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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-KSB

(Mark One)

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

    For the fiscal year ended: June 30, 1998

                                       OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934 
For the transition period from ___________________ to __________________

                         Commission file number: 0-21910

                             CONTINUCARE CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                    FLORIDA                                    59-2716023
        (State or other jurisdiction of                     (I.R.S. Employer
         incorporation or organization)                    Identification No.)

           100 SOUTHEAST SECOND STREET
                    36TH FLOOR
                  MIAMI, FLORIDA                                   33131
     (Address of principal executive offices)                   (Zip Code)

Registrant's telephone number, including area code:  (305) 350-7515
Securities registered pursuant to Section 12(b) of the Act:

   Title of each class                Name of each exchange on which registered
       COMMON STOCK,                           AMERICAN STOCK EXCHANGE
    $.0001 PAR VALUE

Securities registered pursuant to Section 12(g) of the Act:  NONE
                                (Title of Class)

         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-KSB. [X]

         Registrant's revenues for the fiscal year ended June 30, 1998 were
$65,584,293.

         Aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant at September 1, 1998 (computed by reference to
the last reported sale price of the registrant's Common Stock on the American
Stock Exchange on such date): $24,377,478.

         Number of shares outstanding of each of the registrant's classes of
Common Stock at September 1, 1998: 14,031,283 shares of Common Stock, $.0001 par
value per share.

         Transactional Small Business Disclosure Format. Yes [  ]  No [X]

                       DOCUMENTS INCORPORATED BY REFERENCE

         Certain portions of the registrant's definitive Proxy Statement
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended,
which will be filed with the Commission subsequent to the date hereof (the
"Proxy Statement"), are incorporated by reference into Part III of this Form
10-KSB.

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                                     GENERAL

         Unless otherwise indicated or the context otherwise requires, all
references in this Form 10-KSB to "Continucare" or the "Company" includes
Continucare Corporation and its consolidated subsidiaries. The Company disclaims
any intent or obligation to update "forward looking statements." All references
to a fiscal year are to the Company's fiscal year which ends June 30. As used
herein, fiscal 1999 refers to fiscal year ending June 30, 1999, fiscal 1998
refers to fiscal year ending June 30, 1998 and fiscal 1997 refers to fiscal year
ending June 30, 1997.

              CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

         In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), Continucare is hereby
providing cautionary statements identifying important factors that could cause
the Company's actual results to differ materially from those projected in
forward-looking statements (as such term is defined in the Reform Act) of the
Company made by or on behalf of the Company herein or which are made orally,
whether in presentations, in response to questions or otherwise. Any statements
that express, or involve discussions as to expectations, beliefs, plans,
objectives, assumptions or future events or performance (often, but not always,
through the use of words or phrases such as "will result," "are expected to,"
"will continue," "is anticipated," "plans," "intends," "estimated," "projection"
and "outlook") are not historical facts and may be forward-looking. Accordingly,
such statements, including without limitation, those relating to the Company's
future business, prospects, revenues, working capital, liquidity, capital needs,
interest costs and income, wherever they may appear in this document or in other
statements attributable to the Company, involve estimates, assumptions and
uncertainties which could cause actual results to differ materially from those
expressed in the forward-looking statements. Such uncertainties include, among
others, the following factors:

LIMITED OPERATING HISTORY; RISKS RELATING TO ACQUISITION STRATEGY

         Continucare was incorporated in February 1996, and has had limited
operations to date. The Company's prospects must be considered in light of the
risks, delays, expenses and difficulties frequently encountered in connection
with an early-stage business in a highly-regulated, competitive environment. No
assurance can be given that the Company will successfully implement any of its
plans in a timely or effective manner or that the Company will be able to
generate significant revenues or continue to operate profitably.

         The Company has expanded its operations through acquisitions of
healthcare related companies. The financial performance and operations of the
Company are and will continue to be subject to various risks associated with the
Company's recent growth through acquisitions of businesses, including the
expenses and operational challenges associated with the integration of the
acquired businesses, difficulties in assimilating the operations of the acquired
businesses and diversion of management resources and personnel. The process of
integrating services, which includes management information systems, claims
administration and billing services, utilization management of medical services,
care coordination and case management, quality and cost monitoring and physician
recruitment, as well as administrative functions, facilities and other aspects
of operations, while managing a larger entity, presents a significant challenge
to the Company's management. In addition, integration must be carried out so
that Continucare is able to control medical and administrative costs.

         The successful integration of acquired businesses, as well as the
ability to control costs, is important to the Company's future financial and
operational performance. The anticipated benefits from acquisitions may not be
achieved unless the operations of the acquired businesses are successfully
combined with those of the Company in a timely manner. The process of
integrating the acquired businesses could cause the interruption of, or a loss
of momentum in, the activities of some or all of these businesses, which could
have a material adverse effect on the Company's operations, prospects, financial
results and cash flows. There can be no assurance that the Company will realize
any of the anticipated benefits from its acquisitions. While many of the
expenses arising from the Company's efforts in these areas may have a negative
effect on operating results until such time, if at all, as these expenses are
offset by increased revenues, there can be no assurance that the Company will be
able to implement its acquisition strategy, or that this strategy will
ultimately be successful.




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         Certain of the companies recently acquired by Continucare have recently
or historically operated at a loss. Other acquired companies have experienced
fluctuations in quarter-to-quarter operating results. Although Continucare has
commenced certain measures intended to reduce these losses and to operate the
acquired businesses profitably, there can be no assurance that Continucare will
reverse these trends or operate these entities profitably. If there are
continuing operating losses at the acquired companies, Continucare may need
additional capital to fund its business, and there can be no assurance that such
additional capital can be obtained or, if obtained, it will be on terms
acceptable to Continucare.

         The Company continually evaluates potential acquisition candidates. In
the event the Company targets a business to acquire, the Company will compete
with other potential acquirors, some of which may have greater financial or
operational resources than the Company. Competition for acquisitions may
intensify due to the ongoing consolidation in the healthcare industry, which may
increase the costs of capitalizing on such opportunities. Consummation of
acquisitions could result in the incurrence or assumption by the Company of
additional indebtedness and the issuance of additional equity. The issuance of
shares of the Company's common stock, $0.0001 par value ("Common Stock") for an
acquisition may result in dilution to shareholders.

RISKS OF FINANCIAL LEVERAGE

         The Company's indebtedness is significant in relation to its total
capitalization. Giving effect to the issuance of the Company's 8% Convertible
Subordinated Notes due 2002 issued in October 1997, Continucare's indebtedness
accounts for approximately 78% of its total capitalization as of June 30, 1998
(or 80% after giving effect to the $5.0 million borrowed under a recent credit
facility in August 1998). While the Company believes it will be able to service
its debt, there can be no assurance to that effect. The degree to which
Continucare is leveraged could affect its ability to service its indebtedness,
make capital expenditures, respond to market conditions and extraordinary
capital needs, take advantage of certain business opportunities or obtain
additional financing. Unexpected declines in Continucare's future business, or
the inability to obtain additional financing on terms acceptable to Continucare,
if required, could impair Continucare's ability to meet its debt service
obligations or fund acquisitions and therefore, could have material adverse
effect on the Company's business and future prospects.

RISKS ASSOCIATED WITH CAPITATED ARRANGEMENTS INCLUDING RISK OF OVER-UTILIZATION
BY MANAGED CARE PATIENTS, RISK OF REDUCTION OF CAPITATED RATES AND REGULATED
RISKS

         The Company's provider entities have entered into several managed care
agreements including certain capitated arrangements with managed care
organizations. As a result, the Company anticipates that revenues derived from
its capitated arrangements with managed care organizations as a percentage of
its total revenue will increase substantially in fiscal 1999. Under capitated
contracts, the health care provider typically accepts a pre-determined amount
for professional services per patient per month from the managed care payor in
exchange for the Company assuming responsibility for the provision of medical
services for each covered individual. Such contracts pass much of the financial
risk of providing care, such as over-utilization of healthcare services, from
the payor to the provider. Because the Company incurs costs based on the
frequency and extent of medical services provided, but only receives a fixed fee
for agreeing to assume responsibility for the provision of such services, to the
extent that the patients covered by such managed care contracts require more
frequent or extensive care than is anticipated, the Company's operating margins
may be reduced and, in certain cases, the revenue derived from such contracts
may be insufficient to cover the costs of the services provided. In either
event, the Company's business, prospects, financial condition and results of
operations may be materially adversely affected. As an increasing percentage of
patients enroll in managed care arrangements, the Company's future success will
depend in part upon its ability to negotiate contracts with managed care payors
on terms favorable to the Company and upon its effective management of health
care costs through various methods, including competitive pricing and
utilization management and review for purchased services. The proliferation of
capitated contracts in markets served by the Company could result in decreased
predictability of operating margins. There can be no assurance that the Company
will be able to negotiate satisfactory arrangements on a capitated basis or that
such arrangements will be profitable to the Company in the future. In addition,
in certain jurisdictions, capitated agreements in which the provider bears the
risk are regulated under state insurance laws. The degree to which these
capitated arrangements 



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are regulated by insurance laws varies on a state by state basis, and as a
result, the Company may be limited in certain states, such as Florida, in which
it may seek to enter into or arrange capitated agreements for its affiliated
physicians when those capitated contracts involve the assumption of risk. There
can be no guarantee that the state of Florida could take the position that the
Company is regulated as an insurer which could have a material adverse affect on
the Company and affect its revenues. See "--Dependence on Contracts with Managed
Care Organizations."

DEPENDENCE ON CONTRACTS WITH MANAGED CARE ORGANIZATIONS

         The Company's ability to expand is dependent in part on increasing the
number of managed care patients served by its affiliated physicians, primarily
through negotiating additional and renewing existing contracts with managed care
organizations and contracting on a favorable basis with additional providers to
provide medical professional services to such patients. There can be no
assurance that the Company will be successful in contracting with sufficient
numbers of affiliated physicians to meet the requirements of managed care
organizations on terms favorable to the Company and affiliated physicians. The
Company's capitated managed care agreement with Foundation Health Corporation
Affiliates ("Foundation") is a ten-year agreement with the initial term expiring
on July 31, 2008, unless terminated earlier by Foundation for cause. In the
event of termination of the Foundation agreement, the Company must continue to
provide services to a patient with a life-threatening or disabling and
degenerative condition for sixty days as medically necessary. The Company's
capitated managed care agreement with Humana Medical Plans, Inc. ("Humana") is a
six-year agreement expiring July 31, 2004, unless terminated earlier for cause.
The agreement shall automatically renew for subsequent one-year terms unless
either party provides 180-days written notice of its intent not to renew. In
addition, the Humana agreement may be terminated by the mutual consent of both
parties at any time. Under certain limited circumstances, Humana may immediately
terminate the agreement for cause, otherwise termination for cause shall require
ninety (90) days prior written notice with an opportunity to cure, if possible.
In the event of termination of the Humana agreement, the Company must continue
to provide or arrange for services to any member hospitalized on the date of
termination until the date of discharge or until it has made arrangements for
substitute care. In some cases, Humana may provide 30 days' notice as to an
amendment or modification of the agreements, including but not limited to,
renegotiation of rates, covered benefits and other terms and conditions. The
Company maintains other managed care relationships subject to various negotiated
terms. There can be no assurance that the Company will be able to renew any of
these managed care agreements or, if renewed, that they will contain terms
favorable to the Company and affiliated physicians. The loss of any of these
contracts or significant reductions in capitated reimbursement rates under these
contracts could have a material adverse effect on the Company's business,
financial condition and results of operations. See "--Reliance on Key Customers;
Related Party Issues", "--Risks Associated with Capitated Arrangements Including
Risk of Over-Utilization by Managed Care Patients, Risk of Reduction of
Capitated Rates and Regulatory Risks," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Managed Care."

FEE-FOR-SERVICE ARRANGEMENTS

         Certain of the Company's physicians who render services on a
fee-for-service basis (as opposed to capitation) typically bill various payors,
such as governmental programs (e.g., Medicare and Medicaid), private insurance
plans and managed care plans, for the health care services provided to their
patients. There can be no assurance that payments under governmental programs or
from other payors will remain at present levels. In addition, payors can deny
reimbursement if they determine that treatment was not performed in accordance
with the cost-effective treatment methods established by such payors or was
experimental or for other reasons. Also, fee-for-service arrangements involve a
credit risk related to uncollectibility of accounts receivable.

RISKS RELATED TO INTANGIBLE ASSETS

         As a result of various acquisition transactions, net intangible assets
of approximately $38.6 million have been recorded as of June 30, 1998 on
Continucare's balance sheet. Such intangible assets totaled approximately 291%
of Continucare's stockholders' equity as of June 30, 1998. Using an amortization
period ranging from 2.5 to 20 years, amortization expense relating to such
intangible assets will be approximately $3.0 million per year. 




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Further acquisitions that result in the recognition of additional intangible
assets would cause amortization expense to further increase. In certain
circumstances, amortization generated by these intangible assets may not be
deductible for tax purposes.

         At the time of or following each acquisition, the Company evaluates
each acquisition and establishes an appropriate amortization period based on the
specific underlying facts and circumstances of each such acquisition. Subsequent
to such initial evaluation, the Company periodically reevaluates such facts and
circumstances to determine if the related intangible asset continues to be
realizable and if the amortization period continues to be appropriate. As the
underlying facts and circumstances subsequent to the date of acquisition can
change, there can be no assurance that the value of such intangible assets will
be realized by the Company. Although at June 30, 1998, the net unamortized
balance of intangible assets acquired was not considered to be impaired, any
future determination, based on reevaluation of the underlying facts and
circumstances, that a significant impairment has occurred would require the
write-off of the impaired portion of unamortized intangible assets, which could
have a material effect on Continucare's business and results of operations.

RELIANCE ON KEY CUSTOMERS; RELATED PARTY ISSUES

         In fiscal 1998, the Company generated approximately 36% of its revenue
from Foundation and approximately 17% of its revenues from Humana. In fiscal
1999, the Company anticipates a substantial increase in the percent of revenue
derived from these sources. The loss of any of these contracts or significant
reductions in reimbursement rates could have a material adverse affect on the
Company. See "--Dependence on Contracts with Managed Care Organizations".

         Medicare regulations limit cost-based reimbursement for healthcare
charges paid to related parties. A party is considered "related" to a provider
if it is deemed to be under common ownership and/or control with the provider.
One test for determining common control for this purpose is whether the
percentage of the total revenues of the party received from services rendered to
the provider is so high that it effectively constitutes control. Another test is
whether the scope of management services furnished under contract is so broad
that it constitutes control. It is possible that such regulations or the
interpretation thereof could limit the number of management contracts and/or the
fees attributable to such contracts if a particular client of the Company is
deemed "related."

REIMBURSEMENT CONSIDERATIONS

         The Company receives reimbursement from the Medicare and Medicaid
programs or payments from insurers, self-funded benefit plans or other
third-party payors. The Medicare and Medicaid programs are subject to statutory
and regulatory changes, retroactive and prospective rate adjustments,
administrative rulings and funding restrictions, any of which could have the
effect of limiting or reducing reimbursement levels. Because a substantial
portion of the services provided by the Company are covered by Medicare, any
changes which limit or reduce Medicare reimbursement levels could have a
material adverse effect on the Company.

         Significant changes have been and may be made in the Medicare program,
which could have a material adverse effect on the Company's business, results of
operations, prospects, financial results, financial condition or cash flows. In
addition, legislation has been or may be introduced in the Congress of the
United States which, if enacted, could adversely affect the operations of the
Company by, for example, decreasing reimbursement by third-party payors such as
Medicare or limiting the ability of the Company to maintain or increase the
level of services provided to patients.

         Title XVIII of the Social Security Act authorizes Medicare Part A, the
health insurance program that pays for inpatient care for covered persons
(generally, those age 65 and older and the long term disabled) and Medicare Part
B, a voluntary supplemental medical assistance insurance program. Healthcare
providers may participate in the Medicare program subject to certain conditions
of participation and acceptance of a provider agreement by the Secretary of
Health and Human Services ("HHS"). Only enumerated services, upon satisfaction
of certain criteria, are eligible for Medicare reimbursement. Relative to the
services of the Company's Medicare certified outpatient rehabilitation
facilities ("ORFs"), Comprehensive Outpatient Rehabilitation Facilities
("CORFs"), and Home Health Agencies ("HHAs"), in the past Medicare has
reimbursed the "reasonable costs" for services up to program limits. 




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Medicare reimbursed costs are subject to audit, which may result in a decrease
in payments the Company has previously received. Historically, Medicare Part B
reimburses the operating cost component of most hospital outpatient services on
a reasonable cost basis, subject to a 5.8% reduction which the Balanced Budget
Act of 1997 (the "Budget Act"), extended through federal fiscal year 2000.
However, Medicare recently issued a proposed regulation pursuant to which
hospital outpatient services would be reimbursed on the basis of a prospective
payment system ("PPS"). Such a PPS system is scheduled to be implemented shortly
after the year 2000, however, it is impossible to predict whether the regulation
will be implemented as currently proposed. It is also impossible to predict the
effect a PPS system for these hospital outpatient services will have on the
Company.

         Medicare Part B also reimburses the Company's radiology and diagnostic
service providers on the basis of fee schedules which may change over time.
There can be no assurance that the established fees will not change in a manner
that could affect the revenues of the Company. See "--The Balanced Budget Act of
1997."

         Pursuant to the Medicaid program, the federal government supplements
funds provided by the various states for medical assistance to the medically
indigent. Payment for such medical and health services is made to providers in
an amount determined in accordance with procedures and standards established by
state law under federal guidelines. Significant changes have been and may
continue to be made in the Medicaid program which could have a material adverse
effect on the financial condition, results of operations and cash flows of the
Company.

         During certain fiscal years, the amounts appropriated by state
legislatures for payment of Medicaid claims has not been sufficient to reimburse
providers for services rendered to Medicaid patients. Failure of a state to pay
Medicaid claims on a timely basis may have a material adverse effect on the
Company's cash flow, results of operations and financial condition.

