUBORDINATED DEBENTURES

On December 18, 1995, the Company completed the sale of $69 million in
convertible subordinated debentures due December 15, 2002. The Company received
$65.4 million in net proceeds after commissions and other offering costs. The
Company used a portion of the proceeds to repay all existing bank debt and
several other notes payable. The debentures bear interest at a rate of 6.5%,
payable on June 15 and December 15, and are convertible into PHP common stock at
a conversion price of $27.25 per share.

The debentures are redeemable at the option of the Company, in whole or in part,
at the redemption prices set forth in the indenture, together with accrued
interest, except that no redemption may be made prior to December 17, 1998. Upon
a repurchase event, each holder of debentures shall have the right, at the
holder's option, to require the Company to repurchase such holder's debenture at
a purchase price equal to 100% of the principal amount thereof, plus accrued
interest. The debentures are unsecured obligations of the Company and are
subordinated to all present and future senior indebtedness of the Company.

                                      F-12
<PAGE>
 
                  PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         April 30, 1997, 1996 AND 1995

(6) INCOME TAXES

Income tax expense (benefit) consists of the following at April 30 (in
thousands):

<TABLE>    
<CAPTION>
                                                                      Current        Deferred         TOTAL  
                                                                      -------        --------         -----   
     <S>                                                            <C>            <C>              <C>      
     1997:                                                                                                   
     Federal......................................................  $      ---        $(2,227)       $(2,227)
     State........................................................         ---           (260)          (260)
                                                                    ----------        -------        ------- 
                                                                    $      ---        $(2,487)       $(2,487)
                                                                    ==========        =======        ======= 
     1996:                                                                                                   
     Federal......................................................  $      ---        $ 3,400        $ 3,400 
     State........................................................         ---            700            700 
                                                                    ----------        -------        ------- 
                                                                    $      ---        $ 4,100        $ 4,100 
                                                                    ==========        =======        ======= 
     1995:                                                                                                   
     Federal......................................................  $     (270)       $(1,775)       $(2,045)
     State........................................................         (30)          (196)          (226)
                                                                    ----------        -------        ------- 
                                                                    $     (300)       $(1,971)       $(2,271)
                                                                    ==========        =======        =======  
</TABLE>     

Income tax expense (benefit) differs from the amounts computed by applying the
U.S. federal income tax rate of 34 percent to earnings (loss) before income
taxes as follows:

<TABLE>    
<CAPTION>
                                                                      1997      1996           1995  
                                                                      ----      ----           ----  
     <S>                                                            <C>         <C>         <C>      
     Computed "expected" tax expense (benefit)................      $(2,227)    $4,494       $(2,145)
     Increase (decrease) in income tax resulting from:                                               
      State income tax expense (benefit), net of federal                                             
       income taxes...........................................         (259)       434          (249)
      Non-taxable gain on sale of stock in subsidiary.........          ---       (853)          --- 
      Amortization of excess cost over fair value of assets                                          
       acquired...............................................           51         64           196 
      Non-deductible items related to sale of subsidiary......          ---        ---         1,489 
      Change in the valuation allowance allocated to income                                          
       tax expense............................................          ---        ---        (1,707)
      Other...................................................          (52)       (39)          145 
                                                                    -------     ------       ------- 
                                                                    $(2,487)    $4,100       $(2,271)
                                                                    =======     ======       =======  
 
     Effective income tax rate................................         38.0%      31.0%         36.0%
                                                                    =======     ======       ======= 
</TABLE>     

                                      F-13
<PAGE>
 
(6) INCOME TAXES (CONTINUED)

The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at April 30, 1997 and
1996, are as follows:

<TABLE>
<CAPTION>
                                                                                                     1997           1996
                                                                                                     ----           ----  
<S>                                                                                                 <C>            <C> 
Deferred tax assets:
   Accounts receivable, principally due to differing recognition methods.....................       $ 1,208        $  746
   Property and equipment, principally due to difference in depreciation.....................           396           349
   Land and building, due to valuation methods...............................................           230           230
   Accrued employee benefits.................................................................         2,263         1,616
   Accrued contract and sublease losses......................................................           237           270
   State and federal net operating loss and contribution carryforwards.......................         5,330         2,725
   Alternative minimum tax credit carryforwards..............................................           361           361
                                                                                                    -------        ------
    Total gross deferred tax assets..........................................................        10,025         6,297
   Less valuation allowance..................................................................           ---           ---
                                                                                                    -------        ------
    Net deferred tax assets..................................................................       $10,025        $6,297
                                                                                                    -------        ------
Deferred tax liabilities:
   Accounts receivable, principally due to differing recognition methods.....................       $ 4,906        $6,527
   Property and equipment, principally due to difference in depreciation.....................            45            35
   Precontract costs.........................................................................         3,008           688
   Deferred lease obligations................................................................            18            19
                                                                                                    -------        ------
    Total deferred tax liabilities...........................................................       $ 7,977        $7,269
                                                                                                    -------        ------
    Net deferred income tax asset (liability)................................................       $ 2,048        $ (972)
                                                                                                    =======        ======
</TABLE>

The valuation allowance for deferred tax assets was zero as of April 30, 1997
and 1996.
    
As of April 30, 1997, the Company has federal and state net operating loss
carryforwards of approximately $11.6 million, available to offset future federal
and state taxable income, expiring principally in fiscal years 2009 through 
2012. Certain of these carryforwards have annual dollar limits. In addition, the
Company has alternative minimum tax credit carryforwards of approximately
$360,000 which are available to reduce future federal regular income taxes, if
any, over an indefinite period.      

(7) CAPITAL STOCK

(a) Stock Split

On October 16, 1995, the Board of Directors of the Company declared a two-for-
one split of its Common Stock payable on November 20, 1995. This was effected in
the form of a 100 percent stock dividend of 7,073,351 shares to shareholders on
record as of November 1, 1995. Stockholders' equity has been restated to give
retroactive recognition to the stock split for all periods presented by
reclassifying from additional paid-in-capital to common stock the par value of
the additional shares arising from the split. In addition, for all periods
presented, all references in the consolidated financial statements and footnotes
thereto to number of shares, earnings per share amounts, weighted average shares
outstanding, as well as stock option, stock warrant and related price
information have been restated to give retroactive effect to the two-for-one
stock split effected on November 20, 1995.

(b) Note Receivable

On September 29, 1994, the Company sold 200,000 shares of treasury stock at
$4.50 per share for a note receivable in the amount of $900,000 to a financial
advisory services firm in which the managing director is also a director of the
Company. The note receivable is collateralized by a pledge and escrow of 300,000
shares of the Company's common stock and by convertible notes payable of
$500,000 by the Company to the same parties.

                                      F-14
<PAGE>
 
(c) Treasury Stock

In September 1994, the Company issued 380,000 shares of treasury stock in
exchange for the minority interests in Paragon and issued 54,286 shares of
treasury stock in exchange for 100% of the common stock of J.P. Cole &
Associates. In December 1996, 88,572 additional shares of the Company's treasury
stock which had been issued as future consideration in the J.P. Cole &
Associates acquisition were released from escrow (note 12(d)).

(d) Stock Rights

On April 10, 1992, the Board of Directors of the Company declared a dividend
distribution of one preferred stock purchase right (the Rights) for each share
of common stock outstanding at April 20, 1992 or issued thereafter. The Board of
Directors also designated and reserved 50,000 shares of preferred stock as
"Series A Junior Preferred Stock". Each Right when exercisable, entitles the
registered holder to purchase from the Company one one-thousandth of a share of
Series A Junior Participating Preferred Stock, at an exercise price of $42.50,
subject to adjustment. The Rights will become exercisable after public
announcement that, without consent of a majority of disinterested members of the
Board of Directors, a third party has acquired or obtained beneficial ownership
of 15% or more of the outstanding Common Shares or 10 business days after
commencement or public announcement of an offer of such an event. The Rights,
which do not have voting rights, expire in April 2002, and may be redeemed in
whole by the Company at $.01 per Right at any time prior to their expiration or
the acquisition by a third party of 15% or more of the Company's Common Stock.
In the event that the Company is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earning
power is sold, provision shall be made so that each holder of a Right shall have
the right to receive, upon exercise thereof at the then current exercise price,
that number of shares of common stock of the surviving company which at the time
of such transaction would have a market value of two times the exercise price of
the Right. At April 30, 1997, and 1996, 11,111,364 and 10,945,502 rights are
outstanding, respectively.

(e) Directors' Retainer Plan

Commencing on May 1, 1993, and thereafter for any fiscal quarter, each Director
of the Company may elect to have the full amount of his retainer paid in the
form of common shares of the Company under this plan. The number of shares
issued is calculated based on the then current market value of the stock. The
Board of Directors of the Company has authorized 100,000 common shares for
issuance under this plan. In April 1996 and October 1994, the Company issued
20,449 shares and 25,778 shares, respectively, to the Board of Directors,
pursuant to the Directors' Plan.

(f) Subsequent Event--Sale of Stock

On May 2, 1997, the Company sold 200,000 shares of stock at $13.00 per share to
an investor in a private transaction.

(8) STOCK OPTIONS AND WARRANTS

     In November 1986, the Board of Directors adopted and the shareholders
approved the Company's 1986 Stock Option Plan. Effective May 1, 1991, the Board
of Directors adopted, and effective September 30, 1991 the shareholders
approved, the Amended and Restated PHP Healthcare Corporation 1986 Stock Option
Plan (the Plan).

     The Plan provided for the granting of options to purchase a maximum of
1,500,000 shares of the Company's stock to eligible employees and officers of
the Company. In November 1994, the shareholders approved an increase in the
maximum to 3,500,000 shares. The Plan provides for the granting of options which
qualify as incentive stock options as well as non-qualified stock options. All
incentive stock options granted under the Plan must have an exercise price of
not less than 100% of the fair market value of the common stock on the date of
grant, and non-qualified stock options must have an exercise price of not less
than 60% of the fair market value of the common stock on the date of grant. All
options granted prior to April 30, 1991, under the Plan, may be exercised no
earlier than two years from the date of grant. All options granted since April
30, 1991, are exercisable ratably on an annual basis over two to five years from
the date of grant. Options are canceled 90 days after termination of employment
if not exercised.