         In 1992, the Medicare program began reimbursing physicians and certain
non-physician professionals such as physical, occupational and speech
therapists, clinical psychologists and clinical social workers, pursuant to a
fee schedule derived using a resource-based relative value scale ("RBRVS").
Reimbursement amounts under the physician fee schedule are subject to periodic
review and adjustment and may affect the Company's revenues to the extent they
are dependent on reimbursement under the fee schedule.

         While the Company's net revenues from managed care organizations have
increased and are expected by the Company to continue to increase, payments per
visit from managed care organizations typically have been lower than cost-based
reimbursement from Medicare and reimbursement from other payors for nursing and
related patient services, resulting in reduced profitability on such services.
In addition, payors and employer groups are exerting pricing pressure on home
health care providers, resulting in reduced profitability. Such pricing
pressures could have a material adverse effect on the Company's business,
results of operations, prospects, financial results, financial condition or cash
flows.

THE BALANCED BUDGET ACT OF 1997

         The Balanced Budget Act of 1997 (the "Budget Act") enacted in August
1997 contains numerous provisions related to Medicare and Medicaid
reimbursement. It is unclear whether any or all of these provisions will be
implemented by the Health Care Financing Administration ("HCFA") as scheduled.
The general thrust of the provisions dealing with Medicare and Medicaid
contained in the Budget Act are intended to incentivize providers to deliver
services efficiently at lower costs. The Budget Act also requires the Secretary
of HHS to implement a PPS for home health agency services, and reduces the
amount of Medicare reimbursement for HHA services. Under such a PPS system,
providers will be reimbursed a fixed fee per treatment unit, and a provider
having costs greater than the prospective amount will incur losses. The Company
expects that there will continue to be numerous initiatives on the federal and
state levels for comprehensive reforms affecting the payment for and
availability of healthcare services. The Budget Act also established per
beneficiary caps on certain outpatient rehabilitation services, including a
$1,500 annual limit per discipline; however, recent legislation has been
introduced to repeal this limit.

         Currently, Medicare reimburses skilled nursing facilities ("SNF") on a
retrospective reasonable-cost basis, up to certain cost limits for routine
services. The Budget Act requires the Secretary of HHS to establish a per diem
prospective payment system for all SNF services. The prospective payment system
for SNFs is required to be 




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implemented over a three-year period beginning July 1, 1998. During the
three-year transition period, payment will reflect a blend of facility specific
and federal rates. In the fourth year, payment will be based solely on the
federal rate adjusted by case mix, wages and geographic area. In addition,
Medicare will soon require SNFs to bill and receive payment for most Medicare
Part B services regardless of whether the services are provided by SNFs or by
others under arrangement or pursuant to any other contracting or consulting
agreement. The effective date to begin consolidated billing for all Part A
residents is when they begin PPS. Consolidated billing for Part B only residents
is delayed indefinitely. There can be no assurance that the implementation of
these new rates will not have a material adverse affect on the Company's ability
to maintain revenues from contracts with SNFs.

         The Budget Act also provides for a PPS for home nursing to be
implemented for cost reporting periods beginning on or after October 1, 1999
(with up to a four-year phase-in period). Prospective rates determined by the
HHS would reflect a 15% reduction to the cost limits and per-patient limits in
place as of September 30, 1999. In the event the implementation deadline is not
met, the reduction will be applied to the reimbursement system then in place.
Until PPS takes effect on October 1, 1999, the Budget Act established an interim
payment system ("IPS") that provides for the lowering of reimbursement limits
for home health visits. For cost reporting periods beginning on or after October
1, 1997, Medicare-reimbursed home health agencies will have their cost limits
determined as the lesser of (i) actual costs (ii) 105% of median costs of
freestanding home health agencies, or (iii) an agency-specific per-patient cost
limit, based on 98% of 1994 costs adjusted for inflation. The new IPS cost
limits apply to the Company for the cost reporting periods beginning after
October 1997. The failure to implement a PPS for home nursing services in the
next several years could adversely affect the Company and its growth strategy.

         For cost reporting periods beginning on or after October 1, 1997, the
Budget Act requires a home health agency to submit claims for payment for home
health services only on the basis of the geographic location at which the
service was furnished. HCFA has publicly expressed concern that some home health
agencies are billing for services from administrative offices in locations with
higher per-visit cost limitations than the cost limitations in effect in the
geographic location of the home health agency furnishing the service. The
Company is unable to determine the effect of the reimbursement impact resulting
from payments for services based upon geographic location until HCFA finalizes
related regulatory guidance. Any resultant reduction in the Company's cost
limits could have a material adverse effect on the Company's business, financial
condition or results of operations. However, until regulatory guidance is
issued, the effect of such reductions cannot be predicted with any level of
certainty.

         Various other provisions of the Budget Act may have an impact on the
Company's business and results of operations. For example, venipuncture will no
longer be a covered skilled nursing home care service unless it is performed in
connection with other skilled nursing services. Additionally, payments will be
frozen for durable medical equipment, excluding orthotic and prosthetic
equipment, and payments for certain reimbursable drugs and biologicals will be
reduced. Beginning with services furnished on or after January 1, 1998, coverage
of home health services will be gradually shifted over a period of six years
from Medicare Part A to Medicare Part B except for a maximum of 100 visits
during a spell of illness after a three-day hospitalization initiated within 14
days after discharge or after receiving any covered services in a skilled
nursing facility, each of which will continue to be covered under Medicare Part
A. Another provision of the Budget Act would reduce Medicare reimbursements to
acute care hospitals for non-Medicare patients who are discharged from the
hospital after a very short inpatient stay to the care of a home health agency.
The impact of these reimbursement changes could have a material adverse effect
on the Company's business, financial condition or results of operations.
However, this impact cannot be predicted with any level of certainty at this
time.

         Among the other changes made by the Budget Act are the following: (i)
reducing the amounts which the federal government will pay for services provided
to Medicare and Medicaid beneficiaries by an estimated $115 billion and $13
billion, respectively over the next five years; (ii) reducing payments to
hospitals for inpatient and outpatient services provided to Medicare
beneficiaries by an estimated $44 billion over the next five years; (iii)
establishing the Medicare+Choice Program, which expands the availability of
managed care alternatives to Medicare beneficiaries, including Medical Savings
Accounts; (iv) converting the Medicare reimbursement of outpatient hospital
services from a reasonable cost basis to a PPS; (v) adjusting the manner in
which Medicare calculates the amount of copayments which are deducted from the
Medicare payment to hospitals for outpatient 




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services; (vi) freezing the Medicare hospital PPS and PPS-exempt hospital and
distinct part unit update for fiscal year 1998, and limiting the level of annual
updates for subsequent years; (vii) reducing various other Medicare payments to
providers; (viii) repealing the federal Boren Amendment, which imposed certain
requirements on the level of reimbursement paid to hospitals for services
rendered to Medicaid beneficiaries; (ix) permitting states to mandate managed
care for Medicaid beneficiaries without the need for federal waivers; (x)
instituting permanent, mandatory exclusion from any federal health care program
for those convicted of three health care-related crimes, and a mandatory 10-year
exclusion for those convicted of two health care-related crimes. Additionally,
the Secretary of HHS will be able to deny entry into Medicare or Medicaid or
deny renewal to any provider or supplier convicted of any felony that the
Secretary deems to be "inconsistent with the best interests" of the program's
beneficiaries; and (xi) creating a new civil monetary penalty for violations of
the Federal Medicare/Medicaid Anti-Fraud and Abuse Amendments to the Social
Securities Act ("Anti-Kickback Law") for cases in which a person contracts with
an excluded provider for the provision of health care items or services where
the person knows or should know that the provider has been excluded from
participation in a federal health care program. Violations will result in
damages three times the remuneration involved, as well as a penalty of $50,000
per violation. There can be no assurance that the Company will not be subject to
the imposition of a fine or other penalty from time to time.

PROPOSED LEGISLATION

         Legislation pending before Congress and the State Legislature proposes
to alter the financing and delivery of health care services provided by the
Company (beyond the changes made by the Budget Act). There are wide variations
among the bills and their ultimate effect on the Company cannot be determined.
Certain proposals would encourage the growth of managed care networks, extend
temporary reductions in Medicare reimbursement imposed under current law, impose
additional costs in Medicare reimbursement and substantially restructure
Medicaid.

ADDITIONAL PAYOR CONSIDERATIONS

         Medicare retrospectively audits all reimbursements paid to
participating providers, including those now or previously managed by the
Company, cost reports of client hospitals, CORFs, ORFs, and HHAs upon which
Medicare reimbursement for services rendered in the programs managed by the
Company is based. Accordingly, at any time, the Company could be subject to
refund obligations to such clients for prior period cost reports that have not
been audited and settled as of the date hereof.

         Certain private insurance companies contract with hospitals and other
providers on an "exclusive" or a "preferred provider" basis and some insurers
have introduced plans known as "preferred provider organizations" ("PPOs").
Under such plans, there may be financial incentives for subscribers to use only
those providers that contract with the plans. Under an exclusive provider plan,
which includes most "health maintenance organizations" ("HMOs"), private payors
limit coverage to those services provided by selected providers. With this
contracting authority, private payors may direct patients away from nonselected
providers by denying coverage for services provided by them.

         Most PPOs and HMOs currently pay providers on a discounted
fee-for-service basis or on a discounted fixed rate per day of care. Many health
care providers do not have accurate information about their actual costs of
providing specific types of care, particularly since each patient presents a
different mix of services and lengths of stay. Consequently, the discounts
offered to PPOs and HMOs may result in payments at less than actual costs.

         Payors, including Medicare and Medicaid, are attempting to manage
costs, resulting in declining amounts paid or reimbursed to hospitals for the
services provided. As a result, the Company anticipates that the number of
patients served by hospitals on a per diem, episodic or capitated basis will
increase in the future. There can be no assurance that if amounts paid or
reimbursed to ORFs and HHAs decline, it will not adversely affect the Company.

INCREASED SCRUTINY OF HEALTHCARE INDUSTRY

         The healthcare industry has in general been the subject of increased
government and public scrutiny in recent years, which has focused on the
appropriateness of the care provided, referral and marketing practices and other
matters. Increased media and public attention has recently been focused on the
outpatient services industry in 




                                       8
<PAGE>   9

particular as a result of allegations of fraudulent practices related to the
nature and duration of patient treatments, illegal remuneration and certain
marketing, admission and billing practices by certain healthcare providers. The
alleged practices have been the subject of federal and state investigations, as
well as other legal proceedings. Healthcare is a target for investigations
because yearly Medicare payments to these types of services have increased
substantially during the past several years. The Company is unable to predict
the effect of a post-payment review on any Continucare provider or publicity in
general about the healthcare services industry might have on the Company. There
can be no assurance that the Company will not be subject to federal and state
review or investigation from time to time.

         Federal and state governments have recently focused significant
attention on healthcare reform intended to control healthcare costs and to
improve access to medical services for uninsured individuals. These proposals
include cutbacks to the Medicare and Medicaid programs and steps to permit
greater flexibility in the administration of Medicaid. See "--Reimbursement
Considerations." It is uncertain at this time what legislation regarding
healthcare reform may ultimately be enacted or whether other changes in the
administration or interpretation of governmental healthcare programs will occur.
There can be no assurance that future healthcare legislation or other changes in
the administration or interpretation of governmental healthcare programs will
not have a material adverse effect on the Company's business, results of
operations, prospects, financial results, financial condition or cash flows.

GOVERNMENT REGULATION

         The federal government and all states in which the Company operates
regulate certain aspects of the healthcare services provided by programs managed
by the Company and other healthcare services provided by the Company. In
particular, the development and operation of healthcare facilities are subject
to federal, state and local licensure and certification laws. Healthcare
facilities are subject to periodic inspection by governmental and other
authorities to assure compliance with the standards established for continued
licensure under state law and certification under the Medicare and Medicaid
programs. Failure to obtain or renew any required regulatory approvals or
licenses could prevent such facility from offering outpatient services or
receiving Medicare, Medicaid or other third party payments.

         The Company is also subject to federal and state laws which govern
financial and other arrangements between healthcare providers. These laws often
prohibit certain direct and indirect payments or fee-splitting arrangements
between healthcare providers that are designed to induce or encourage
overutilization, underutilization or the referral of patients or payor funded
business, or the recommendation of, a particular provider for medical products
and services.

         FEDERAL "FRAUD AND ABUSE" LAWS AND REGULATIONS. The Anti-Kickback Law
makes it a criminal felony offense to knowingly and willfully offer, pay,
solicit or receive remuneration in order to induce business for which
reimbursement is provided under the Medicare or Medicaid programs. In addition
to criminal penalties, including fines of up to $25,000 and five (5) years
imprisonment, violations of the Anti-Kickback Law can lead to civil monetary
penalties (which, pursuant to the Budget Act, can amount to as much as $50,000
for each violation, plus up to treble damages, based on the remuneration
illegally offered, paid, received or solicited) and exclusion from Medicare,
Medicaid and certain other state and federal health care programs. The scope of
prohibited payments in the Anti-Kickback Law is broad and includes economic
arrangements involving hospitals, physicians and other health care providers,
including joint ventures, space and equipment rentals, purchases of physician
practices and management and personal services contracts. HHS has published
regulations which describe certain "safe harbor" arrangements that will not be
deemed to constitute violations of the Anti-Kickback Law. HHS is expected to
promulgate additional safe harbor regulations in the future. The safe harbors
described in the regulations are narrow and do not cover a wide range of
economic relationships which many hospitals, physicians and other health care
providers consider to be legitimate business arrangements not prohibited by the
statute. Because the regulations describe safe harbors and do not purport to
describe comprehensively all lawful or unlawful economic arrangements or other
relationships between health care providers and referral sources, health care
providers having these arrangements or relationships may be required to alter
them in order to ensure compliance with the Anti-Kickback Law.





                                       9
<PAGE>   10

         Management of the Company believes that its contracts with providers,
physicians and other referral sources are in material compliance with the
Anti-Kickback Law and will make every effort to comply with the Anti-Kickback
Law. However, in light of the narrowness of the safe harbor regulations and the
scarcity of case law interpreting the Anti-Kickback Law, there can be no
assurances that the Company will not be alleged to have violated the
Anti-Kickback Law, and if an adverse determination is reached, whether any
sanction imposed would have a material adverse effect on the Company's financial
condition, results of operations or cash flows.

         The Office of the Inspector General of the Department of HHS, the
Department of Justice and other federal agencies interpret these fraud and abuse
provisions liberally and enforce them aggressively. Members of Congress have
proposed legislation that would significantly expand the federal government's
involvement in curtailing fraud and abuse and increase the monetary penalties
for violation of these provisions. In addition, some states restrict certain
business relationships between physicians and other providers of health care
services.

         The federal government, private insurers and various state enforcement
agencies have increased their scrutiny of provider business practices and
claims, particularly in the areas of home health care and durable medical
equipment in an effort to identify and prosecute parties engaged in fraudulent
and abusive practices. In May 1995, the Clinton Administration instituted
Operation Restore Trust ("ORT"), a health care fraud and abuse initiative
focusing on nursing homes, home health care agencies and durable medical
equipment companies. ORT, which initially focused on companies located in
California, Florida, Illinois, New York and Texas, the states with the largest
Medicare populations, has been expanded to all 50 states. While the Company
believes that it is in material compliance with such laws, there can be no
assurance that the practices of the Company, if reviewed, would be found to be
in full compliance with such laws, as such laws ultimately may be interpreted.
It is the Company's policy to monitor its compliance with such laws and to take
appropriate actions to ensure such compliance.

         Additionally, HCFA has implemented "Wedge Surveys" in at least 13
states, including Connecticut, Florida, Tennessee, Illinois, Indiana,
Massachusetts, Minnesota, Ohio, Oklahoma, Texas, Utah, Virginia and Wyoming. In
these surveys, HCFA completes ORT-type surveys on a much smaller scale.
Generally, HCFA reviews a small, limited number of claims over a two-month
period and extrapolates the percentage alleged to be paid in error to all claims
paid for the period under review. Assuming the reviewer uncovered nothing
significant, the provider then has the option to repay the amount determined by
HCFA or undergo a broader review of its claims. If the survey uncovers
significant problems, the matter may be referred for further review.

         STATE FRAUD AND ABUSE REGULATIONS. Various States also have
anti-kickback laws applicable to licensed healthcare professionals and other
providers and, in some instances, applicable to any person engaged in the
proscribed conduct. For example, Florida enacted "The Patient Brokering Act"
which imposes criminal penalties, including jail terms and fines, for receiving
or paying any commission, bonus, rebate, kickback, or bribe, directly or
indirectly in cash or in kind, or engage in any split-fee arrangement, in any
form whatsoever, to induce the referral of patients or patronage from a
healthcare provider or healthcare facility.

         Management of the Company believes that its contracts with providers,
physicians and other referral sources are in material compliance with the State
laws and will make every effort to comply with the State laws. However, there
can be no assurances that the Company will not be alleged to have violated the
State laws, and if an adverse determination is reached, whether any sanction
imposed would have a material adverse effect on the Company's financial
condition, results of operations or cash flows.

         RESTRICTIONS ON PHYSICIAN REFERRALS. The federal Anti-Self Referral Law
(the "Stark Law") prohibits certain patient referrals by interested physicians.
Specifically, the Stark Law prohibits a physician, or an immediate family
member, who has a financial relationship with an entity, from referring Medicare
or Medicaid patients with limited exceptions, to that entity for the following
"designated health services", clinical laboratory services, physical therapy
services, occupational therapy services, radiology or other diagnostic services,
durable medical equipment and supplies, radiation therapy services and supplies,
parenteral and enteral nutrients, equipment and supplies, prosthetics, orthotics
and prosthetic devices, home health services, outpatient prescription drugs, and
inpatient and outpatient hospital services. A financial relationship is defined
to include an ownership or investment in, or a compensation relationship with,
an entity. The Stark Law also prohibits an entity receiving a prohibited
referral from billing the Medicare or Medicaid programs for any services
rendered to a patient. The Stark Law contains 




                                       10
<PAGE>   11

certain exceptions that protect parties from liability if the parties comply
with all of the requirements of the applicable exception. The sanctions under
the Stark Law include denial and refund of payments, civil monetary penalties
and exclusions from the Medicare and Medicaid programs.

         HHS has proposed regulations further implementing and interpreting the
Stark Law. If adopted as final these regulations will impact the interpretation
and application of the Stark Law. The Company is unable to predict the manner in
which those regulations could impact the Company's current compliance with the
Stark Law.

         Management of the Company believes that it is presently in material
compliance with the Stark Law and will make every effort to comply with the
Stark Law. However, in light of the lack of regulatory guidance and the scarcity
of case law interpreting the Stark Law, there can be no assurances that the
Company will not be alleged to have violated the Stark Law, and if an adverse
determination is reached, whether any sanction imposed would have a material
adverse effect on the Company's results of operations, financial condition or
cash flows.

         CORPORATE PRACTICE OF MEDICINE DOCTRINE. Many states prohibit business
corporations from providing, or holding themselves out as a provider of, medical
care. Possible sanctions for violation of any of these restrictions or
prohibitions include loss of licensure or eligibility to participate in
reimbursement programs (including Medicare and Medicaid), asset forfeitures and
civil and criminal penalties. These laws vary from state to state, are often
vague and loosely interpreted by the courts and regulatory agencies. The Company
seeks to structure its business arrangements in compliance with these laws and,
from time to time, the Company has sought guidance as to the interpretation of
such laws; however, there can be no assurance that such laws ultimately will be
interpreted in a manner consistent with the practices of the Company.

         CERTIFICATES OF NEED AND CERTIFICATES OF EXEMPTION. Many states,
including states in which the Company operates, have procedures for the orderly
and economical development of health care facilities, the avoidance of
unnecessary duplication of such facilities and the promotion of planning for
development of such facilities. Such states require health care facilities to
obtain Certificates of Need ("CONs") or Certificates of Exemption ("COEs")
before initiating projects in excess of a certain threshold for the acquisition
of major medical equipment or other capital expenditures; changing the scope or
operation of a health care facility; establishing or discontinuing a health care
service or facility; increasing, decreasing or redistributing bed capacity;
and/or changing of ownership of a health care facility, among others. Possible
sanctions for violation of any of these statutes and regulations include loss of
licensure or eligibility to participate in reimbursement programs and other
penalties. These laws vary from state to state and are generally administered by
the respective state department of health. The Company seeks to structure its
business operations in compliance with these laws and has sought guidance as to
the interpretation of such laws and the procurement of required CONs and/or
COEs. There can be no assurance, however, that the Company or any of its client
hospitals, CORFs, ORFs or HHAs will be able to obtain required CONs and/or COEs
in the future.

         The Company is unable to predict the future course of federal, state or
local legislation or regulation, including Medicare and Medicaid statutes and
regulations. Further changes in the regulatory framework could have a material
adverse effect on the Company's financial condition, results of operations or
cash flows.

GEOGRAPHIC CONCENTRATION; RISKS ASSOCIATED WITH FUTURE GEOGRAPHIC EXPANSION

         Approximately 94% of the Company's net revenues in fiscal 1998 were
derived from the Company's operations in Florida. Unless and until the Company's
operations become more diversified geographically (as a result of acquisitions
or internal expansion), adverse economic, regulatory, or other developments in
Florida could have a material adverse effect on the Company's financial
condition or results of operations. The Company has made limited expansions
outside the State of Florida. In the event that the Company continues to expand
its operations into new geographic markets, the Company will need to establish
new relationships with physicians and other healthcare providers. In addition,
the Company will be required to comply with laws and regulations of states that
differ from those in which the Company currently operates, and may face
competitors with greater knowledge of such local markets. There can be no
assurance that the Company will be able to establish relationships, realize
management efficiencies or otherwise establish a presence in new geographic
markets.





                                       11
<PAGE>   12

DEPENDENCE ON PHYSICIANS

         A significant portion of the Company's revenue is derived (i) from
patient service revenue generated by physicians employed by or under contract
with the Company and (ii) under managed care contracts held by the Company.
Revenue derived by the Company under capitated managed care contracts depends on
the continued participation of physicians providing medical services to patients
of the managed care companies and independent physicians contracting with the
Company to participate in provider networks which are developed or managed by
the Company. Physicians can typically terminate their agreements to provide
medical services under managed care contracts by providing notice of such
termination to the payor. Termination of these agreements by physicians may
result in termination by the payor of a managed care contract between the
Company and the payor. Any material loss of physicians, whether as a result of
the loss of network physicians or the termination of managed care contracts
resulting from the loss of network physicians or otherwise, could have a
material adverse effect on the Company's business, results of operations,
prospects, financial results, financial condition or cash flows. The Company
competes with general acute care hospitals and other healthcare providers for
the services of medical professionals. Demand for such medical professionals is
high and such professionals often receive competing offers. No assurance can be
given that the Company will be able to continue to recruit and retain a
sufficient number of qualified medical professionals. The inability to
successfully recruit and retain medical professionals could adversely affect the
Company's ability to successfully implement its growth strategy. See 
"Business--Administrative Support Operations."

DEPENDENCE ON KEY EMPLOYEES

         The Company's ability to implement its growth strategy is dependent in
large part upon the efforts of its senior management, particularly Charles M.
Fernandez, the Company's Chairman of the Board, Chief Executive Officer and
President. The loss of the services of Mr. Fernandez could have a material
adverse effect on the Company. The Company has secured a $2 million "key-man"
life insurance policy on Mr. Fernandez.

COMPETITION

         The healthcare industry is highly competitive. Continucare competes
with several national competitors and many regional and national healthcare
companies, some of which have greater resources than Continucare. In addition,
healthcare providers may elect to manage their own outpatient health programs.
Competition is generally based upon reputation, price, the ability to offer
financial and other benefits for the particular provider, and the management
expertise necessary to enable the provider to offer outpatient programs that
provide the full continuum of outpatient services in a quality and
cost-effective manner. The pressure to reduce healthcare expenditures has
emphasized the need to manage the appropriateness of health services provided to
patients. As a result, competitors without management experience covering the
various levels of the continuum of outpatient services may not be able to
compete successfully.

INSURANCE

         Continucare carries general liability, comprehensive property damage,
malpractice, workers' compensation, stop-loss and other insurance coverages that
management considers adequate for the protection of Continucare's assets and
operations. There can be no assurance, however, that the coverage limits of such
policies will be adequate to cover losses and expenses for lawsuits brought or
which may be brought against the Company. A successful claim against Continucare
in excess of its insurance coverage could have a material adverse effect on
Continucare.

TECHNOLOGY; YEAR 2000 COMPLIANCE

         The Year 2000 Issue is the result of the computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations and
patient care, including, among other things, a failure of certain 




                                       12
<PAGE>   13

patient care applications and equipment, a failure of control systems, a
temporary inability to process transactions, send invoices, or engage in similar
normal business activities.

         Based on a recent and ongoing assessment, the Company determined that
it will be required to modify or replace certain portions of its software,
hardware and patient care equipment so that its systems will function properly
with respect to dates in the year 2000 and thereafter. Affected systems will
include clinical and biomedical instrumentation and equipment used within the
Company for purposes of direct or indirect patient care such as imaging,
laboratory, pharmacy and respiratory devices; cardiology measurement and support
devices; emergency care devices (including monitors, defibrillators, dialysis
equipment and ventilators); and general patient care devices (including
telemetry equipment and intravenous pumps). The Company presently believes that
with modifications to existing software and conversions to new clinical and
biomedical instrumentation and equipment, the Year 2000 Issue will not pose
significant operational problems. However, if such modifications and conversions
are not made, or are not completed timely, the Year 2000 Issue could have a
material impact on the operations of the Company.

         The Company has initiated formal communications with all of its
significant suppliers to determine the extent to which the Company's interface
systems are vulnerable to those third parties' failure to remediate their own
Year 2000 Issues. The Company's total Year 2000 project cost and estimates to
complete include the costs and time associated with the impact of third-party
Year 2000 Issues based on presently available information. However, there can be
no guarantee that the systems of other companies on which the Company's systems
rely will be timely converted and would not have an adverse effect on the
Company's systems.

         The Company will utilize both internal and external resources to
reprogram, or replace and test the software and patient care equipment for Year
2000 modifications. The Company anticipates completing the Year 2000 project by
June 30th, 1999, which is prior to any anticipated impact on its operating
systems. The total cost of the Year 2000 project is estimated at $1.0 million
and is being funded through operating cash flows. Of the total projected cost,
approximately $800,000 is attributable to the purchase of new software and
patient care equipment, which will be capitalized. The remaining $200,000, which
will be expensed as incurred, is not expected to have a material effect on the
results of operations. To date, the Company has incurred approximately $500,000
($100,000 expensed and $400,000 capitalized for new systems and equipment).

         The costs of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause material differences
include, but are not limited to, the availability and cost of replacement
equipment and personnel trained in this area, the ability to locate and correct
all relevant computer codes, and similar uncertainties.

UPGRADE OF MANAGEMENT INFORMATION SYSTEMS; TECHNOLOGICAL OBSOLESCENCE

         The operations of the Company are heavily dependent on its management
information systems. Implementation of new management information systems and
integration of management information systems in connection with acquisitions
require a transition period during which various functions must be converted or
integrated to the new systems. This conversion and integration process may
entail errors, defects or prolonged downtime, especially at the outset, and such
errors, defects or downtime could have a material adverse effect on the
Company's business, results of operations, prospects, financial results,
financial condition or cash flows.





                                       13
<PAGE>   14

         Both the software and hardware used by the Company in connection with
the services it provides have been subject to rapid technological change.
Although the Company believes that its technology can be upgraded as necessary,
the development of new technologies or refinements of existing technology could
make the Company's existing equipment obsolete. Although the Company is not
currently aware of any pending technological developments that would be likely
to have a material adverse effect on its business, there is no assurance that
such developments will not occur.

                                  * * * * * * *

         The Company cautions that the risk factors described above could cause
actual results or outcomes to differ materially from those expressed in any
forward-looking statements of the Company made by or on behalf of the Company.
Any forward-looking statement speaks only as of the date on which such statement
is made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrences of unanticipated
events. New factors emerge from time to time and it is not possible for
management to predict all of such factors. Further, management cannot assess the
impact of each such factor on the Company's business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements.






                                       14
<PAGE>   15


                                     PART I

ITEM 1. BUSINESS

GENERAL

         Continucare is a provider of integrated outpatient healthcare services
and operates primarily in Florida. The Company provides a broad continuum of
healthcare services through its network of physician practices, outpatient
clinics, rehabilitation centers, home healthcare agencies, diagnostic imaging
centers and laboratory services (within its group physician practices). As a
result of its ability to provide a quality continuum of healthcare services
through approximately 300 locations, the Company has become a preferred
healthcare provider in Florida to some of the nation's largest managed care
organizations, including (i) Humana, for which, as of June 30, 1998, it managed
the care for approximately 16,000 patients on a capitated basis and (ii)
Foundation, for which, as of June 30, 1998, it managed the care for
approximately 34,000 patients on a capitated basis. As of June 30, 1998, the
Company's Florida delivery services network included approximately 300
physicians.

INDUSTRY OVERVIEW

         There are three principal industry elements which management believes
have created a substantial opportunity for the Company including: (i) the
continued penetration of managed care, (ii) the highly fragmented nature of the
delivery of outpatient services, and (iii) the shift in the provision of
healthcare services from the hospital to lower cost outpatient locations and the
home.

         CONTINUED PENETRATION OF MANAGED CARE. In response to escalating
expenditures in healthcare costs, payors, such as Medicare and managed care
organizations, have increasingly pressured physicians, hospitals and other
providers to contain costs. This pressure has led to the growth of lower cost
outpatient care, and to reduced hospital admissions and lengths of stay. To
further increase efficiency and reduce the incentive to provide unnecessary
healthcare services to patients, payors have developed a reimbursement structure
called capitation. Capitation contracts require the payment to healthcare
providers of a fixed amount per patient for a given patient population, and the
providers assume full responsibility for servicing all of the healthcare
services needs of those patients, regardless of their condition. The Company
believes that low cost providers and those companies providing a full continuum
of outpatient care will succeed in the capitation environment because such
companies have the ability to manage the cost of patient care.

         HIGHLY FRAGMENTED MARKET. The highly fragmented nature of the delivery
of outpatient services has created an inefficient healthcare services
environment for patients, payors and providers. Managed care companies and other
payors must negotiate with multiple healthcare services providers, including
physicians, hospitals and ancillary services providers, to provide geographic
coverage to their patients. As a result, patients are often forced to visit
multiple locations and multiple providers to seek appropriate treatment.
Furthermore, physicians who practice alone or in small groups have experienced
difficulty negotiating favorable contracts with managed care companies and have
trouble providing the burdensome documentation required by such entities. In
addition, healthcare services providers may lose control of patients when they
refer them out of their network for additional services that such providers do
not offer. As a result of these industry dynamics, the Company has developed a
network to provide a full continuum of outpatient care where patients can
receive substantially all of their outpatient service needs through
approximately 300 locations. Due to the Company's broad network, managed care
companies can negotiate capitation contracts with the Company and service a
large group of patients within its network. The Company intends to continue
affiliating with physicians who are sole practitioners or who operate in small
groups to staff and expand its network, which should make the Company a provider
of choice to managed care organizations.

         SHIFT TOWARD LOW-COST OUTPATIENT TREATMENT. Outpatient treatment has
grown rapidly as a result of (i) advances in medical technology, which have
facilitated the delivery of healthcare in alternate sites, (ii) demographic
trends, such as an aging population and (iii) preferences among patients to
receive care in their homes. The Company expects this trend to continue as
managed care companies and healthcare providers continue shifting towards the
lower cost providers.





                                       15
<PAGE>   16

BUSINESS STRATEGY

         The Company intends to leverage the current industry dynamics by (i)
expanding its physician network, (ii) expanding its continuum through ancillary
service offerings, such as rehabilitation services, diagnostic services and home
care, (iii) increasing its managed care revenues and (iv) implementing its
network model in additional selected strategic markets.

         CONTINUED EXPANSION OF PHYSICIAN NETWORK. The physician network is the
platform of the Company's continuum of services. The Company intends to expand
its physician network by (i) adding physicians to its Independent Practice
Association ("IPA"), which enables physicians to maintain their own practices,
(ii) hiring physicians to work in Company-owned physician practices and clinics
and (iii) acquiring physician practices and clinics. Pursuant to the Company's
physician practice and clinic acquisition strategy, the Company generally
targets smaller physician practices which do not currently provide ancillary
services. Immediately following such acquisitions, the Company integrates these
operations into the Company's continuum and provides the practices with
administrative services, additional and more favorable managed care arrangements
and access to the Company's ancillary services offerings such as diagnostic
imaging, laboratory services, rehabilitation services and home care.

         EXPANSION OF THE CONTINUUM THROUGH ANCILLARY SERVICES. Ancillary
services currently include rehabilitation services, home care, diagnostic
imaging and laboratory services. Such services provide the Company with
additional services and entry points along the continuum which are highly
desired by patients and managed care organizations. These ancillary services
assist the Company in negotiating more favorable managed care contracts,
including higher capitation rates. The Company believes that it has been
successful at making such acquisitions at favorable purchase prices. The Company
believes that there are significant other opportunistic acquisitions available
in Florida and in other targeted areas which should enhance the continuum. The
Company periodically evaluates potential opportunities for acquisitions of
health centers, rehabilitation facilities and home health operations which would
complement the Company's current operations.

         ESTABLISH ADDITIONAL MANAGED CARE CONTRACTS. The Company is focused on
establishing additional managed care contracts with the leading managed care
companies in Florida to capitalize on increased managed care enrollments. The
Company believes it has been successful in developing managed care relationships
due to its network of quality physicians, the provision of a range of healthcare
services within its network and its many locations.

         IMPLEMENT CONTINUUM SERVICES MODEL IN SELECTED MARKETS. The Company has
successfully implemented its integrated continuum services model in south and
central Florida, and intends to selectively expand the model into other
appropriate markets by tailoring its services and facilities to the needs of
individual markets.

ACQUISITIONS

         Since its inception in February 1996, the Company has expanded its
continuum of outpatient delivery services through various acquisitions. Because
physicians are in a position to control quality of care, utilization of care and
cost of care, the Company seeks to acquire smaller, well-established physician
practices that traditionally do not provide a substantial amount of ancillary
services.

         The Company focuses on improving the performance of these practices by
expanding the managed care contracts and providing ancillary services along the
continuum of care. The Company continues to evaluate the acquisition of
providers of ancillary services, such as rehabilitation, home health and
diagnostic services. The Company's criteria for acquisitions include those that
are complimentary to the existing network, are consistent with the Company's
strategy, have established relationships with managed care providers, have
established management teams, as well as those that provide entry into new
markets and regions. The Company has traditionally targeted acquisitions in the
Florida market and other southeastern states. The purchase price for
acquisitions is typically based on a multiple of prior year earnings before
interest, taxes, depreciation and amortization ("EBITDA") for the target
company, and is paid in cash or Common Stock, or a combination thereof.






                                       16
<PAGE>   17

RECENT DEVELOPMENTS

         In August 1998, the Company purchased the assets of Care Med, a managed
care healthcare company which owns or has agreements with approximately 30
physician practices. The total purchase price was approximately $6.7 million, of
which $4.2 million was paid at closing and the remaining balance is payable in
equal monthly installments over the ensuing 24 months.