                                      F-15
<PAGE>
 
The following is a summary of activity of the stock option plan in 1995, 1996
and 1997:

<TABLE>
<CAPTION>
                                                                                                  
                                                                                                     Weighted    
                                                                                                      AVERAGE    
                                                    SHARES          PRICE            AMOUNT       Exercise Price 
                                                    ------          -----            ------       --------------
<S>                                                 <C>            <C>              <C>           <C> 
Options outstanding at April 30, 1994..........     1,494,800      $ 1.95-11.25     $12,936,975   $        8.65
 Options granted in 1995.......................     2,697,200         3.04-5.94      11,793,908            4.37
 Options exercised in 1995.....................         5,000             2.875          14,375            2.88
 Options canceled in 1995......................     1,342,700        3.04-11.25      12,263,377            9.13
                                                    ---------      ------------     -----------   -------------
                                                                                                          
Options outstanding at April 30, 1995..........     2,844,300        1.95-11.25      12,453,131            4.38
 Options granted in 1996.......................       267,000        9.25-27.25       3,977,375           14.90
 Options exercised in 1996.....................       108,372        1.95-11.25         506,196            4.67
 Options canceled in 1996......................        15,378        3.04-11.25          83,745            5.45
                                                    ---------      ------------     -----------   -------------
                                                    2,987,550                                             
Options outstanding at April 30, 1996..........                      3.00-27.25      15,840,565            5.30
 Options granted in 1997.......................       380,084       11.63-35.00       9,810,648           25.81
 Options exercised in 1997.....................        75,862        3.03-10.50         504,013            6.64
 Options canceled in 1997......................        24,676        3.04-34.13         442,970           17.95
                                                    ---------      ------------     -----------   -------------
                                                                                                          
Options outstanding at April 30, 1997..........     3,267,096      $ 3.00-35.00     $24,704,230   $        7.56
                                                    =========      ============     ===========   =============
                                                                                                          
Options exercisable at April 30, 1997..........     1,835,496                                     $        4.76
                                                    =========                                     =============
</TABLE>

On June 10, 1994, the Stock Option Committee of the Board of Directors adopted a
resolution whereby each holder of outstanding stock options under the Plan was
allowed to surrender outstanding stock options on or before September 15, 1994,
in return for an equal number of options with an exercise price equal to 60% of
the fair market value of the Company's common stock on June 10, 1994. The new
options vest ratably in one-third increments over three years and expire in ten
years. A total of 1,315,700 options were surrendered and canceled with a
corresponding issuance of new options with a grant price of $3.04 under the
provisions of this resolution.

                                      F-16
<PAGE>
 
The Company has also granted options outside of the Plan. The following is a
summary of stock option activity outside of the Plan in 1995, 1996 and 1997:

<TABLE>
<CAPTION>
                                                                                                  
                                                                                                         Weighted   
                                                                                                          AVERAGE   
                                                           SHARES        PRICE         AMOUNT         Exercise Price
                                                           ------        -----         ------         --------------
<S>                                                      <C>          <C>            <C>              <C> 
Options outstanding at April 30, 1994................      85,000     $3.80-5.50     $  426,750          $    5.02
 Options granted in 1995.............................     324,286           4.50      1,459,287               4.50
 Options exercised in 1995...........................         ---            ---            ---                ---
 Options canceled in 1995............................         ---            ---            ---                ---
                                                          -------     ----------     ----------          ---------
                                                                                                              
Options outstanding at April 30, 1995................     409,286      3.80-5.50      1,886,037               4.61
 Options granted in 1996.............................         ---            ---            ---                ---
 Options exercised in 1996...........................         ---            ---            ---                ---
 Options canceled in 1996............................         ---            ---            ---                ---
                                                          -------     ----------     ----------          ---------
                                                                                                              
Options outstanding at April 30, 1996................     409,286      3.80-5.50      1,886,037               4.61
 Options granted in 1997.............................         ---            ---            ---                ---
 Options exercised in 1997...........................         ---            ---            ---                ---
 Options canceled in 1997............................         ---            ---            ---                ---
                                                          -------     ----------     ----------          --------- 

Options outstanding at April 30, 1997................     409,286     $3.80-5.50     $1,886,037          $    4.61
                                                          -------     ----------     ----------          --------- 
                                                                                                              
Options exercisable at April 30, 1997................     409,286                                        $    4.61
                                                          =======                                        =========
</TABLE>

To the extent any options are granted at an exercise price less than the fair
market value at the date of the grant, the Company records compensation expense
equal to the difference in such prices ratably over the applicable vesting
period. The Company recorded compensation expense of $1.3 million, $1.0 million
and $1.1 million in 1997, 1996, and 1995, respectively, in the consolidated
statement of operations relating to options.

The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
stock option plan, except as required by Accounting Principles Board Opinion No.
25 (APB No. 25) "Accounting for Stock Issued to Employees", as noted above. Had
compensation cost for the Company's stock option plan been determined based on
the fair value at the grant date for awards in 1997 and 1996 consistent with the
provisions of SFAS No. 123, the Company's net earnings per share would have been
reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                                        1997         1996 
                                                                                        ----         ---- 
     <S>                                                                         <C>            <C>       
     Net earnings (loss)--as reported (000's)..................................       $(4,049)     $9,138 
     Net earnings (loss)--pro forma (000's)....................................       $(4,960)     $9,015 
     Earnings (loss) per share--as reported....................................       $  (.37)     $  .68 
     Earnings (loss) per share--pro forma......................................       $  (.45)     $  .67  
</TABLE>

                                      F-17
<PAGE>
 
The weighted average fair value per share of options granted during fiscal years
1997 and 1996 was $14.73 and $7.00, respectively. The fair value of each option
grant is estimated on the date of grant, based on the market price of the stock
on that date which is also the option grant price using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants:

<TABLE>
     <S>                                                                               <C>          <C>    
     Dividend Yield............................................................           0%           0%  
     Expected volatility.......................................................          60%          60%  
     Risk-free Interest Rate...................................................        6.03%        6.03%  
     Expected Lives............................................................        5 years      5 years 
</TABLE>

In conjunction with the acquisition of EastWest Research Corporation on November
1, 1992, the Company issued 20,000 stock warrants at $5.75 per share, 20,000
stock warrants at $7.50 per share, and 20,000 stock warrants at $12.00 per
share. In December 1994, 25% of these warrants were canceled. The 45,000
remaining warrants are exercisable in varying percentages after two years and
expire seven years from the date of issuance. The value assigned to these
warrants was immaterial. The number of these stock warrants which are
exercisable at April 30, 1997 is 45,000.