CONTINUUM OF CARE

         Continucare is a provider of integrated outpatient healthcare. The
Company has established a network of physician practices as the primary
caregiver and surrounded these practices with a continuum of outpatient
services, including office based rehabilitation services, home healthcare and
diagnostic services. The Company intends to expand its delivery services network
by adding ancillary services and through strategic acquisitions of, and
affiliations with, primary and specialty physician practices, especially primary
care physicians with an emphasis on musculoskeletal disorders such as
rheumatologists and orthopedic surgeons. Treatment of these diseases by such
physicians involves the utilization of physical rehabilitation, bone
densitometry, home healthcare and diagnostic services; services which are
presently part of the Company's continuum of care. The Company's services are
provided by physicians in office-based practices, including health centers,
outpatient rehabilitation facilities and in the patient's home.

         OFFICE AND PHYSICIAN/HEALTH CENTER PRACTICES. Since commencing its
operations in 1996, the Company has expanded its physician network through
acquisitions of physician practices, employment of new physicians and
affiliations with physicians through the Company's IPAs. This physician network
provides a broad platform for the delivery of the Company's continuum of
healthcare services to patients. As of June 30, 1998, the Company employed or
contracted with approximately 300 physicians in Florida and provided services to
approximately 50,000 patients under capitated managed care contracts.

         The physicians within the Company's network treat patients in
office-based settings as well as health centers. A typical office-based practice
is located in a major metropolitan area, in office space that ranges from 5,000
to 8,000 square feet. The office typically employs or contracts with
approximately two to three physicians. The physicians provide primary care and
specialty care to their patients. A typical health center is located in or near
major metropolitan areas, in space that ranges from 2,500 to 5,000 square feet.
A health center is typically staffed with approximately two physicians, and is
open five days a week. The Company provides laboratory services to its owned
physician practices.

         OUTPATIENT REHABILITATION FACILITIES. The continuing emphasis of
containing the increases in healthcare costs, as evidenced by Medicare's
prospective payment system, the growth in managed care and the various
alternative healthcare reform proposals, often results in the early discharge of
patients from acute care facilities. As a result, many hospital patients may not
receive the intensity of services necessary for them to achieve a full recovery
from their diseases, disorders or traumatic conditions. The Company's outpatient
rehabilitation services play a significant role in the continuum of care because
they provide a high level of service, in terms of intensity, quality and
frequency, in a more cost-efficient setting.

         Since commencing operations, the Company's rehabilitation division has
grown primarily through two acquisitions. As of June 30, 1998, there were 18
rehabilitation centers throughout Florida and one center in each of Alabama,
Georgia, North Carolina and South Carolina. The Company also provides
rehabilitation staffing services for 20 additional locations throughout Florida,
Alabama, Georgia, North Carolina and South Carolina. The Company began its
rehabilitation operations in November 1996 and acquired the additional centers
in connection with the acquisition of Rehab Management Systems, Inc.,
Integracare, Inc. and J.R. Rehab Associates, Inc. in February 1998.

         When a patient is referred to one of the Company's rehabilitation
facilities, a multi-disciplinary team of professionals work with the patient,
the patient's family and physicians to establish a rehabilitation care plan
designed specifically for that patient. Depending upon the patient's disability,
this process may involve the services of a single discipline, such as physical
therapy for a knee injury, or of multiple disciplines, as in the case of a





                                       17
<PAGE>   18

complicated stroke patient, which may include speech therapy and occupational
therapy. The rehabilitation care plan is designed to address the medical,
physical, occupational, social, emotional and communication impairments of a
patient as a result of trauma and physical conditions. Emphasis is placed on
maximizing functional independence in regard to mobility, self-care and daily
living skills related to environment and leisure activities. Rehabilitative
healthcare services are provided by a variety of healthcare professionals
including physiatrists, rehabilitation nurses, physical therapists, occupational
therapists, speech-language pathologists, respiratory therapists, recreation
therapists, social workers, rehabilitation counselors and others.

         The Company has developed numerous rehabilitation programs for a
variety of disorders, which include treatment for stroke, head injury,
peripheral nerve injury, neuromuscular injury, speech and language disorder,
amputation, arthritis, cerebral palsy and multiple sclerosis. Patients treated
at the Company's outpatient centers will undergo varying courses of therapy
depending upon their needs. Some patients may only require a few hours of
therapy per week for a few weeks, while others may spend up to four hours per
day in therapy for six months or more, depending on the nature, severity and
complexity of their injuries. Each facility's goal is to provide a
rehabilitation program that will restore the patient to a productive, active and
independent lifestyle as soon as possible.

         The Company manages three rehabilitation facilities in Florida for
Bally fitness centers pursuant to its February 1997 agreement with Bally Total
Fitness ("Bally"). Continucare will be responsible for staffing the
rehabilitation facilities at the Bally fitness centers with necessary personnel,
such as physical and occupational therapists, and contracts for a medical
director at each facility.

         As of June 30, 1998, the Company operated or managed approximately 40
outpatient rehabilitation facilities.

         HOME HEALTHCARE. Continucare provides home healthcare services to
recovering, disabled, chronically ill and terminally ill patients in their
homes. Typically, a service care provider (such as a registered nurse, home
health aide, therapist or technician) will visit the patient one or two times a
day or the patient may require around-the-clock care. Treatment may last for
several weeks, several months or the remainder of the patient's life. The
services provided by the Company include skilled nursing, physical therapy,
speech therapy, occupational therapy, medical social services and home health
aide services. Reimbursement for the home health services provided by the
Company include Medicare, Medicaid and managed care.

         DIAGNOSTIC IMAGING SERVICES. The Company's diagnostic radiology
division provides physician practices with a convenient and cost effective
method of accessing imaging services. Prior to forming this division, the
Company's physician practices obtained these services from various other
companies outside of the continuum, resulting in delays and additional costs.
Substantially all of the Company's capitated contracts and the Company's owned
office based and health centers now have access to a primary source for
diagnostic imaging, which the Company believes benefits patients and reduces
costs of providing healthcare services.

         The Company's diagnostic imaging division provides diagnostic services
at physicians' offices, inpatient and outpatient facilities and diagnostic
centers. As of June 30, 1998, these services were delivered at five fixed site
locations and through three mobile units. Fixed site capabilities include
magnetic resonance imaging, computer axial tomography scans, fluoroscopy,
mammography, general radiology, sonography, cardiovascular studies, nuclear
medicine and neurological studies, which are interpreted by board certified
radiologists. The Company has a centralized scheduling department, which handles
the scheduling for all of the Company's fixed and mobile sites. This scheduling
service enables patients to receive treatments at convenient locations. The
Company also offers patient transportation to a fixed site facility.

         The Company believes these services expand the continuum of care and
allow the Company to better meet the needs of its patients and physicians, in
addition to providing a key selling point when negotiating with new physician
groups.






                                       18
<PAGE>   19

ADMINISTRATIVE SUPPORT OPERATIONS

         ADMINISTRATIVE FUNCTIONS. The Company enhances administrative
operations of its physician practices by providing management functions such as
payor contract negotiations, credentialing, financial reporting, risk management
services, access to lower cost professional liability insurance and the
operation of integrated billing and collection systems. The Company believes
that it competes effectively with traditional physician practice management
companies and independent practice associations because its physicians are
linked to the Company's network. As a result, a strategic alliance of cost
effective services can be consolidated thereby delivering quality healthcare at
a lower cost. The Company also believes it offers physicians increased
negotiating power associated with managing their practice and fewer
administrative burdens, which allows the physician to focus on providing care to
patients.

         EMPLOYMENT AND RECRUITING OF PHYSICIANS. The Company generally enters
into seven-year employment agreements with the physicians in the practices
purchased by the Company. These agreements usually provide for base compensation
and benefits and may contain incentive compensation provisions based on
increases in productivity and efficiency. The Company verifies that the
credentials of physicians in its network meet the minimum requirements specified
in payor contracts. In addition, the Company assists its physicians in the
recruitment of competent physicians. The recruitment process includes interviews
and reference checks incorporating a number of credentialing and competency
assurance protocols. All of the Company's physicians are generally either board
certified or board eligible.

         CONTRACT NEGOTIATIONS. The Company assists its physicians in obtaining
managed care contracts. The Company believes that its experience in negotiating
and managing risk contracts enhance its ability to market the services of its
affiliated physicians to managed care payors and to negotiate favorable terms
from such payors. The managed care contracts are held, managed and administered
by a wholly owned subsidiary of the Company. The Company also performs quality
assurance and utilization management under each contract on behalf of its
affiliated physicians.

         INFORMATION SYSTEMS. The Company supports free-standing systems for its
physician practices to facilitate patient scheduling, billing and collection,
accounts receivable management, provider productivity analysis and cash
disbursement functions. Upon closing of an acquisition of a physician practice,
the Company generally integrates the practice's systems to streamline financial
reporting, accounts receivable management and productivity analysis functions,
rather than replacing the systems used by the physician practice. See "Risk
Factors -- Upgrade of Management Information Systems; Technological
Obsolescence."

MANAGED CARE

         The Company's strategy is to increase enrollment by adding new payor
relationships and new providers to the existing network and by expanding the
network into new geographic areas where the penetration of managed healthcare is
growing. The Company believes new payor and provider relationships are possible
because of its ability to manage the cost of health care without sacrificing
quality. The Company seeks to control one of the "gatekeeping" points of entry
into the managed health care delivery system -- the primary care physician's
office thereby giving the Company a platform for coordinating all aspects of
patient care under global capitation payor contracts. The Company is also
pursuing national and multi-state payor contracts, which facilitate more rapid
development of provider networks in new markets and thus should enable the
Company to increase enrollment in an accelerated manner.

         CONTRACTS WITH PAYORS. Contracts with payors generally provide for
terms of one to ten years, may be terminated earlier without cause, upon notice
and upon renewal or in a number of other circumstances and are subject to annual
renegotiation of capitation rates, covered benefits and other terms and
conditions. Pursuant to payor contracts, the physicians provide covered medical
services and receive capitation payments from payors for each enrollee who
selects a Company network physician as his or her primary care physician. To the
extent that patients require more care than is anticipated or require
supplemental medical care that is not otherwise reimbursed by payors, aggregate
capitation payments may be insufficient to cover the costs associated with the
treatment of patients. The Company maintains stop-loss insurance coverage, which
mitigates the effect of occasional high 




                                       19
<PAGE>   20

utilization of health care services. If revenues are insufficient to cover costs
or the Company is unable to maintain stop-loss coverage at favorable rates, the
Company's business results of operations and financial condition could be
materially adversely affected. The loss of significant payor contracts and the
failure to regain or retain such payor's patients or the related revenues
without entering into new payor relationships could have a material adverse
effect on the Company's business results of operations and financial condition.

         The Company's capitated managed care agreement with Foundation is a ten
year agreement with the initial term expiring in July, 2008, unless terminated
earlier by Foundation for cause. In the event of termination of the Foundation
agreement, the Company must continue to provide services to a patient with a
life-threatening or disabling and degenerative condition for sixty days as
medically necessary. This agreement is automatically renewed for another five
year period unless notice by either party is provided 120 days in advance of the
expiration date. Any negotiation must be completed 90 days prior to the
expiration of the term. Foundation can terminate the agreement with respect to
one or more benefit programs; however, the Company may only terminate the
agreement in its entirety. The Company's capitated managed care agreement with
Humana Medical Plans, Inc. ("Humana") is a six-year agreement expiring July 31,
2004, unless terminated earlier for cause. The agreement shall automatically
renew for subsequent one-year terms unless either party provides 180-days
written notice of its intent not to renew. In addition, the Humana agreement may
be terminated by the mutual consent of both parties at any time. Under certain
limited circumstances, Humana may immediately terminate the agreement for cause,
otherwise termination for cause shall require ninety (90) days prior written
notice with an opportunity to cure, if possible. In the event of termination of
the Humana agreement, the Company must continue to provide or arrange for
services to any member hospitalized on the date of termination until the date of
discharge or until it has made arrangements for substitute care. In some cases,
Humana may provide 30 days' notice as to an amendment or modification of the
agreements, including but not limited to, renegotiation of rates, covered
benefits and other terms and conditions. The Company maintains other managed
care relationships subject to various negotiated terms. There can be no
assurance that the Company will be able to renew any of these managed care
agreements or, if renewed, that they will contain terms favorable to the Company
and affiliated physicians. The loss of any of these contracts or significant
reductions in capitated reimbursement rates under these contracts could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors--Risks Associated with Capitated
Arrangements Including Risk of Over-Utilization by Managed Care Patients, Risk
of Reduction of Capitated Rates and Regulatory Risks," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
"Business--Managed Care."

         FEE-FOR-SERVICE ARRANGEMENTS. Certain of the Company's physicians who
render services on a fee-for-service basis (as opposed to capitation) typically
bill various payors, such as governmental programs (e.g., Medicare and
Medicaid), private insurance plans and managed care plans, for the health care
services provided to their patients. There can be no assurance that payments
under governmental programs or from other payors will remain at present levels.
In addition, payors can deny reimbursement if they determine that treatment was
not performed in accordance with the cost-effective treatment methods
established by such payors or was experimental or for other reasons.

COMPLIANCE PROGRAM

         The Company has implemented a compliance program to provide ongoing
monitoring and reporting to detect and correct potential regulatory compliance
problems. The program establishes compliance standards and procedures for
employees and agents. The program includes, among other things, (i) written
policies, (ii) annual training for each employee on topics such as insider
trading, anti-kickback act, Federal False Claims Act and Anti-Self Referral Act,
and (iii) a "hot line" for employees to anonymously report violations.

COMPETITION

         The healthcare industry is highly competitive. Continucare competes
with several national competitors and many regional and national healthcare
companies, some of which have greater resources than Continucare. In addition,
healthcare providers may elect to manage their own outpatient health programs.
Competition is generally based upon reputation, price, the ability to offer
financial and other benefits for the particular provider, and the management
expertise necessary to enable the provider to offer outpatient programs that
provide the full continuum of outpatient services in a quality and
cost-effective manner. The pressure to reduce healthcare expenditures has
emphasized the need to manage the appropriateness of health services provided to
patients. As a result, competitors without management experience covering the
various levels of the continuum of outpatient services may not be able to
compete successfully.





                                       20
<PAGE>   21

GOVERNMENT REGULATION

         GENERAL. Continucare's business is affected by federal, state and local
laws and regulations concerning healthcare. These laws and regulations impact
the development and operation of outpatient programs and the provision of
healthcare to patients in physicians' offices and in patient's homes. Licensing,
certification, reimbursement and other applicable government regulations vary by
jurisdiction and are subject to periodic revision. Continucare is not able to
predict the content or impact of future changes in laws or regulations affecting
the healthcare industry. See "Risk Factors."

         PRESENT AND PROSPECTIVE FEDERAL AND STATE REIMBURSEMENT REGULATION. The
Company's operations are affected on a day-to-day basis by numerous legislative,
regulatory and industry-imposed operational and financial requirements which are
administered by a variety of federal and state governmental agencies as well as
by self-regulatory associations and commercial medical insurance reimbursement
programs.

         HHAs, CORFs and ORFs, including those of Continucare, are subject to
numerous licensing, certification and accreditation requirements. These include,
but are not limited to, requirements relating to Medicare participation and
payment, requirements relating to state licensing agencies, private payors and
accreditation organizations. Renewal and continuance of certain of these
licenses, certifications and accreditation are based upon inspections, surveys,
audits, investigations or other review, some of which may require or include
affirmative action or response by Continucare. An adverse determination could
result in a loss, fine or reduction in the scope of licensure, certification or
accreditation or could reduce the payment received or require the repayment of
amounts previously remitted.

         Significant changes have been and may be made in the Medicare and
Medicaid programs, which changes could have a material adverse impact on
Continucare's financial condition. In addition, legislation has been or may be
introduced in the Congress of the United States which, if enacted, could
adversely affect the operations of Continucare by, for example, decreasing
reimbursement by third-party payors such as Medicare or limiting the ability of
Continucare to maintain or increase the level of services provided to the
patients.

         Title XVIII of the Social Security Act authorizes Medicare Part A, the
health insurance program that pays for inpatient care for covered persons
(generally, those age 65 and older and the long-term disabled) and Medicare Part
B, a voluntary supplemental medical assistance insurance program. Healthcare
providers may participate in the Medicare program subject to certain conditions
of participation and acceptance of a provider agreement by the federal Secretary
of HHS. Only enumerated services, upon satisfaction of certain criteria, are
eligible for Medicare reimbursement. Relative to the services of Continucare's
Medicare certified HHAs, CORFs and ORFs, Medicare reimburses the "reasonable
costs" for services up to program limits. Medicare reimbursed costs are subject
to audit, which may result in either decreases or increases in payments the
Company has previously received.

         The Budget Act contains a number of provisions that affect
Continucare's operations. The Budget Act expands the current requirements that
hospitals have a discharge planning process, including information on the
availability of home health services and providers in the area. Each plan must
also identify the entities to whom a patient is referred in which the hospital
has a "disclosable financial interest" or which has such an interest in the
provider. The Budget Act also requires the Secretary of HHS to implement a PPS
for both CORF and outpatient rehabilitation services, and reduces the amount of
Medicare reimbursement for HHA services. Under such a system, providers will be
reimbursed a fixed fee per treatment unit, and a provider having costs greater
than the prospective amount will incur losses. It can not be predicted what
effect, if any, such new PPS will have on the operations of Continucare. The
Budget Act also established per beneficiary caps on certain outpatient
rehabilitation services.

         HEALTHCARE REFORM. Federal and state governments have recently focused
significant attention on healthcare reform intended to control healthcare costs
and to improve access to medical services for uninsured individuals. These
proposals include cutbacks to the Medicare and Medicaid programs and steps to
permit greater flexibility in the administration of Medicaid. It is uncertain at
this time what legislation on healthcare reform may ultimately be enacted or
whether other changes in the administration or interpretation of governmental
healthcare programs will occur. There can be no assurance that future healthcare
legislation or other changes in the 




                                       21
<PAGE>   22

administration or interpretation of governmental healthcare programs will not
have a material adverse effect on Continucare's business, financial condition or
results of operations.

EMPLOYEES

         At June 30, 1998, Continucare employed or contracted with approximately
1,300 individuals of whom 300 are physicians. Continucare has no collective
bargaining agreement with any unions and believes that its overall relations
with its employees are good.

INSURANCE

         Continucare carries general liability, comprehensive property damage,
medical malpractice, workers' compensation, stop-loss and other insurance
coverages that management considers adequate for the protection of Continucare's
assets and operations. There can be no assurance, however, that the coverage
limits of such policies will be adequate. A successful claim against Continucare
in excess of its insurance coverage could have a material adverse effect on
Continucare.

ITEM 2. PROPERTIES

         Continucare leases approximately 19,000 square feet of space for its
corporate offices in Miami, Florida under a lease expiring in September 2001
with average annual base lease payments of approximately $320,000. All of the
Company's facilities are leased.

ITEM 3. LEGAL PROCEEDINGS

         The Company entered into a Settlement Agreement on June 12, 1998 (the
"Settlement Agreement") in settlement of a claim by a former shareholder of the
Company prior to the merger of a subsidiary of the Company's predecessor, Zanart
Entertainment, Incorporated ("Zanart") into Continucare Corporation on August 9,
1996 (the "Merger"). Pursuant to the Settlement Agreement, the Company paid $2.0
million and on July 12, 1998 issued 300,000 restricted shares of the Company's
common stock. The Settlement Agreement resolves all disputes, disagreements and
conflicts between the parties.

         The Company is a party to the case of JAMES N. HOUGH, PLAINTIFF V.
INTEGRATED HEALTH SERVICES, INC., A DELAWARE CORPORATION, AND REHAB MANAGEMENT
SYSTEMS, INC., A FLORIDA CORPORATION ("RMS"), AND CONTINUCARE REHABILITATION
SERVICES, INC., A FLORIDA CORPORATION, in the Circuit Court of the Tenth
Judicial Circuit in and for Polk County, Florida, Civil Division. Mr. Hough was
the founder and former Chief Executive Officer and President of RMS. Mr. Hough
sold RMS to Integrated Health Services, Inc. ("IHS"), and entered into an
Employment Agreement (the "Employment Agreement") with IHS. RMS was acquired by
Continucare in February 1998. Mr. Hough is seeking damages from the Employment
Agreement and is alleging breach of contract. His initial demand of $1.1 million
was rejected by the Company and the Company intends to vigorously defend the
claim.

         The Company is a party to the case of MANAGED HEALTH CARE SYSTEMS AND
AFFILIATES ("MHS") V. CONTINUCARE ACQUISITION CORP. AND CONTINUCARE HOME HEALTH
SERVICES, INC. MHS is seeking in excess of $1 million in damages for an alleged
breach of contract. The Company believes the claim has little merit and intends
to vigorously defend the claim.

     The Company is also involved in various legal proceedings incidental to its
business, substantially all of which involve claims related to the alleged
malpractice of employed and contracted medical professionals.

     In the opinion of the Company's management, no individual item of
litigation or group of similar items of litigation, taking into account the
insurance coverage maintained by the Company and any accounts for self-insured
retention, is likely to have a material adverse effect on the Company's
financial position, results of operations or liquidity.

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

         None -- not applicable.




                                       22
<PAGE>   23


                                     PART II

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

MARKET PRICE

         The principal U.S. market in which the Company's Common Stock is traded
is the American Stock Exchange ("AMEX") (symbol: CNU). Prior to the Company's
listing of its Common Stock on AMEX, which occurred on September 11, 1996, such
shares of Common Stock were traded on the Nasdaq Small-Cap Market. The following
table shows the high and low sales prices as reported on Nasdaq, and on AMEX for
the Common Stock for the periods indicated below. These quotations have been
obtained from Nasdaq and AMEX.

          PRICE PERIOD                           HIGH           LOW
          ------------                           ----           ----
        Fiscal Year 1997
            First Quarter                   $    13.12      $     3.31(1)
            Second Quarter                       12.00            7.62
            Third Quarter                         9.87            5.87
            Fourth Quarter                        6.38            5.19

        Fiscal Year 1998
            First Quarter                   $     8.63      $     5.00
            Second Quarter                        7.38            4.75
            Third Quarter                         6.38            4.75
            Fourth Quarter                        6.50            4.63

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

(1) On September 11, 1996, the Merger was consummated.

         As of June 30, 1998, there were 123 holders of record of the Common
Stock.

DIVIDEND POLICY

         The Company has never declared or paid any cash dividends on the Common
Stock and has no present intention to declare or pay cash dividends on the
Common Stock in the foreseeable future but intends to retain earnings, if any,
which it may realize in the foreseeable future to finance its operations. The
Company is subject to various financial covenants with its lenders that could
limit and/or prohibit the payment of dividends in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
payment of future cash dividends on the Common Stock will be at the discretion
of the Board of Directors and will depend on a number of factors, including
future earnings, capital requirements, the financial condition and prospects of
the Company and any restrictions under credit agreements existing from time to
time. There can be no assurance that the Company will pay any cash dividends on
the Common Stock in the future.

SALE OF SECURITIES

         On June 12, 1998, the Company agreed to issue 300,000 shares of Common
Stock pursuant to the Settlement and Registration Rights Agreement in settlement
of a claim by a former shareholder of the Company prior to the merger of a
subsidiary of the Company's predecessor, Zanart into Continucare Corporation on
September 11, 1996, alleging securities fraud in connection with the redemption
of his shares. The shares were issued on July 12, 1998 pursuant to an exemption
under Section 4(2) of the Securities Act of 1933, as amended (the "Securities
Act") based on standard "private placement" investment representations. 





                                       23
<PAGE>   24

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

GENERAL

         Continucare is a provider of integrated outpatient healthcare services
in Florida. The Company provides a broad continuum of healthcare services
through its network of physician practices, outpatient clinics, rehabilitation
centers, home healthcare services, diagnostic imaging services and laboratory
services (within its group physician practices). As a result of its ability to
provide a quality continuum of healthcare services through approximately 300
locations, the Company has become a preferred healthcare provider in Florida to
some of the nation's largest managed care organizations, including (i) Humana
for which, as of June 30, 1998, it managed the care for approximately 16,000
patients on a capitated basis and (ii) Foundation, for which, as of June 30,
1998, it managed the care for approximately 34,000 patients on a capitated
basis. As of June 30, 1998, the Company's Florida delivery services network
included approximately 300 physicians.

         In fiscal 1998, the Company's focus shifted away from the behavioral
health area, an area which had previously been a substantial source of the
Company's revenue. In the fiscal year 1997, the contracts to manage and provide
staffing and billing services for behavioral health programs in hospitals and
freestanding mental health rehabilitation centers represented approximately 86%
of total revenue. In the first quarter of fiscal 1998, the Company assigned its
behavioral health management contracts with freestanding centers and hospitals.
The Company's operations in the behavioral health care area are referred to as
"Results from Operations Disposed of during Fiscal 1998" in the Consolidated
Statements of Operations. Accordingly, comparative data for the fiscal year
ended June 30, 1998 and the fiscal year ended June 30, 1997 would represent this
change in focus on the Company's businesses, and the Company has limited its
discussion with respect to comparison of these periods.

RESULTS OF OPERATIONS

         The following discussion and analysis should be read in conjunction
with the consolidated financial statements and notes thereto appearing elsewhere
in this Annual Report. The following tables set forth, for the periods
indicated, the percentage of total revenues represented by certain items in the
Company's Consolidated Statement of Income.





                                       24
<PAGE>   25

<TABLE>
<CAPTION>

                                                                                  FOR THE YEAR ENDED JUNE 30,
                                                                             ------------------------------------
                                                                                 1998                 1997
                                                                             --------------       ---------------
<S>                                                                          <C>                  <C>          
Operations continuing at June 30, 1998
   Revenue............................................................
     Fees for medical services, net...................................       $  63,088,911        $     937,143
     Management fees..................................................           1,233,284            1,041,793
                                                                             -------------        -------------
       Subtotal.......................................................          64,322,195            1,978,936

   Expenses
     Medical services.................................................          44,380,226              662,103
     Payroll and employee benefits....................................          13,681,854              818,297
     Provision for bad debt...........................................           1,953,013              132,830
     Professional fees................................................           1,637,957              887,628
     General and administrative.......................................           8,435,001              721,387
     Depreciation and amortization....................................           3,247,717              207,903
                                                                             -------------        -------------
                                                                                73,335,768            3,430,148
Operations disposed of during fiscal 1998
   Revenues...........................................................           1,262,098           11,937,449
   Expenses...........................................................           2,348,019            7,572,582
                                                                             -------------        -------------
     Subtotal.........................................................          (1,085,921)           4,364,867
   Provision for notes receivable.....................................           3,825,203                   --
                                                                             -------------        -------------
     Subtotal.........................................................          (4,911,124)           4,364,867
                                                                             --------------       -------------

Income (loss) from operations.........................................         (13,924,697)           2,913,655

Other income (expenses)
   Interest income (expense), net.....................................          (2,074,934)               3,018
   Other..............................................................             107,696               (9,081)
                                                                             -------------        -------------

Income (loss) before income taxes.....................................         (15,891,935)           2,907,592
Provision (benefit) for income taxes..................................            (909,000)           1,200,917
                                                                             --------------       -------------
Net income (loss).....................................................         (14,982,935)           1,706,675
                                                                             ==============       =============

Basic earnings (loss) per common share................................               (1.20)                 .16
                                                                             ==============       =============
Diluted earnings (loss) per common share..............................               (1.20)                 .16
                                                                             ==============       =============
</TABLE>






                                       25
<PAGE>   26

<TABLE>
<CAPTION>



                                                                                  PERCENT OF REVENUE FROM
                                                                              SERVICES CONTINUING AT JUNE 30,
                                                                              -------------------------------
                                                                                  1998                1997
                                                                              -------------       -----------
<S>                                                                             <C>                  <C>  
Operations continuing at June 30, 1998
   Revenue
     Fees for medical services, net...................................          98.1%                47.4%
     Management fees..................................................           1.9                 52.6
                                                                               -----                -----
       Subtotal.......................................................         100.0                100.0

   Expenses
     Medical services.................................................          69.0                 33.5
     Payroll and employee benefits....................................          21.3                 41.4
     Provision for bad debt...........................................           3.0                  6.7
     Professional fees................................................           2.5                 44.9
     General and administrative.......................................          13.1                 36.5
     Depreciation and amortization....................................           5.1                 10.5
                                                                               -----                -----
                                                                               114.0                173.3
Operations disposed of during fiscal 1998
   Revenue............................................................           2.0                603.2
   Expenses...........................................................           3.7                382.7
                                                                               -----                -----
     Subtotal.........................................................          (1.7)               220.5
   Provision for notes receivable.....................................          (6.0)                  --
                                                                               -----                -----
     Subtotal.........................................................          (7.7)               220.5
                                                                               -----                -----

Income (loss) from operations.........................................         (21.7)               147.2

Other income (expenses)
   Interest income (expense), net.....................................          (3.2)                  .2
   Other..............................................................            .2                  (.5)
                                                                               -----                -----

Income (loss) before income taxes.....................................         (24.7)               146.9
Provision for income taxes............................................          (1.4)                60.7
                                                                               -----                -----
Net income (loss).....................................................         (23.3)                86.2
                                                                               =====                =====

</TABLE>



THE FINANCIAL RESULTS DISCUSSED BELOW RELATED TO THE OPERATION OF CONTINUCARE
FOR THE FISCAL YEAR ENDED JUNE 30, 1998 AS COMPARED TO THE FISCAL YEAR ENDED
JUNE 30, 1997.

REVENUE FROM OPERATIONS CONTINUING AT JUNE 30, 1998

         The Company made a number of acquisitions during fiscal 1998 as it
developed its outpatient services strategy. The substantial increase of
$62,152,000 in medical services revenue during 1998 was a result of these
acquisitions.

         Approximately 33% of the Company's medical services revenue is derived
from fee-for-service arrangements, 57% from capitated payments from HMOs and 10%
from direct contracting with medical providers, respectively.

         Fee-for-service revenue represents amounts realized that relate
directly to medical services provided by a facility owned by the Company.
Capitated revenue represents a fixed monthly fee from a HMO in exchange for the
Company assuming responsibility for the provision of medical services for each
covered individual. The Company 




                                       26
<PAGE>   27

also has arrangements with hospitals whereby a percentage of the hospital's
charges are remitted to the Company for services provided to patients of the
hospital.

EXPENSES FROM OPERATIONS CONTINUING AT JUNE 30, 1998

         Medical services of $44,380,000 for the year ended June 30, 1998,
represent the direct cost of providing medical services to patients
($14,353,000) as well as the medical claims incurred by the Company under the
capitated contracts with HMOs ($30,027,000). The costs of the medical services
provided include the salaries and benefits of health professionals providing the
services ($10,773,000), insurance and other costs necessary to operate the
centers ($3,580,000). Medical claims costs represent the cost of medical
services provided by providers other than the Company but which are to be paid
by the Company for individuals covered by capitated arrangements with HMOs.
Medical services of $662,000 for the year ended June 30, 1997 represent the
direct cost of providing medical services to patients, including salaries and
benefits of $429,000 and insurance and other costs of $233,000.

         Payroll and related benefits increased by $12,864,000, or 1572%, from
$818,000 in 1997 to $13,682,000 in 1998. As a percent of revenue, salary and
related benefits fell from 41.4% of total revenue in 1997 to 21.3% in 1998. This
increase was a direct result of the growth from the acquisitions made during
1998.

         Provision for bad debts was approximately $1,953,000 or 3% of total
revenues for the year ended June 30, 1998, as compared to $133,000 or 7% of
total revenue for the year ended June 30, 1997. The dollar amount increase is
due to the revenue increase from the acquisitions during the years ended June
30, 1998 and 1997. The decrease as a percentage of total revenue is due to the
increase in revenue under capitated managed care contracts.

         Professional fees were $1,638,000, or 3% of total revenue, for the year
ended June 30, 1998 as compared to $888,000, or 45%, of total revenue, for the
year ended June 30, 1997. The decrease as a percentage of revenue was primarily
a result of a decrease in outsourcing costs resulting from the hiring of
additional management individuals in the current year.

         General and administrative expenses were approximately $8,435,000, or
13% of total revenue, for the year ended June 30, 1998, as compared to $721,000,
or 37% of total revenues, for the year ended June 30, 1997. The increase of
$7,714,000 was primarily related to the increased costs attributable to the
various primary care practices acquired during the latter part of the prior
fiscal year in addition to the administrative costs related to the
rehabilitation entities, home health agencies, outpatient primary care centers
and the outpatient radiology and diagnostic imaging services company acquired
during the current fiscal year.

         Depreciation and amortization increased to $3,248,000, or 5% of total
revenue, for the year ended June 30, 1998 as compared to $208,000, or 11% of
total revenue, for the year ended June 30, 1997 primarily as a result of the
amortization of goodwill and other intangibles related to the acquisitions noted
above.

REVENUES AND EXPENSES FROM OPERATIONS DISPOSED OF DURING 1998

         Revenue decreased 89% to $1,262,000 for the year ended June 30, 1998,
from $11,937,00 for the year ended June 30, 1997. Expenses decreased 69% to
$2,348,000 for the year ended June 30, 1998, from $7,572,000 for the year ended
June 30, 1997. These decreases were due to the Company's focus shifting away
from the behavioral health area. In fiscal 1997, the contracts to manage and
provide staffing and billing services for behavioral health programs in
hospitals and freestanding centers represented approximately 86% of total
revenues. The Company sold its behavioral health management contracts with
freestanding centers and hospitals during the first quarter of fiscal 1998. A
provision of $3,825,000 was recorded for the year ended June 30, 1998 to reflect
management's determination of the estimated realizable value of the notes
receivable received in connection with the sale of this business.

INTEREST

         Consolidated net interest income (expense) for the year ended June 30,
1998, was ($2,075,000), or 3% of total revenues, compared to $3,000, or .2% of
total revenue, for the year ended June 30, 1997. $3,007,000 of interest expense
for the year ended June 30, 1998 primarily relates to the $46 million of 8%
Convertible 




                                       27
<PAGE>   28
Subordinated Notes due September 30, 2002, (the "Notes") issued on October 30,
1997 and amortization of deferred financing costs incurred in connection with
issuing the Notes. Interest on the notes is payable semiannually beginning April
30, 1998. The increase in interest expense in 1998 was partially offset by an
increase in interest income primarily attributed to the investment of the Notes
unused proceeds.

NET INCOME (LOSS)

         Continucare's consolidated net loss for the year ended June 30, 1998
was approximately ($14,983,000) compared to net income for the year ended June
30, 1997 of approximately $1,707,000 for the reasons discussed above.

LIQUIDITY AND CAPITAL RESOURCES

         The Company's financial position has changed significantly since June
30, 1997.

         On October 30, 1997, the Company issued $46,000,000 (of which
approximately $3.0 million was used for loan issue costs) of 8% Convertible
Subordinated Notes due September 30, 2002 with interest payable semiannually
(the "Notes"). The Notes are convertible into Common Stock at any time after 60
days following the date of initial issuance thereof and prior to maturity,
unless previously redeemed, at a conversion price of $7.25 per share. The
Company used the net proceeds of these Notes to fund its various acquisitions
made during fiscal 1998.

         On December 5, 1997, the Company completed a private equity placement
of 2,250,000 shares of newly issued common stock, representing approximately
19.5% of the outstanding shares on such date, at an issue price of $5.00 per
share. Proceeds to the Company, net of issue costs, were approximately
$10,600,000. The stock was issued to Strategic Investment Partners Ltd., an
investment vehicle managed by Soros Fund Management LLC.

         On October 1, 1997, warrants to purchase 17,000 shares of common stock
were exercised at an issue price of $6.00 per share. On January 30, 1998
warrants to purchase 250,000 shares were exercised at an issue price of $3.15
per share.