(9) RETIREMENT OF FORMER CHAIRMAN

     On January 31, 1997, the Company's Founder, Chairman and Chief Executive
Officer, Charles H. Robbins, retired. The Board of Directors provided Mr.
Robbins a retirement agreement that included a one-time $2 million payment and a
payment of $275,000 related to a one-year noncompetition agreement. In
connection with the agreement, on May 2, 1997, Mr. Robbins repaid all
outstanding notes receivable and accrued interest due the Company under the
Senior Executive Loan Program and notes receivable related to certain life
insurance policies. The agreement contains additional clauses which include,
among other things, a "standstill" provision and restrictions on the timing of
any dispositions of Mr. Robbins' holdings in the Company. For the year ended
April 30, 1997, the Company recognized $2.275 million in expense related to this
retirement agreement.

                                      F-18
<PAGE>
 
                  PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         APRIL 30, 1997, 1996 AND 1995

(10) RESTRUCTURING CHARGES

During the third quarter ended January 31, 1997, the Company incurred
restructuring charges of $2.55 million. Within a broad restructuring effort,
this charge resulted from two specific decisions made by the Board of Directors.

In November 1996, the Company made the strategic decision to terminate its long-
term care line of business, resulting in restructuring charges of $1.8 million.

Effective January 31, 1997, the Company made the strategic decision to terminate
the Company's facilities development and maintenance function operated out of
the corporate offices through the Company's wholly-owned subsidiary, Sterling
Communities Corporation. Future buildings and facilities management needs will
be fulfilled through outsourced vendor relationships. The Company incurred a
restructuring charge of $750,000 for severance and other termination costs
associated with the elimination of this function.

(11) ACQUISITION, DEVELOPMENT, AND SALE OF SUBSIDIARIES

(a) Acquisition of Remaining Interests in Paragon

Effective September 29, 1994, the Company acquired the remaining 49% ownership
interest in Paragon for $125,000 in cash, notes payable of $917,000 and 380,000
shares of the Company's treasury stock. After one year, $500,000 of the notes
payable are convertible into Company stock at a conversion price of $4.50 per
share. The acquisition was accounted for using the purchase method of accounting
and accordingly, the purchase price was allocated to the acquired share of
tangible and identifiable intangible assets and liabilities based on their
respective fair values. The excess cost over the estimated fair value of the
acquired share of net assets approximated $1.9 million. Subsequent to the
acquisition, Paragon was merged into the Company. The results of operations for
Paragon have been included in the consolidated statements from November 5, 1991,
when the Company first purchased the majority interest.

(b) Sale of Surgery Centers

Effective September 30, 1994, the Company sold 100% of its interest in two
ambulatory surgery centers for approximately $11.75 million in cash plus the
assumption of related notes payable of approximately $5 million. The related
gain on disposition after the write-off of the excess cost over the estimated
fair value of net assets resulting from the acquisition of the centers is
approximately $340,000 and is included as miscellaneous income in fiscal year
1995.

(c) Sale of Office Building

In July 1994, the Company, through a wholly owned subsidiary, sold an office
building in Reston, Virginia for approximately $14.8 million. The Company leases
approximately 55,000 square feet of the building under a 15 year lease and
accordingly, the gain on this sale of approximately $1.2 million has been
deferred and is being amortized ratably over the life of this lease. In
conjunction with this sale, the Company repaid in full non-recourse mortgage
notes of approximately $9.4 million.

(d) Sale of Partial Interest in Health Maintenance Organization

On January 31, 1996, Virginia Chartered Health Plan, Inc. (VACHP), a wholly
owned subsidiary of the Company, sold a 30% interest to University Health
Services, Inc. (UHS), an affiliate of the Medical College of Virginia, for $3.0
million in cash. The Company recognized a gain of $2.2 million related to this
sale, which is presented separately in the consolidated statement of operations
for the year ended April 30, 1996. Since this was a sale of previously unissued
VACHP shares the resulting gain is not taxable and accordingly, no corresponding
provision for income taxes was recognized. In conjunction

                                      F-19
<PAGE>
 
with the sale of stock, VACHP entered into a five-year Network Agreement with
UHS for inpatient services. The sale of stock agreement provides that at the
termination of the five-year Network Agreement, if not renewed or terminated due
to breach, UHS may put or VACHP may call the shares purchased at the then fair
market value.

(e) Acquisition of Primary Care Facilities and Related Network Services
Agreement

On February 28, 1997, the Company and a real estate investment trust subsidiary
in which the Company owns a minority interest (the REIT), acquired certain
primary care facilities located throughout New Jersey formerly operated by Blue
Cross and Blue Shield of New Jersey, Inc. (BCBSNJ). The total purchase price,
including transaction costs and other consideration, was approximately $37.0
million, of which $22.3 million was paid by the REIT and the balance of the
other consideration was provided by the Company in the form of $8.8 million in
cash, $3.5 million in new lease financing, and 90,000 shares of the Company's
common stock. In addition, in connection with the transaction, the Company made
a $0.9 million capital contribution to the REIT and advanced the REIT an
additional $18 million, including $16 million in short-term loans and $2 million
in long-term secured loans until permanent financing is obtained. Since the
Company funded substantially all of the funds at closing, in concert with
certain ownership risk provisions of the lease agreements, the Company has
consolidated the operations of the REIT since February 1997. The Company's
portion of the cash consideration paid to BCBSNJ and the amounts contributed or
advanced to the REIT were obtained from a combination of cash on hand, equipment
lease financing, and borrowings on its bank line of credit.
    
This acquisition was accounted for using the purchase method of accounting and
accordingly, the purchase price was allocated to the acquired tangible ($32.6
million) and identifiable intangible ($2.6 million) assets and assumed
liabilities based on their respective fair market values. The identifiable
intangible assets are being amortized on a straight-line basis over periods
ranging from 3 to 25 years.      

On February 28, 1997, the Company and BCBSNJ replaced an existing operating
agreement with a network services agreement effective July 1, 1996, pursuant to
which the Company provides certain health care services to enrolled BCBSNJ
beneficiaries through global capitation. As a result of the new agreement,
BCBSNJ paid the Company global capitation from July 1, 1996 amounting to
$9,977,000 of additional revenue for the period July 1, 1996 through February
28, 1997, recorded in the fourth quarter of fiscal 1997. Also, under the network
services agreement, the Company was responsible for all costs associated with
global capitation services for the period July 1, 1996 through February 1997
resulting in incremental costs of $10,018,000, recorded in the fourth quarter of
fiscal 1997. Accordingly, the results of operations under the network services
agreement are included in the consolidated financial statements from July 1,
1996.
    
If these transactions occurred on May 1, 1995 or 1996, the effect on the
Company's results of operations and net earnings would have been immaterial.
Unaudited pro forma consolidated revenues of the Company would have been
approximately $235 million and $211 million for the years ended April 30, 1997
and 1996, respectively.      

                                      F-20
<PAGE>
 
(f) Supplemental Disclosure of Noncash Investing and Financing Activities

<TABLE>
<CAPTION>
                                                                     1997         1996        1995
                                                                     ----         ----        ----     
<S>                                                              <C>          <C>         <C> 
Acquisition of subsidiaries
 Fair value of assets acquired.................................     $36,977          ---     $ 1,343
 Excess of cost over fair value of assets acquired.............          17          ---       2,439
 Notes payable issued..........................................      (3,541)         ---      (1,017)
 Value of stock and guarantee issued...........................      (2,400)         ---      (1,954)
                                                                    -------   ----------     -------
 Cash paid.....................................................      31,053          ---         811
 Less cash acquired............................................         ---          ---         ---
                                                                    -------   ----------     -------
 Acquisition of subsidiaries, net of cash acquired.............     $31,053          ---     $   811
                                                                    =======   ==========     =======
 
Disposition of subsidiaries
 Fair value of assets sold.....................................         ---          ---     $ 5,964
 Write-off of excess of cost over fair value of assets.........         ---          ---      11,130
 Liabilities assumed by purchaser..............................         ---          ---      (5,721)
                                                                    -------   ----------     -------
 Cash received.................................................         ---          ---      11,373
 Less cash conveyed............................................         ---          ---        (583)
                                                                    -------   ----------     -------
 Disposition of subsidiaries, net of cash......................         ---          ---     $10,790
                                                                    =======   ==========     =======
</TABLE>

(12) RELATED-PARTY TRANSACTIONS

(a) Legal and Financial Advisory Services

During 1997, 1996, and 1995, legal services were provided by law firms in which
one director of the Company is a partner. During the years ended April 30, 1997,
1996, and 1995, total billings approximated $321,000, $300,000, and $257,000,
respectively, all of which was expensed in the consolidated statements of
operations. At April 30, 1997, 1996, and 1995 amounts due the law firms
approximated $112,000, $19,000, and $142,000, respectively.

In 1997, 1996, and 1995, financial advisory services were provided the Company
by a firm in which the managing general partner was a director of the Company,
and became Chairman of the Company on February 1, 1997. In addition, the two
partners in the firm were also employees of the Company from September 1994 to
September 1995. During 1997, 1996 and 1995, total billings approximated
$233,000, $211,000, and $86,000, respectively. At April 30, 1997, 1996, and
1995, the amounts due the firm were none, $11,000, and none, respectively.

(b) Senior Executive Loan Program

On November 5, 1992, the Board of Directors approved a Senior Executive Loan
Program (the Program). Loans made pursuant to this Program may not exceed three
and one-half times the executive's annual salary. The loans are to be repaid in
one year and bear interest at two percent above the Company's short-term
borrowing rate. The loans are collateralized by Company stock owned by the
senior executive or a second position in stock previously pledged provided there
remains sufficient equity in the stock. As of April 30, 1997 and 1996, a total
of $4.4 and $3.3 million, respectively, was outstanding (including accrued
interest) to five officers under the Program. The current outstanding amounts
have been renewed and are now due March 1998. On May 2, 1997, one loan in the
amount of $1.6 million, including accrued interest, was repaid in full.

(c) Other Notes and Advances

The Company has advanced amounts to an officer of a subsidiary of the Company in
the form of promissory notes due from April 1998 to July 2000. The notes bear
interest at 8.5%. The notes are collateralized by the officer's stock in the
Company. As of April 30, 1997 and 1996, the amounts outstanding were $742,000
and $807,000, respectively.