         In August 1998, the Company entered into a credit facility (the "Credit
Facility") with First Union National Bank of Florida ("First Union") which
provides for a $5,000,000 Acquisition Facility and a $5,000,000 Revolving Loan.
Under the terms of the Credit Facility, the Company may elect the interest rate
to be either the bank's prime rate or the London InterBank Offered Rate plus 250
basis points. Interest only on each acquisition advance under the Acquisition
Facility is payable monthly in arrears for the first six months. Commencing six
months from the date of each acquisition advance, the advance shall be repayable
in equal monthly amortization payments, based upon a five year amortization. The
Company borrowed the entire $5 million Acquisition Facility to fund acquisitions
in the first quarter of 1999. Interest only on the Revolving Loan advances is
payable quarterly in arrears. In all events, the Revolving Loan matures and all
unpaid principal and interest is due in full on August 31, 2001. The $5,000,000
Revolving Loan is comprised of (i) $2,000,000 reserved for a pending letter of
credit arrangement, and (ii) $3,000,000 which can be drawn commercing September
30, 1999, as long as the Company is in compliance with all covenants of the
Credit Facility at such time. The Credit Facility (a) is secured by
substantially all of the assets of the Company, (b) is secured by $1.5 million
placed in a restricted account at First Union, which will be released when
certain covenants have been met by the Company and (c) contains restrictive
covenants which, among other things, require the Company to maintain certain
financial ratios, limit the incurrence of additional debt, limit 




                                       28
<PAGE>   29

the payment of dividends and limit the amount of capital expenditures. 

         Pursuant to a Settlement Agreement entered into on June 12, 1998, the
Company paid $2.0 million in cash and on July 12, 1998 the Company issued
300,000 shares of Common Stock in settlement of a claim by a former shareholder
of the Company prior to the merger of a subsidiary of the Company's predecessor,
Zanart into Continucare Corporation on September 11, 1996, alleging securities
fraud in connection with the redemption of his shares.

         For the fiscal year ended June 30, 1998, net cash used in operating
activities was approximately $8,792,000 primarily as a result of an increase in
accounts receivable of approximately $3,615,000 related primarily to increased
revenue from businesses acquired during the current period. For the fiscal year
ended June 30, 1998, net cash used in investing activities was approximately
$38,980,000, primarily related to the purchase of (i) Maxicare, Inc., (ii) DHG
Enterprises, Inc. and Doctors Health Partnership, Inc. (collectively, "Doctors
Health Group"), (iii) Beacon Healthcare Group, Inc., Associates in
Cardiovascular and Ultrasound Diagnostics, Inc., Associates in Diagnostic
Imaging, Inc., and E Care, Inc. (collectively, "Beacon Healthcare Group"), (iv)
SPI Managed Care, Inc., SPI Managed Care of Hillsborough County, Inc., SPI
Managed Care of Broward, Inc., and Broward Managed Care, Inc. (collectively,
"SPI"), (v) Medical Service Organization, Inc., and (vi) Rehab Management
Systems, Inc., IntegraCare, Inc. and J.R. Rehab Associates, Inc. (collectively,
"RMS"). Net cash provided by financing activities for the fiscal year ended June
30, 1998 was approximately $48,219,000, comprised primarily of the $46,000,000
sale of principal amount of notes and $10,500,000 of the sale of 2,250,000
shares of common stock to Strategic Investment Partners Ltd.

         The Company's working capital was approximately $11,123,917 at June 30,
1998, compared to $7,499,000 at June 30, 1997.

         During the year ended June 30, 1998, capital expenditures amounted to
approximately $1.0 million. Capital expenditures during fiscal 1999 principally
for computer and related diagnostic equipment are not expected to exceed $.6
million. See "Risk Factors-Technology; Year 2000 Compliance" and "Upgrade of
Management Information Systems; Technological Obsolescence."

         The Company believes that its cash on hand and anticipated cash flows
from its operations will be sufficient to meet the Company's operating capital
needs during fiscal 1999.

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The financial statements included herein, commencing at page F-1, have
been prepared in accordance with Regulation S-B.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL
         
         The accounting firm of Arthur Andersen LLP ("Arthur Andersen")
represented the predecessor to Continucare, Zanart Entertainment, Incorporated
("Zanart"), as its independent accountants during fiscal years 1995 and 1996 and
was dismissed by the Company's Board of Directors on November 15, 1996 as a
result of the Merger of a wholly-owned subsidiary of Zanart with and into
Continucare. During such period, there were no disagreements between the Company
and Arthur Andersen on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Arthur Andersen, would
have caused it to make reference to the subject matter of the disagreement in
connection with its reports. Arthur Andersen's reports on the financial
statements of the Company for the fiscal years ended 1995 and 1996 did not
contain an adverse opinion or a disclaimer of opinion, and were not qualified or
modified as to uncertainty, audit scope, or accounting principles.

         The accounting firm of Deloitte & Touche LLP ("Deloitte & Touche")
represented pre-Merger Continucare as its independent accountants during the
period from February 12, 1996 (inception) to June 30, 1996 and was appointed as
the Company's independent accountants by the Board of Directors for fiscal year
1997. During the Company's two most recent fiscal years and subsequent interim
periods, for which Deloitte & Touche was the Company's independent auditors,
there were no disagreements between the Company and Deloitte & Touche on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Deloitte & Touche, would have caused it to make reference to the
subject matter of the disagreement in connection with its reports. Deloitte &
Touche's reports on the financial statements of the Company for the two most
recent fiscal years, for which Deloitte & Touche was the Company's independent
auditors, did not contain an adverse opinion or disclaimer of opinion, and were
not qualified or modified as to uncertainty, audit scope, or accounting
principles.






                                       29
<PAGE>   30

         The Company's Board of Directors appointed Ernst & Young LLP as the
Company's independent accountants for fiscal year 1998. There have been no
reported disagreements on any matter of accounting principles or practice or
financial statement disclosure at any time during the period that operations
have been audited by Ernst & Young LLP.






                                       30
<PAGE>   31


                                    PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The information with respect to directors and executive officers of the
Company is incorporated by reference to the registrant's Proxy Statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this report.

ITEM 10. EXECUTIVE COMPENSATION

         The information required in response to this item is incorporated by
reference to the registrant's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required in response to this item is incorporated by
reference to the registrant's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required in response to this item is incorporated by
reference to the registrant's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.





                                       31
<PAGE>   32


                                     PART IV

(a)(1)   Financial Statements

         Reference is made to the Index set forth on Page F-1 of this Annual
         Report on Form 10-KSB.

(a)(2)   Financial Statement Schedules

         None

(a)(3)   Exhibits

           3.1     Restated Articles of Incorporation of Company, as amended.
                   (4) (Exhibit 3.1)
           3.2     Restated Bylaws of Company. (4) (Exhibit 3.2)
           4.1     Form of certificate evidencing shares of Common Stock. (4)
                   (Exhibit 4.1)
           4.2     Indenture, dated as of October 30, 1997, between the
                   Company and American Stock Transfer & Trust Company, as
                   Trustee, relating to 8% Convertible Subordinated Notes due
                   2002. (9) (Exhibit 4.1)
           4.3     Registration Rights Agreement, dated as of October 30,
                   1997, by and between the Company and Loewenbaum & Company
                   Incorporated. (9) (Exhibit 4.2)
           4.4     Continucare Corporation Amended and Restated 1995 Stock
                   Option Plan (11)
           10.1    Employment Agreement between the Company and Charles M.
                   Fernandez dated as of September 11, 1996. (2) (Exhibit
                   10.36)
           10.2    Employment Agreement between the Company and Susan Tarbe
                   dated as of September 23, 1996. (3)
           10.3    Agreement and Plan of Merger by and among Continucare
                   Corporation, Zanart Entertainment Incorporated and Zanart
                   Subsidiary, Inc. dated August 9, 1996. (1) (Exhibit 2)
           10.4    Stock Purchase Agreement dated April 10, 1997 by and among
                   Continucare Corporation, Continucare Physician Practice
                   Management, Inc., AARDS, Inc. and Sheridan Healthcorp. Inc.
                   (6) (Exhibit 10.1)
           10.5    Stock Purchase Agreement dated April 10, 1997 by and among
                   Continucare Corporation, Continucare Physician Practice
                   Management, Inc., Rosenbaum, Weitz & Ritter, Inc. and
                   Sheridan Healthcorp, Inc. (6) (Exhibit 10.2)
           10.6    Stock Purchase Agreement dated April 10, 1997 by and among
                   Continucare Corporation, Continucare Medical Management,
                   Inc., Arthritis & Rheumatic Disease Specialties, Inc. and
                   Sheridan Healthcare, Inc. (6) (Exhibit 10.3)
           10.7    Acquisition Facility ($3,000,000), Revolving Credit
                   Facility ($2,000,000) and Security Agreement among
                   Continucare Corporation, Borrower and First Union National
                   Bank of Florida, dated November 14, 1996, as amended on
                   March 4, 1997. (7)
           10.8    Lease Agreement, dated as of the 29th day of August 1996, 
                   between Miami Tower Associates Limited Partnership and
                   Continucare Corporation, as amended.(8)
           10.9    Physician Employment Agreement, dated as of the 10th day of 
                   April, 1997, by and between Arthritis and Rheumatic Disease
                   Specialties, Inc. and Norman Gaylis, M.D.(8)
           10.10   First Amendment, dated as of the 17th day of September, 1997,
                   to Employment Agreement, dated August 23, 1996, between the
                   Company and Susan Tarbe.(8)
           10.11   Employment Agreement, dated as of the 20th day of 
                   October, 1997, by and between Continucare Corporation and 
                   Joseph P. Abood.(8)
           10.12   Placement Agreement, dated as of October 27, 1997, between
                   the Company and Loewenbaum & Company Incorporated (the
                   "Placement Agent"). (9) (Exhibit 10.1)
           10.13   Purchase Agreement, dated as of September 4, 1997, by and
                   among Continucare Corporation, Continucare Physician
                   Practice Management, Inc., a wholly owned subsidiary of
                   Continucare Corporation, DHG Enterprises, Inc. f/k/a
                   Doctor's Health Group, Inc. and Doctor's Health
                   Partnership, Inc., both Florida corporations, and Claudio
                   Alvarez and Yvonne Alvarez. (10) (Exhibit 2.1)
           10.14   Stock Purchase Agreement, dated as of February 13, 1998, by
                   and among Continucare Corporation, Continucare
                   Rehabilitation Services, Inc., Integrated Health Services,
                   Inc., Rehab Management Systems, Inc., IntegraCare, Inc. and
                   J.R. Rehab Associates, Inc. (12) (Exhibit 2.1)





                                       32
<PAGE>   33

            10.15    Asset Purchase Agreement, dated as of April 7, 1998, by and
                     among (i) SPI Managed Care, Inc., SPI Managed Care of
                     Hillsborough County, Inc., SPI Managed Care of Broward,
                     Inc., Broward Managed Care, Inc., each a Florida
                     corporation, (ii) First Medical Corporation, a Delaware
                     corporation and First Medical Group, Inc., a Delaware
                     corporation and (iii) CNU Acquisition Corporation, a
                     Florida corporation. (13) (Exhibit 2.1)
             16.1    Acknowledgment letter from Arthur Andersen LLP regarding
                     its dismissal as the Company's independent public
                     accountants. (5)
             16.2    Acknowledgment Letter from Deloitte & Touche LLP regarding
                     its dismissal as the Company's independent public
                     accountants. (14)
             21.1    Subsidiaries of the Company.  (15)
             23.1    Consent of Ernst & Young LLP (15)
             23.2    Consent of Deloitte & Touche LLP (15)
             27.1    Financial Data Schedule (15)

Documents incorporated by reference to the indicated exhibit to the following
filings by the Company under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934.

                 (1)     Current Report Form 8-K dated August 9, 1996.
                 (2)     Form 10-KSB filed with the Commission on September 30,
                         1996.
                 (3)     Form 10-KSB filed with the Commission on October 21,
                         1996.
                 (4)     Post Effective Amendment No. 1 to the Registration
                         Statement on SB-2 on Form S-3 Registration Statement
                         filed on October 29, 1996.
                 (5)     Form 8-K/A filed with the Commission on December 3,
                         1996
                 (6)     Form 8-K filed with the Commission on April 25, 1997
                 (7)     Form 10-KSB for the fiscal year ended June 30, 1997,
                         filed with the Commission on September 29, 1997.
                 (8)     Form 10-KSB/A for the fiscal year ended June 30, 1997,
                         filed with the Commission on October 28, 1997.
                 (9)     Form 8-K dated October 30, 1997 and filed with the
                         Commission on November 13, 1997.
                 (10)    Form 8-K dated October 31, 1997 and filed with the
                         Commission on November 13, 1997.
                 (11)    Schedule 14A dated December 26, 1997 and filed with the
                         Commission on December 30, 1997.
                 (12)    Form 8-K dated February 13, 1998 and filed with the
                         Commission on February 26, 1997.
                 (13)    Form 8-K dated April 14, 1998 and filed with the
                         Commission on April 27, 1998.
                 (14)    Form 8-K dated May 6, 1998 and filed on May 11, 1998.
                 (15)    Filed herewith.

(b)      There were two reports on Form 8-K and one amendment to a Form 8-K
         filed with the Securities and Exchange Commission ("SEC") in the fourth
         quarter of fiscal 1998. Form 8-K was filed on April 27, 1998 and
         amended on Form 8-K/A filed on May 14, 1998 regarding the acquisition
         of substantially all of the assets of SPI Managed Care, Inc., SPI
         Managed Care of Hillsborough County, Inc., SPI Managed Care of Broward,
         Inc., Broward Managed Care, Inc., each a Florida corporation which are
         direct or indirect subsidiaries of First Medical Corporation and First
         Medical Group, Inc., each a Delaware corporation. Form 8-K was filed on
         May 11, 1998, regarding the change in accountants. Form 8-K/A was filed
         on April 29, 1998 to amend the Form 8-K filed on February 26, 1998
         regarding the acquisition of Rehab Management Systems, Inc., a Florida
         corporation, Integracare, Inc., a Florida corporation, and J.R. Rehab
         Associates, Inc., a North Carolina corporation, each a wholly-owned
         subsidiary of Integrated Health Services, Inc., a Delaware corporation.






                                       33
<PAGE>   34


                                   SIGNATURES

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

                                        CONTINUCARE CORPORATION

                                        By: /s/ CHARLES M. FERNANDEZ
                                            -----------------------------------
                                            Charles M. Fernandez
                                            Chairman of the Board, Chief 
                                            Executive Officer, and President

Dated:   October 12, 1998

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
                SIGNATURE                                  TITLE                       DATE



<S>                                           <C>                                  <C> 
/s/ CHARLES M. FERNANDEZ                        Chairman of the Board, Chief       October 12, 1998
------------------------------------          Executive Officer and President 
Charles M. Fernandez                           (principal executive officer)



/s/ PHILLIP FROST, M.D.                           Vice Chairman of the Board       October 12, 1998
------------------------------------
Phillip Frost, M.D.



/S/ JEFF BARNHILL                               Principal Accounting Officer       October 12, 1998
------------------------------------          (principal financial officer and
Jeff Barnhill                                   principal accounting officer)



/s/ RICHARD B. FROST                                       Director                October 12, 1998
------------------------------------
Richard B. Frost



/s/ MARK J. HANNA                                          Director                October 12, 1998
------------------------------------
Mark J. Hanna



                                                          Director                 October __, 1998
------------------------------------
Elias F. Ghanem, M.D.



/s/ ROBERT SOROS                                           Director                October 12, 1998
------------------------------------
Robert Soros



/s/ LEE S. HILLMAN                                         Director                October 12, 1998
------------------------------------
Lee S. Hillman



/s/ J. KENNETH LOOLOIAN                                    Director                October 12, 1998
------------------------------------
J. Kenneth Looloian

</TABLE>





                                       34
<PAGE>   35

                          INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

                                                                                                  PAGE
                                                                                                  ----
<S>                                                                                               <C>
Report of Independent Certified Public Accountants......................................           F-2

Report of Independent Accountants.......................................................           F-3

Consolidated Balance Sheet as of June 30, 1998..........................................           F-3

Consolidated Statements of Operations for the years ended June 30, 1998 and 1997........           F-4

Consolidated Statements of Shareholders' Equity for the years ended June 30, 1998 
  and 1997..............................................................................           F-5

Consolidated Statements of Cash Flows for the years ended June 30, 1998 and 1997........           F-6

Notes to Consolidated Financial Statements..............................................           F-7

</TABLE>





                                      F-1
<PAGE>   36


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
Continucare Corporation and Subsidiaries:

         We have audited the accompanying consolidated balance sheet of
Continucare Corporation and subsidiaries as of June 30, 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

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

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Continucare Corporation and subsidiaries as of June 30, 1998 and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.


                                                   ERNST & YOUNG LLP

Miami, Florida
September 28, 1998





                                      F-2
<PAGE>   37
                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors of Continucare Corporation and Subsidiaries:

         We have audited the accompanying consolidated statement of operations
of Continucare Corporation and subsidiaries (the "Company") for the year ended
June 30, 1997 and the related consolidated statement of shareholders' equity and
cash flows for the year ended June 30, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

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

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the results of operations of the Company and
its cash flows for the year ended June 30, 1997 in conformity with generally
accepted accounting principles.



Deloitte & Touche LLP


Miami, Florida 
September 23, 1997





                                      F-3
<PAGE>   38
                             CONTINUCARE CORPORATION

                           CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                                                  JUNE 30, 1998
                                                                                                  -------------
<S>                                                                                                <C>         
                                            ASSETS

Current assets
   Cash and cash equivalents................................................................       $  7,435,724
   Accounts receivable, net of allowance for doubtful accounts of $2,071,000................          9,009,462
   Other receivables........................................................................          1,091,744
   Prepaid expenses and other current assets................................................            595,086
   Income taxes receivable..................................................................          1,800,000
                                                                                                   ------------
     Total current assets...................................................................         19,932,016
Notes receivable, net of allowance for doubtful accounts of $5,510,000......................          1,644,420
Equipment, furniture and leasehold improvements, net........................................          5,496,025
Cost in excess of net tangible assets acquired, net of accumulated amortization 
  of $2,252,000 ............................................................................         38,621,561
Deferred financing costs, net of accumulated amortization of $400,000.......................          3,373,999
Other assets, net...........................................................................            418,084
                                                                                                   ------------
   Total assets.............................................................................       $ 69,486,105
                                                                                                   ============
                             LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
   Accounts payable.........................................................................       $    816,844
   Accrued expenses.........................................................................          2,593,493
   Accrued salaries and benefits............................................................          2,629,660
   Medical claims payable...................................................................            966,251
   Acquisition note payable.................................................................            850,000
   Accrued interest payable.................................................................            623,556
   Current portion of capital lease obligations.............................................            328,295
                                                                                                   ------------
     Total current liabilities..............................................................          8,808,099
Convertible subordinated notes payable......................................................         46,000,000
Deferred tax liability......................................................................            954,894
Obligations under capital lease.............................................................            496,766
                                                                                                   ------------
     Total liabilities......................................................................         56,259,759
                                                                                                   ------------
Commitments and contingencies

Shareholders' equity
   Common stock; $0.0001 par value; 100,000,000 shares authorized, 16,661,283 shares issued
     and 13,731,283 shares outstanding......................................................              1,374
   Additional paid-in capital...............................................................         31,099,303
   Retained deficit.........................................................................        (12,631,651)
   Treasury Stock (2,930,000 shares)........................................................         (5,242,680)
                                                                                                   ------------
     Total shareholders' equity.............................................................         13,226,346
                                                                                                   ------------
     Total liabilities and shareholders' equity.............................................       $ 69,486,105
                                                                                                   ============
</TABLE>


              THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                       CONSOLIDATED FINANCIAL STATEMENTS.




                                      F-4
<PAGE>   39
                             CONTINUCARE CORPORATION

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                  FOR THE YEAR ENDED JUNE 30,
                                                                             -----------------------------------
                                                                                 1998                 1997
                                                                             -------------        --------------

<S>                                                                          <C>                  <C>          
    Operations continuing at June 30, 1998
       Revenue
         Medical services, net.........................................      $  63,088,911        $     937,143
         Management fees...............................................          1,233,284            1,041,793
                                                                             -------------        -------------
           Subtotal....................................................         64,322,195            1,978,936

       Expenses
         Medical services..............................................         44,380,226              662,103
         Payroll and employee benefits.................................         13,681,854              818,297
         Provision for bad debt........................................          1,953,013              132,830
         Professional fees.............................................          1,637,957              887,628
         General and administrative....................................          8,435,001              721,387
         Depreciation and amortization.................................          3,247,717              207,903
                                                                             -------------        -------------
                                                                                73,335,768            3,430,148
    Operations disposed of during fiscal 1998
       Revenues........................................................          1,262,098           11,937,449
       Expenses........................................................          2,348,019            7,572,582
                                                                             -------------        -------------
         Subtotal......................................................         (1,085,921)           4,364,867
       Provision for notes receivable..................................          3,825,203                   --
                                                                             -------------        -------------
         Subtotal......................................................         (4,911,124)           4,364,867
                                                                             -------------        -------------

    (Loss) income from operations......................................        (13,924,697)           2,913,655

    Other income (expenses)
       Interest income.................................................            932,397              165,253
       Interest expense................................................         (3,007,331)            (162,235)
       Other...........................................................            107,696               (9,081)
                                                                             -------------        --------------

    (Loss) income before income taxes..................................        (15,891,935)           2,907,592
    (Benefit) provision for income taxes...............................           (909,000)           1,200,917
                                                                             --------------       -------------
    Net (loss) income..................................................      $ (14,982,935)       $   1,706,675
                                                                             =============        =============

    Basic (loss) earnings per common share.............................      $       (1.20)       $         .16
                                                                             ==============       =============
    Diluted (loss) earnings per common share...........................      $       (1.20)       $         .16
                                                                             ==============       =============
</TABLE>


              THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                       CONSOLIDATED FINANCIAL STATEMENTS.
                                        



                                      F-5
<PAGE>   40
                             CONTINUCARE CORPORATION

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>

                                                                ADDITIONAL     RETAINED                      TOTAL
                                                     COMMON       PAID-IN      EARNINGS       TREASURY    SHAREHOLDERS'
                                                      STOCK       CAPITAL      (DEFICIT)       STOCK         EQUITY
                                                     ------     ----------     ---------      --------    ------------
<S>                                                <C>          <C>          <C>             <C>          <C>        
    Balance at July 1, 1996                        $      667   $   763,202 $    644,609    $        --   $ 1,408,478

    Issuance of stock related to private
       placement net of costs....................         330     6,499,670           --             --     6,500,000

    Issuance of stock/merger with Zanart net
       of merger costs...........................         290     1,845,428           --             --     1,845,718

    Exercise of stock warrants...................          91     5,441,584           --             --     5,441,675

    Buyout of minority interest
       in subsidiary.............................           4            --           --             --             4

    Repurchase of stock..........................        (293)           --           --     (2,284,330)   (2,284,623)

    Net income...................................          --            --    1,706,675             --     1,706,675
                                                        -----   ----------- -------------   -----------  ------------

    Balance at June 30, 1997.....................       1,089    14,549,884    2,351,284     (2,284,330)   14,617,927


    Issuance of stock related to Doctors                   
       Health Group..............................          25     2,311,294           --             --     2,311,319

    Issuance of stock related to other
       acquisitions..............................           8       401,277           --             --       401,285

    Issuance of stock related to private
       placement, net of costs...................         225    10,574,775           --             --    10,575,000

    Exercise of stock warrants and options.......          27     1,101,973           --             --     1,102,000

    Settlement of former shareholder claim.......          --     1,385,100           --     (2,958,350)   (1,573,250)

    Issuance of stock warrants...................          --       775,000           --             --       775,000

    Net loss.....................................          --            --  (14,982,935)            --   (14,982,935)
                                                       ------   ----------- ------------    -----------  ------------
    Balance at June 30, 1998.....................      $1,374   $31,099,303 $(12,631,651)   $(5,242,680) $ 13,226,346
                                                       ======   =========== ============    ===========  ============
</TABLE>


              THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                       CONSOLIDATED FINANCIAL STATEMENTS.





                                      F-6
<PAGE>   41
                             CONTINUCARE CORPORATION

                      CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                                               FOR THE YEAR ENDED JUNE 30,
                                                                                             ------------------------------
                                                                                                1998               1997
                                                                                             ------------       -----------
<S>                                                                                          <C>                <C>       
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income (loss)........................................................................ $(14,982,935)       $ 1,706,675
   Adjustments to reconcile net income to cash used in operating
         activities:
      Depreciation and amortization including amortization of deferred loan costs...........    3,648,581            208,936
      Bad debt expense......................................................................    1,953,013          1,818,293
      Loss on purchase of minority interest.................................................           --              9,081
      Income applicable to minority interest................................................           --            162,235
      Provision for notes receivable........................................................    3,825,219                 --
      Loss on treasury stock transaction....................................................      426,750                 --
      Compensation expense on exercise of warrants..........................................      212,500                 --
    Changes in assets and liabilities, excluding the effect of acquisitions:
      Increase in accounts receivable.......................................................   (3,615,007)        (2,031,859)
      Decrease (increase) in prepaid expenses and other current assets......................      127,467           (368,373)
      Increase in other receivables.........................................................   (2,891,744)        (5,000,000)
      Increase in intangible assets.........................................................           --           (249,063)
      Increase in other assets..............................................................     (206,662)          (499,402)
      Decrease (increase) in deferred tax asset, net........................................      505,699           (450,824)
      Increase in accounts payable and accrued expenses.....................................    2,311,647            813,681
      Increase in accrued interest payable..................................................      586,261             14,134
      (Decrease) increase in income and other taxes payable.................................     (693,709)           199,179
                                                                                             ------------        -----------
Net cash used in operating activities                                                          (8,792,920)        (3,667,307)
                                                                                             ------------        -----------

CASH FLOWS FROM INVESTING ACTIVITIES
   Cash paid for acquisitions...............................................................  (37,972,997)        (3,342,500)
   Property and equipment additions.........................................................   (1,006,706)          (536,091)
                                                                                             ------------        -----------
Net cash used in investing activities.......................................................  (38,979,703)        (3,878,591)
                                                                                             ------------        -----------

CASH FLOWS FROM FINANCING ACTIVITIES
   Payments to acquire treasury stock.......................................................   (2,000,000)        (2,284,623)
   Issuance of common stock to purchase minority interest...................................           --           (204,000) 
   Principal repayments under capital lease obligation......................................     (254,233)           (27,105)
   Proceeds received from private placement.................................................   10,575,000          6,600,000
   Payment on acquisition notes.............................................................     (892,500)                --
   Costs incurred associated with Convertible Subordinated Notes............................   (3,000,000)                -- 
   Proceeds from acceleration of Series A Warrants..........................................           --          5,441,675
   Proceeds from Convertible Subordinated Notes.............................................   46,000,000                 --  
   Proceeds from Term and Revolving Notes...................................................    2,500,000          2,500,000
   Proceeds from issuance of common stock...................................................      889,500          1,970,715
   Repayment of loan from HCMP..............................................................           --            (55,250)
   Repayment of Term and Revolving Notes....................................................   (5,000,000)                --
   Costs incurred associated with Private Placement & Merger................................           --           (225,000)
   Repayment of shareholder note............................................................     (599,000)                --
                                                                                             ------------        -----------
Net cash provided by financing activities...................................................   48,218,767         13,716,412
                                                                                             ------------        -----------
Net increase (decrease) in cash and cash equivalents........................................      446,144          6,170,514
                                                                                             ------------        -----------
Cash and cash equivalents at beginning of period............................................    6,989,580            819,066
                                                                                             ------------        -----------
Cash and cash equivalents at end of period.................................................. $  7,435,724        $ 6,989,580
                                                                                             ============        ===========

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Cash paid for income taxes.................................................................. $  1,528,445        $ 1,457,000
                                                                                             ============        ===========
Cash paid for interest...................................................................... $  2,021,070        $    86,348
                                                                                             ============        ===========
Purchase of furniture and fixtures with proceeds of capital lease obligation................ $          0        $   252,712
                                                                                             ============        ===========
</TABLE>


              THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                       CONSOLIDATED FINANCIAL STATEMENTS.




                                      F-7
<PAGE>   42
                             CONTINUCARE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - GENERAL

Continucare Corporation ("Continucare" or the "Company") is a provider of
integrated outpatient healthcare services and operates primarily in Florida. The
Company provides a broad continuum of healthcare services through its network of
physician practices, outpatient clinics, rehabilitation centers, home healthcare
agencies, diagnostic imaging centers and laboratory services (within its group
physician practices).

In fiscal 1998, the Company's focus shifted away from the behavioral health
area, an area which had previously been a substantial source of the Company's
revenue. In fiscal 1997, contracts to manage and provide staffing and billing
services for behavioral health programs in hospitals and freestanding mental
health rehabilitation centers represented approximately 86% of total revenue. In
the first quarter of fiscal 1998, the Company assigned its behavioral health
management contracts with freestanding centers and hospitals. Accordingly, the
results pertaining to these services are segregated and classified as operations
disposed of during fiscal 1998 in the accompanying consolidated statements of
operations.

Zanart Merger - Continucare's predecessor, Zanart Entertainment, Incorporated
("Zanart") was incorporated in 1986. On August 9, 1996, a subsidiary of Zanart
merged into Continucare Corporation (the "Merger"), which was incorporated on
February 12, 1996 as a Florida corporation ("Old Continucare"). As a result of
the Merger, the shareholders of Old Continucare became shareholders of Zanart,
and Zanart changed its name to Continucare Corporation. In December 1996, in
conjunction with the merger agreement, Zanart disposed of its assets and
liabilities relating to its licensing business. The assets remaining and
recorded on Continucare's financial statements were approximately $2,000,000 in
cash and a $152,000 note receivable. The remaining balance on the note was
written off at June 30, 1997.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents - The Company defines cash and cash equivalents as
those highly liquid investments purchased with an original maturity of three
months or less.

Deposits in banks may exceed the amount of insurance provided on such deposits.
The Company performs reviews of the credit worthiness of its depository banks.
The Company has not experienced any losses on its deposits of cash.

Accounts Receivable - Accounts receivable result primarily from medical services
provided to patients on a fee-for-service basis and on a capitated basis and
from hospitals where the Company provides medical services. Fee-for-service
amounts are paid by government sponsored health care programs (primarily
Medicare and Medicaid), insurance companies, self-insured employers and
patients.

Accounts receivable include an allowance for contractual adjustments, charity
and other adjustments. Contractual adjustments result from differences between
the rates charged for the service performed and amounts reimbursed under
government sponsored health care programs and insurance contracts. Charity and
other adjustments represent services provided to patients for which fees are not
expected to be collected at the time the service is provided.

Equipment, Furniture and Leasehold Improvements - Equipment, furniture and
leasehold improvements are stated at cost. Depreciation is computed using the
straight line method over the estimated useful lives of the related assets,
which range from three to five years. Leasehold improvements are amortized over
the underlying assets' useful lives or the term of the lease, whichever is
shorter. Repairs and maintenance costs are expensed as incurred. Improvements
and replacements are capitalized.

Costs In Excess Of Net Tangible Assets Acquired - Costs in excess of net
tangible assets acquired are stated net of accumulated amortization and are
amortized on a straight-line basis over periods ranging from 2.5 to 20 years.
The Company periodically evaluates the recovery of the carrying amount of costs
in excess of net tangible assets 




                                      F-8
<PAGE>   43

acquired by determining if a permanent impairment has occurred. Indicators of a
permanent impairment include duplication of resources resulting from
acquisitions, the estimated undiscounted cash flows of the entity over the
remaining amortization period and other factors. The amount of impairment, if
any, would be measured based on discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds. The Company does
not believe that any impairment has occurred at June 30, 1998.

Deferred Financing Costs - Expenses in connection with the Company's issuance of
the 8% Convertible Subordinated Notes due 2002 (See Note 6) have been deferred
and are being amortized using the interest method over the life of the notes.

Fair Value of Financial Instruments - The estimated fair values of financial
instruments have been determined by the Company using available market
information and appropriate valuation methods. Considerable judgment is required
in interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methods may have a material effect on the
estimated fair value amounts. The Company has used the following market
assumptions and/or estimation methods:

         CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND
         ACCRUED EXPENSES - The carrying value approximate fair value due to the
         relatively short maturity of the respective instruments.

         CONVERTIBLE SUBORDINATED NOTES - The carrying value at June 30, 1998
         approximates fair value based on the terms of the notes.

Accounting for Stock Based Compensation - The Company has elected to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related Interpretations in accounting for its employee
stock options because the alternative fair value accounting provided for under
Financial Accounting Standards Board (FASB) Statement No. 123, "Accounting for
Stock-Based Compensation" ("Statement 123"), requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, when the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized (see Note 10).

Earnings per Share - Basic earnings per share is computed by dividing the net
income or loss by the weighted average common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.

Revenue - The Company's health care providers provide service to patients on
either a fee for service arrangement or under a fixed monthly fee arrangement
with HMOs or through contracts directly with the payor. Revenue is recorded in
the period services are rendered as determined by the respective contract.
Management fee revenue represents fees received by the Company to manage
outpatient facilities owned by third parties.

Fee for service arrangements (33% of medical services net revenue in fiscal
1998) require the Company to assume the financial risks relating to payor mix
and reimbursement rates. The Company receives reimbursement for these services
under either the Medicare or Medicaid programs or payments from the individual,
insurers, self-funded benefit plans or third-party payors. The Company is paid
based upon established charges, the cost of providing services, predetermined
rates per diagnosis, or discounts from established charges. Revenue is recorded
as an estimated amount, net of contractual allowances. These accounts, which are
unsecured, have longer collection periods than capitated fee contracts and
require the Company to bear the credit risk of uninsured individuals.

Under the Company's contracts with HMOs (approximately 57% of total medical
services net revenue in fiscal 1998), the Company receives a fixed, monthly fee
from the HMO for each covered life in exchange for assuming responsibility for
the provision of medical services. To the extent that patients require more
frequent or expensive care than was anticipated by the Company, revenue to the
Company under a contract may be insufficient to cover the costs of care
provided.





                                      F-9
<PAGE>   44

When it is probable that expected future health care costs and maintenance costs
under a contract or group of existing contracts will exceed anticipated
capitated revenue on those contracts, the Company recognizes losses on its
prepaid healthcare services with HMOs.

Approximately 10% of the Company's medical services net revenue is earned
through contracts which are directly between the payor (i.e. hospital) and the
Company. These contracts provide for payments to the Company based upon a fixed
percentage of the hospital's charges related to the services provided by the
Company to patients of the hospital.

Certain of the Company's services are paid based on a reasonable cost
methodology. The Company is reimbursed for cost reimbursable items at a
tentative rate with final settlement determined after submission of annual cost
reports and audits thereof by the payor. Changes in the estimated settlements
recorded by the Company may be adjusted in future periods as final settlements
are determined.

Revenue from the Medicare and Medicaid programs, accounted for approximately 50%
and 69% of the Company's net patient service revenue for the years ended June
30, 1998 and 1997, respectively. Laws and regulations governing the Medicare and
Medicaid programs are complex and subject to interpretation. The Company
believes that it is in compliance with all applicable laws and regulations and
is not aware of any pending or threatened investigations involving allegations
of potential wrongdoing. While no such regulatory inquiries have been made,
compliance with such laws and regulations can be subject to future government
review and interpretation as well as significant regulatory action including
fines, penalties, and exclusion from the Medicare and Medicaid programs.