                                      F-21
<PAGE>
 
In accordance with the Board of Directors' approval, the Company makes premium
payments relating to certain insurance policies on behalf of certain officers of
the Company. These advances are owed to the Company and are collateralized by
assignment of the underlying cash surrender value and related death benefit.
During 1994, $650,000 of these amounts were reserved, representing the excess of
the advances over the accumulated cash surrender value. During 1995, the
officers signed promissory notes bearing interest at 7% and due in April 2002
for the amounts advanced; accordingly, the previously recorded reserve was
eliminated. The elimination of this reserve is included in miscellaneous income
in fiscal year 1995. The promissory notes total $1.2 and $1.1 million at April
30, 1997 and 1996, respectively. On May 2, 1997, one note in the amount of
$745,000, including accrued interest, was repaid in full.

(d) J.P. Cole & Associates

During fiscal year 1994 the Company entered into an agreement with an affiliate,
J.P. Cole & Associates, which performed exclusive marketing services for the
Company. The operating results of the affiliate have been combined with the
Company's consolidated financial statements since August 1993. One of the
minority shareholders of the affiliate is a director of the Company. A sales and
service agreement with the affiliate provided for the payment of commissions
related to successful marketing efforts as defined.

Effective September 30, 1994, the Company purchased the affiliate for $100,000
in cash, 142,858 shares of the Company's common stock, and options to purchase
142,858 shares of the Company's common stock at $4.50 per share. Under the terms
of the purchase agreement, 88,572 shares of the 142,858 shares of the common
stock issued were held in escrow until December 1996 subject to certain
performance conditions. Additionally, options to purchase 54,286 shares of
common stock were immediately exercisable and options to purchase 88,572 shares
of common stock which were subject to certain performance conditions became
exercisable in December 1996.

(13) COMMITMENTS AND CONTINGENCIES

(a) Leases as Lessee

The Company has several noncancelable operating leases, principally for office
space and equipment, that expire on various dates over the next fifteen years.
The office leases provide for increased real estate taxes and building operating
costs through annual adjustments. Total rental expense for operating leases for
the years ended April 30, 1997, 1996 and 1995 was approximately $7.2 million,
$4.9 million, and $4.3 million, respectively.

Future minimum rental payments under noncancelable operating leases at April 30,
1997, are as follows: $6.9 million in 1998, $5.9 million in 1999, $5.5 million
in 2000, $5.1 million in 2001, $4.3 million in 2002, and $18.7 million
thereafter.

At April 30, 1997 and 1996, deferred lease obligations of $680,000 and $458,000,
respectively, presented as other long-term liabilities in the financial
statements, represent the excess of rent expense, recorded on a straight-line
basis, over the cash payments required under certain leases.

(b) Leases as Lessor

The Company leased office space in the building which it owned to third parties
(see note 11(c)). These leases expire on various dates over the next nine years
and provide for increased real estate taxes and building operating costs through
annual adjustments. For the year ended April 30, 1995, total rental income from
operating leases of $450,000 is included in revenues.

The Company also sublets office space at other facilities. These leases expire
on various dates over the next four years and provide for increased real estate
taxes and building operating costs through annual adjustments.

In fiscal year 1995, the Company removed a $540,000 valuation allowance related
to a tenant note receivable because its collectibility was no longer considered
uncertain. Payments on this note commenced in August 1995 for a period of two
years.

                                      F-22
<PAGE>
 
In July 1994, the Company entered into a sublease agreement as lessor for
approximately 15,700 square feet of office space in Alexandria, Virginia. The
resultant net loss for amounts due under the original lease for this space of
approximately $750,000 is included as miscellaneous expense in fiscal year 1995.

(c) Commitments and Contingencies-Other

The Company is a defendant in various legal actions. The principal actions
allege or involve claims under contractual arrangements, employment matters and
medical malpractice with an estimated possible range of loss between zero and
approximately $200,000. The Company does not believe that it has a material,
estimable and probable liability related to these various legal actions and
therefore has not recorded any reserves at April 30, 1997.

The Company maintains medical malpractice insurance coverage which provides for
reimbursement of any claim amounts in excess of $250,000 per incident on
government service division projects and $50,000 per incident on commercial
service division projects.

(14) EMPLOYEE BENEFIT PLAN

The Company has a qualified defined contribution savings plan covering
substantially all full-time employees as allowed under Section 401(k) of the
Internal Revenue Code. The plan permits participant contributions and requires a
minimum contribution from the Company, which vests over two years, based on
participants' contribution. Participants may elect to defer up to 12% of their
annual compensation by contributing to the plan. Total expenses related to this
plan for the years ended April 30, 1997, 1996 and 1995 were $476,000, $327,000
and $187,000, respectively.

(15) SUBSEQUENT EVENT

On July 24, 1997, the Company announced a strategic alliance with HIP Health
Plan of New Jersey. The Company will acquire the assets of HIP Health Plan of
New Jersey's 18 health care centers and its ancillary services, such as pharmacy
and optical. The Company will provide and manage healthcare services for HIP
Health Plan of New Jersey's 200,000 members through a 20-year exclusive global
capitation arrangement. These members will have access to a consolidated network
of more than 3,000 community physicians and an additional 10 health care centers
in the Company's existing network. The consideration payable for these
transactions totals approximately $73 million. The Company intends to finance
this transaction through a combination of debt and equity.

(16) RESTATEMENT
    
Upon further review the Company has revised its accounting treatment for two
contracts entered into during fiscal years 1994 and 1995.  The two contracts,
a construction contract and a management contract, which were with the same 
party, were previously combined for purposes of revenue recognition.  The 
Company has restated previously issued financial statements and related footnote
disclosures to account for these two contracts separately.  As a result, the 
fiscal year 1995 financial statements have been adjusted to reduce revenue 
recognized by $6.9 million for certain cost overruns related to 1995 
construction and start-up activities which would have been recovered 
prospectively under the two combined contracts.  Furthermore, the Company has 
recorded additional contract loss reserves of approximately $915,000 in fiscal 
year 1995 resulting from the contracts being accounted for separately.  This 
revised accounting treatment also resulted in the reduction of fiscal year 1996
revenues and direct costs by approximately $900,000 and $915,000, respectively.
Immaterial adjustments to revenue were also recorded in fiscal year 1997.  The 
effects of these adjustments on net earnings and per share amounts as 
previously reported, were as follows:      
<TABLE>     
<CAPTION>
                                                                                 1997              1996            1995
                                                                                 ----              ----            ----         
<S>                                                                            <C>                <C>             <C>
Net earnings, as previously reported.................................          $(4,088)           $9,118          $   952
Adjustments, net of income taxes of $24 in 1997 and $2,807 in 1995...               39                20           (4,990)
                                                                               -------            ------          -------
Net earnings (loss), as adjusted.....................................          $(4,049)           $9,138          $(4,038)
                                                                               =======            ======          =======
 
Per Share Amounts:
Primary earnings (loss) per share:
</TABLE>      
                                      F-23
<PAGE>
 
<TABLE>     
<S>                                                                            <C>                <C>             <C>
Net earnings, as previously reported.................................          $ (0.37)           $ 0.68          $  0.08
Adjustments, net of tax..............................................             0.00              0.00            (0.46)
                                                                               -------            ------          -------
Net earnings (loss), as adjusted.....................................          $ (0.37)           $ 0.68          $ (0.38)
                                                                               =======            ======          =======
 
Fully diluted earnings (loss) per share:
Net earnings, as previously reported.................................          $ (0.37)           $ 0.66          $  0.08
Adjustment, net of tax...............................................             0.00              0.00            (0.46)
                                                                               -------            ------          -------
Net earnings (loss), as adjusted.....................................          $ (0.37)           $ 0.66          $ (0.38)
                                                                               =======            ======          =======
</TABLE>      

                                      F-24
<PAGE>
 
                  PHP HEALTHCARE CORPORATION AND SUBSIDIARIES

                                  SCHEDULE II

                       VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED APRIL 30, 1997, 1996, AND 1995

<TABLE>
<CAPTION>
                                                             ADDITIONS           DEDUCTIONS
                                                     ------------------------------------------
                                         BALANCE AT    CHARGED TO       CHARGED     RECEIVABLE      BALANCE     
                                          BEGINNING     COSTS AND       TO OTHER   CHARGE-OFFS       AT END     
                                           OF YEAR      EXPENSES        ACCOUNTS   -----------      OF YEAR     
                                           ------       --------        --------                    -------     
<S>                                      <C>          <C>               <C>       <C>             <C>           
YEAR ENDED APRIL 30, 1997                                                                                       
Allowance for doubtful accounts                                                                                 
 (deducted from accounts receivable)...   $  194,025  $        ---      $    ---   $    6,580      $   187,445  
Allowance for Medicaid receivables.....          ---     9,822,025/(c)/      ---          ---        9,822,025 
                                          ----------  ------------      --------   ----------      -----------  
                                          $  194,025   $ 9,822,025      $    ---   $    6,580      $10,009,470  
                                          ==========   ===========      ========   ==========      ===========  
                                                                                                                
YEAR ENDED APRIL 30, 1996                                                                                       
Allowance for doubtful accounts                                                                                 
 (deducted from accounts receivable)...   $  138,495   $    55,530      $    ---   $      ---      $   194,025  
Claim allowance........................    1,900,000           ---           ---    1,900,000/(b)/         ---  
                                          ----------   -----------      --------  -----------      -----------  
                                          $2,038,495   $    55,530      $    ---  $ 1,900,000      $   194,025  
                                          ==========   ===========      ========  ===========      ===========  
                                                                                                                
YEAR ENDED APRIL 30, 1995                                                                                       
Allowance for doubtful accounts                                                                                 
 deducted from accounts receivable)....   $  186,170   $    38,132      $    ---  $    85,807/(a)/ $   138,495  
Claim allowance........................    1,900,000           ---           ---          ---        1,900,000  
Note receivable allowance..............      536,879      (536,879)          ---          ---              ---  
Allowance for receivables from officers      650,000      (650,000)          ---          ---              ---  
Deferred tax asset valuation allowance.    2,160,000    (2,160,000)          ---          ---              ---  
                                          ----------   -----------      --------   ----------      -----------  
                                          $5,433,049   $(3,308,747)     $    ---   $   85,807      $ 2,038,495  
                                          ==========   ===========      ========   ==========      ===========   
</TABLE>
-----------

(a)  Represents allowance for doubtful accounts receivable for two ambulatory
     surgery centers sold during fiscal year 1995.

(b)  Claim was settled in September 1995 for $300,000 and the allowance and
     related receivable were charged off.

(c)  Represents allowance for Medicaid receivables due from the District of
     Columbia for the 1992 to 1994 contract years.

                                      F-25
<PAGE>
 
                                  EXHIBIT INDEX
                                        


<TABLE>
<CAPTION>
Exhibit No.      Description
-----------      -----------
<C>              <S>
3.1              Amended and Restated Certificate of Incorporation of the Company. (13)
3.2              Bylaws of the Company. (14)
4.1              Rights Agreement between the Company and Riggs National Bank, N.A., as Rights Agent, dated as of
                 April 10, 1992. (7)
10.2             Credit Agreement by and between the Company and NationsBank of Virginia, N.A., dated effective March
                 8, 1994. (10)
10.2A            Second Amendment to Amended and Restated Credit Agreement by and between the Company and NationsBank
                 of Virginia, N.A., dated effective April 26, 1995. (10)
10.3             Form of Indemnification Agreements between PHP Healthcare Corporation and each of Charles H.
                 Robbins, Michael D. Starr, George E. Schafer, M.D., Jack M. Mazur, Stephen I. Frates, Ronald J.
                 Raben, David M. Thomas, Julien J. Lavoie, Paul T. Cuzmanes, George B. Randolph, Charles P. Reilly
                 and Donald J. Ruffing. (3)
*10.4            Form of "Split Dollar Agreement" entered into between PHP Healthcare Corporation and each of Charles
                 H. Robbins, Jack M. Mazur and Michael D. Starr. (9)
*10.5            Terms of Senior Executive Loan Program adopted by the Board of Directors November 5, 1992. (9)
10.8             Articles of Merger of PHP Healthcare Corporation and PHP Corporation.(1)
10.10.1          Lease Agreement between PHP Healthcare Corporation and Commerce Park Development Corporation dated
                 May 5, 1993 (relating to current executive offices of the Company at 11440 Commerce Park Drive,
                 Reston, Virginia.) (10)
10.10.1A         Amendment No. 1 to Lease Agreement dated July 14, 1994. (10)
*10.11           Employment Agreements dated May 1, 1992 by and between the Company and each of Charles H. Robbins,
                 Jack M. Mazur and Michael D. Starr. (10)
*10.12           Amended and Restated PHP Healthcare Corporation 1986 Stock Option Plan, as amended. (10)
*10.12A          PHP Healthcare Corporation 1996 Incentive Plan, filed as Annex A to the Company's 1996 Definitive
                 Proxy Statement and incorporated herein by reference.
*10.13           Stock Option Agreement by and between the Company and Julien J. Lavoie, dated as of November 26,
                 1990. (5) [Exhibit 10.21]
*10.14           Stock Option Agreement by and between the Company and Anthony M. Picini, dated as of December 4,
                 1990. (5) [Exhibit 10.22]
10.15            Provider Agreement between the District of Columbia Department of Human Services and D.C. Chartered
                 Health Plan, Inc. dated September 24, 1991. (10)
10.16            District of Columbia Medicaid Managed Care Program, Provider Agreement dated September 15, 1994 by
                 and between the Department of Human Services and D.C. Chartered Health Plan, Inc. (11)
*10.17           Employment Agreement dated September 29, 1994 by and between the Company and John. P. Cole.
                 (12)[Exhibit 8]
*10.28           Employment Agreement dated August 1, 1994 by and between the Company and Charles P. Reilly.
                 (12)[Exhibit 6]
11               Statement re Computation of Per Share Earnings.
21               List of Subsidiaries.(14)
23               Consent of Independent Accountants.
27               Financial Data Schedule.
</TABLE>

-----------

(1)  Indicates an exhibit to the Company's Registration Statement on Form S-18
     (Registration No. 33-9372, effective November 20, 1986), bearing the same
     exhibit number, which is incorporated herein by reference.
<PAGE>
 
(2)  Indicates an exhibit to the Company's 10-K Report (File No. 33-9372) for
     the period ended April 30, 1987, bearing the same exhibit number, which is
     incorporated herein by reference.

(3)  Indicates an exhibit to the Company's 10-K Report (File No. 0-16235) for
     the period ended April 30, 1989, bearing the same exhibit number, which is
     incorporated herein by reference.

(4)  Indicates an exhibit to the Company's 10-K Report (File No. 0-16235) for
     the period ended April 30, 1990, bearing the exhibit number, which is
     incorporated herein by reference.

(5)  Indicates an exhibit to the Company's 10-K Report (File No. 0-16235) for
     the period ended April 30, 1991, bearing the exhibit number in brackets,
     which is incorporated herein by reference.

(6)  Indicates an exhibit to the Company's 8-K Current Report (File No. 0-16235)
     reporting an event on November 5, 1991, bearing the exhibit number in
     brackets, which is incorporated herein by reference.

(7)  Indicates an exhibit to the Company's 8-K Current Report (File No. 0-16235)
     reporting an event on April 10, 1992, bearing the same exhibit number,
     which is incorporated herein by reference.

(8)  Indicates an exhibit to the Company's 10-K Report (File No. 0-16235) for
     the period ended April 30, 1992, bearing the same exhibit number, which is
     incorporated herein by reference.

(9)  Indicates an exhibit to the Company's 10-K Report (File No. 0-16235) for
     the period ended April 30, 1993, bearing the same exhibit number, which is
     incorporated herein by reference.

(10) Indicates an exhibit to the Company's 10-K Report (File No. 0-16235) for
     the period ended April 30, 1994, bearing the same exhibit number, which is
     incorporated herein by reference.

(11) Indicates an exhibit to the Company's 10-K Report (File No. 0-16235) for
     the period ended April 30, 1995, which is incorporated herein by reference.

(12) Indicates an exhibit to the Company's 8-K Report (File No. 0-16235),
     reporting an event on October 3, 1994, bearing the exhibit number in
     brackets, which is incorporated herein by reference.

(13) Indicates an exhibit to the Company's 10-Q Report (File No. 0-16235) for
     the period ended January 31, 1997, which is incorporated herein by
     reference.

(14) Indicates an exhibit to the Company's 10-K Report (File No. 0-16235) for
     the period ended April 30, 1997, which is incorporated herein by reference.

*    Indicates a management contract or compensatory plan or arrangement
     required to be filed as an exhibit hereto.