Medical Service Expense - The Company contracts with or employs various health
care providers to provide medical services to its patients. Primary care
physicians are compensated on either a salary or capitation basis. For patients
enrolled under capitated managed care contracts, the cost of specialty services
are paid on either a fee for service, per diem or capitation basis.

The cost of health care services provided or contracted for is accrued in the
period in which it is provided. In addition, the Company provides for claims
incurred but not yet reported based on past experience together with current
factors. Estimates are adjusted as changes in these factors occur and such
adjustments are reported in the year of determination. Although considerable
variability is inherent in such estimates, management believes that these
reserves are adequate.

Reinsurance (stop-loss insurance) - Reinsurance premiums are reported as health
care cost, and reinsurance recoveries are reported as a reduction of related
health care costs.

Principles of Consolidation - The consolidated financial statements include the
accounts of the Company, its wholly-owned subsidiaries, and all entities in
which the Company has a greater than 50% voting interest. All significant
intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates. Changes in the estimates are charged or credited to operations as the
estimates are revised.

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

Recent Accounting Pronouncements - During June 1997, the FASB issued Statement
of Financial Accounting Standards No. 130 ("Statement 130"), "REPORTING
COMPREHENSIVE INCOME." Statement 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in general purpose financial statements and requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Statement 130 does not
require a specific format, but requires an entity to (a) classify items of other
comprehensive income by their nature and (b) display the accumulated balance 




                                      F-10
<PAGE>   45

of other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position.
Statement 130 is effective for fiscal years beginning after December 15, 1997
and requires reclassification for earlier periods provided for comparative
purposes. Based on current circumstances, the Company does not believe the
effect of adoption will be material.

Also during June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 ("Statement 131"), "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION." Statement 131 establishes standards for the
way that public enterprises report selected information about operating segments
in annual financial statements and requires them to report selected segment
information in interim financial reports issued to shareholders. Statement 131,
which supersedes Statement 14, "Financial Reporting for Segments of a Business
Enterprise," retains the requirement to report information about major
customers, and requires that a public company report financial and descriptive
information about its reportable operating segments. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources to segments. Statement 131 requires that a
public company report a measure of segment profit or loss, certain specific
revenue and expense items, and segment assets. However, Statement 131 does not
require the reporting of information that is not prepared for internal use if
reporting it would be impracticable. Statement 131 also requires that a public
company report descriptive information about the way that the operating segments
were determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in the enterprise's general-purpose financial statements, and changes
in the measurement of segment amounts from period to period. Statement 131 is
effective for periods beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years is to be restated. The
Company has not determined the effects, if any, that Statement 131 will have on
its consolidated financial statements.

NOTE 3 -  BUSINESS COMBINATIONS

Effective December 31, 1996 (the "Effective Date"), the Company purchased the
25% minority interest in a 75% owned subsidiary for 40,000 shares of Continucare
common stock, $0.0001 par value, having a market value of $204,000 on the
Effective Date. Such amount was offset against a receivable due from the
minority shareholder. As a result, the Minority Interest on Continucare's
consolidated balance sheet, approximately $195,000 as of the Effective Date, was
eliminated and a loss on the purchase of minority interest of approximately
$9,000 was recorded.

On April 10, 1997, the Company, through Continucare Physician Practice
Management, Inc., a wholly-owned subsidiary, acquired all of the outstanding
stock of certain arthritis rehabilitation centers and affiliated physician
practices. The acquisitions included the purchase of AARDS, INC., a Florida
corporation formerly known as Norman B. Gaylis, M.D., Inc., of Rosenbaum, Weitz
& Ritter, Inc., a Florida corporation, and of Arthritis & Rheumatic Disease
Specialties, Inc., a Florida corporation, from Sheridan Healthcare, Inc. The
aggregate purchase price was approximately $3,300,000. As a result of the
acquisitions, purchase price in excess of the fair value of the net tangible
assets acquired of approximately $2,149,000 was recorded. This amount is being
amortized over a weighted average life of 14 years. The consolidated financial 
statements include the accounts of these acquisitions from the date of the 
acquisitions.

On September 19, 1997, the Company acquired the stock of Maxicare, Inc.
("Maxicare"), a Florida based home health agency for $4,200,000 including
approximately $900,000 of liabilities assumed. In addition, $300,000 of
additional purchase price is contingent upon maintaining various performance
criteria and, if earned, would be due in equal installments at the end of years
two and three. Maxicare is certified by the Healthcare Financing Administration
and is licensed in the State of Florida. The acquisition is being accounted for
under the purchase method of accounting. The purchase price in excess of the
fair value of the net tangible assets acquired was approximately $3,048,000 and
is being amortized using the straight-line method over a weighted average life
of 18 years. The consolidated financial statements include the accounts of
Maxicare since the date of acquisition.

On October 31, 1997, the Company purchased the assets of DHG Enterprises, Inc.
and Doctors Health Partnership, Inc. (collectively, "Doctors Health Group"), a
company that provides healthcare services at outpatient centers through managed
care contracts. The total purchase price for the acquisition was approximately
$16,000,000, including acquisition costs of approximately $1,052,000. Of this
amount, $1,700,000 was paid in common stock of the Company (242,098 shares),
approximately $13,700,000 was paid in cash and warrants to purchase 200,000





                                      F-11
<PAGE>   46

shares of the Company's common stock with an estimated fair market value of
$600,000 were issued. The warrants have an exercise price of $7.25 per share for
a period of 5 years. The acquisition is being accounted for under the purchase
method of accounting. The purchase price in excess of the fair value of the net
tangible assets acquired was approximately $15,478,000 and is being amortized
using the straight-line method over a weighted average life of 15 years. The
consolidated financial statements include the accounts of Doctors Health Group
from the purchase date.

On January 1, 1998, the Company acquired certain of the assets of Medical
Services Organization, Inc. ("MSO") for a total purchase price of $4,260,000.
MSO provides healthcare services at outpatient centers through capitated managed
care contracts. The Company paid $2,560,000 in cash and entered into a note
payable totaling $1,700,000. The acquisition is being accounted for under the
purchase method of accounting. The purchase price in excess of the fair value of
the net tangible assets acquired was approximately $4,260,000 and is
being amortized using the straight-line method over a weighted average life of
approximately 5 years. The amortization period is based on the remaining life of
the contract acquired. The note is noninterest bearing and is payable in six
equal monthly installments beginning May 1, 1998 (balance of $850,000 at June
30, 1998). In addition, the Company is obligated to pay the owners of MSO an
additional purchase price up to a maximum amount of $25 million based on the
annualized net revenues of the acquired contract for the twelve month period
ended December 31, 1998, as adjusted, times a multiple of 4.25. The additional
purchase price, if any, may be paid entirely in Common Stock of the Company
however the Company may, at its discretion, pay 50% of the additional purchase
price in cash. The consolidated financial statements include the accounts of MSO
since the date of purchase.

On February 13, 1998, the Company acquired the stock of Rehab Management
Systems, Inc., IntegraCare, Inc. and J.R. Rehab Associates, Inc. collectively
referred to as "RMS", for a total purchase price of approximately $10,500,000,
including acquisition costs of approximately $500,000. RMS operates numerous
rehabilitation clinics certified by the Healthcare Financing Administration and
is licensed in the States of Florida, Georgia, Alabama, North Carolina and South
Carolina as a Medicare and Medicaid Outpatient Rehab provider of services. The
acquisition is being accounted for under the purchase method of accounting. The
purchase price in excess of the fair value of the net tangible assets acquired
was approximately $6,160,000 and is being amortized using the straight-line
method over a weighted average life of 15 years. The consolidated financial
statements include the accounts of RMS since the date of purchase.

On April 14, 1998, the Company purchased the assets of SPI Managed Care, Inc.,
SPI Managed Care of Hillsborough County, Inc., SPI Managed Care of Broward,
Inc., and Broward Managed Care, Inc., collectively "SPI". SPI provides
healthcare services at outpatient centers through capitated managed care
contracts. The total purchase price for the acquisition was approximately
$6,750,000. The acquisition is being accounted for under the purchase method of
accounting. The purchase price in excess of the fair value of the net tangible
assets acquired was approximately $6,416,000 and is being amortized using the
straight-line method over a weighted average life of 15 years. The consolidated
financial statements include the accounts of SPI from the purchase date.

The allocations of the purchase price of RMS and SPI are preliminary, while the
Company continues to obtain information to determine the fair value of the
assets acquired and the identifiable intangible assets.

During fiscal 1998, the Company made other acquisitions for a total purchase
price of $3,460,000 of which approximately $2,970,000 was paid in cash, and
approximately $490,000 was paid by issuing approximately 83,000 shares of the
Company's common stock. Each of the acquisitions were accounted for under the
purchase method of accounting. The purchase price in excess of the net tangible
assets or stock acquired aggregated approximately $2,630,000. The excess
purchase price is being amortized using the straight-line method over weighted
average lives of 19 years. The consolidated financial statements include the
accounts of these other acquisitions since the date of purchase.

The following unaudited pro forma data summarize the results of operations for
the periods indicated as if these acquisitions had been completed on July 1,
1996, the beginning of the 1997 fiscal year. The pro forma data gives effect to
actual operating results prior to the acquisitions and adjustments to interest
expense, goodwill amortization and income taxes. These pro forma amounts do not
purport to be indicative of the results that would have actually been obtained
if the acquisitions had occurred on July 1, 1996 or that may be obtained in the
future. The pro forma data does not give effect to acquisitions completed
subsequent to June 30, 1998.





                                      F-12
<PAGE>   47

<TABLE>
<CAPTION>

                                                                YEAR ENDED JUNE 30
                                                        ---------------------------------------
                                                            1998                      1997
                                                        ------------               ------------
                                                                    (Unaudited)
<S>                                                     <C>                        <C>         
Total revenues..............................            $127,462,502               $115,740,000
Net loss....................................             (13,425,812)                (1,595,000)
Basic loss per common share.................                   (1.06)                      (.15)
Diluted loss per common share...............                   (1.06)                      (.15)
</TABLE>


In August, 1998, the Company acquired a corporation in which an officer of the
Company is a shareholder. The purchase price totaled $115,000 in cash and
575,000 shares of the Company's common stock with a fair market value of
approximately $1,600,000.

In August 1998, the Company purchased the assets of Care Med, a managed care
healthcare company which owns or has agreements with approximately 30 physician
practices. The total purchase price was approximately $6.7 million, of which
$4.2 million was paid at closing and the remaining balance is payable in equal
monthly installments over the ensuing 24 months.

In order to fund these acquisitions, the Company entered into a credit facility
(the "Credit Facility") with First Union National Bank of Florida in August,
1998 which provides for a $5 million Acquisition Facility and a $5 million
Revolving Loan. Under the terms of the Credit Facility, the Company may elect
the interest rate to be either the bank's prime rate or the London InterBank
Offered Rate plus 250 basis points. Interest only on each acquisition advance
under the Acquisition Facility is payable monthly in arrears for the first six
months. Commencing six months from the date of each acquisition advance, the
acquisition advance shall be repayable in equal monthly amortization payments,
based upon a five year amortization. The Company borrowed the entire $5 million
Acquisition Facility to fund these acquisitions. Interest only on the Revolving
Loan advances is payable quarterly in arrears. In all events, the Revolving Loan
matures and all unpaid principal and interest is due in full on August 31, 2001.
The $5,000,000 Revolving Loan is comprised of (i) $2,000,000 reserved for a
pending letter of credit arrangement, and (ii) $3,000,000 which can be drawn
commercing September 30, 1999, as long as the Company is in compliance with all
covenants of the Credit Facility at such time. The Credit Facility (a) is
secured by substantially all of the assets of the Company (b) is secured by $1.5
million placed in a restricted account at First Union, which will be released
when certain covenants have been met by the Company and (c) and contains
restrictive covenants which, among other things, require the Company to maintain
certain financial ratios, limits the incurrence of additional debt, limits the
payment of dividends and limits the amount of capital expenditures.

NOTE 4 - NOTES RECEIVABLE

In the first quarter of fiscal 1998, the Company assigned the accounts
receivable related to its behavioral health programs and assigned its behavioral
health management contracts to third parties in exchange for notes receivable in
the aggregate amount of $7.8 million. The Company recorded no gain or loss on
the assignment since the amount received approximated the net book value of the
assets assigned. The notes receivable are to be paid over a five year term with
interest to accrue at 9% per annum. The notes receivable are secured by all the
assets of the behavioral health business.

During fiscal 1998, the Company determined that these notes receivable were
impaired and increased its allowance for doubtful accounts against these notes
receivable by approximately $3,800,000. Of this amount, approximately $1,500,000
was recorded in the fourth quarter. The Company did not recognize any interest
income on these notes in fiscal 1998. The Company will apply all payments to
principal with interest being recognized on a cash basis after all principal has
been paid.





                                      F-13
<PAGE>   48

NOTE 5 - EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS

Equipment, furniture and leasehold improvements is summarized as follows:

<TABLE>
<CAPTION>

                                                                                ESTIMATED
                                                                              USEFUL LIVES
                                                              JUNE 30, 1998    (IN YEARS)
                                                              -------------   ------------
<S>                                                           <C>                 <C>
Furniture, fixtures and equipment.........................    $ 8,727,597         3 - 5
Furniture and equipment under capital lease...............        252,712
Vehicles..................................................         68,515           5
Leasehold improvements....................................        827,654           5
                                                              -----------
                                                                9,876,478
Less accumulated depreciation.............................     (4,380,453)
                                                              -----------
                                                              $ 5,496,025
                                                              ===========
</TABLE>


Depreciation expense for the years ended June 30, 1998 and 1997 was $969,007 and
$157,749, respectively.

In connection with its acquisitions, the Company entered into various
noncancellable leases for certain furniture and equipment that are classified as
capital leases. The leases are payable over 5 years and the Company has used an
incremental borrowing rate ranging from 9% to 35% per annum. Payments under the
leases for the years ended June 30, 1998 and 1997 were approximately $395,200
and $42,600, respectively, of which $141,000 and $15,500, respectively,
represented interest.

Future minimum lease payments under all capital leases is as follows:

For the year ending June 30,

          1999.................................................  $  426,975
          2000.................................................     337,887
          2001.................................................     197,674
          2002.................................................      48,837
          2003.................................................         171
                                                                 ----------
                                                                  1,011,544

          Less amount representing imputed interest............     186,483
                                                                 ----------
          Present value of obligation under capital lease......     825,061
          Less current portion.................................     328,295
                                                                 ----------
          Long-term capital lease obligation...................  $  496,766
                                                                 ==========

NOTE 6 - CONVERTIBLE SUBORDINATED NOTES

On October 30, 1997, the Company issued $46.0 million of 8% Convertible
Subordinated Notes due 2002 (the "Notes"). Interest on the Notes is payable
semiannually beginning April 30, 1998. The Notes can be converted into shares of
common stock of the Company at a conversion price of $7.25 per share at any time
after 60 days following the date of initial issuance which is adjusted upon the
occurrence of certain events. In addition, the Notes are redeemable, in whole or
in part, at the option of the Company at any time on or after October 31, 2000,
at the redemption prices (expressed as a percentage of the principal amount) set
forth below for the 12-month period beginning October 31 of the years indicated:

                2000................................... 104.00%
                2001................................... 102.00%

and thereafter at 100% of principal amount, together with accrued interest to
the redemption date.

The Notes were not registered under the Securities Act of 1933, as amended (the
"Securities Act") and could not be offered or sold without registration or an
applicable exemption from the registration requirements. A registration
statement covering resales of the Notes became effective on January 8, 1998. As
a result, holders of Notes who are identified in the registration statement may
make resales of the Notes, as described in the registration statement, without
any volume limitations or other constraints normally applicable to sales of
"restricted securities."





                                      F-14
<PAGE>   49

NOTE 7 - EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per
share:

<TABLE>
<CAPTION>

                                                                                         YEAR ENDED JUNE 30,
                                                                                     ------------------------------
                                                                                        1998                1997
                                                                                     ------------        ----------
<S>                                                                                  <C>                 <C>
Numerator for basic and dilutive earnings per share
   Net (loss) income..........................................................       $(14,982,935)       $1,706,675
                                                                                     ============        ==========
Denominator
   Denominator for basic (loss) earnings per share - weighted average shares..         12,517,503        10,406,089

Effects of dilutive securities
   Employee stock options.....................................................                 --           275,214
                                                                                     ------------        ----------
   Denominator for diluted (loss) earnings per share - adjusted weighted 
     average shares and assumed conversions...................................         12,517,503        10,681,303
                                                                                     ============        ==========

</TABLE>

For additional disclosure regarding the employee stock options and the warrants
see Note 10.

Diluted loss per share for fiscal 1998 is not presented because the effect of
the dilutive securities would be antidilutive.

Options and warrants to purchase 180,000 shares of the Company's Common Stock
were outstanding at June 30, 1997 but were not included in the computation of
diluted earnings per share because the options' exercise prices were greater
than the average market price of the common shares during the year and,
therefore, the effect would be antidilutive.

NOTE 8 - RELATED PARTY TRANSACTIONS

For the year ended June 30, 1997, the Company provided certain management
services to five facilities owned by two shareholders of Continucare, in return
for a management fee based on Continucare's estimated cost of providing such
services. The management fee charged was calculated based on the ratio of
patient volume represented by the five facilities to total patient volume
managed by Continucare, applied to certain of Continucare's expenses that were
related to the provision of such services. The resulting management fee was
recorded by Continucare as a reduction of the respective financial statement
expense line items. For the fiscal year ended June 30, 1997, management fees
related to this agreement were approximately $878,000. In April 1997, this
agreement was terminated in connection with the Termination & Settlement
Agreement between Continucare and the shareholders.

In addition, during the year ended June 30, 1997, Continucare had contracted
with a company owned, in part, by two shareholders to provide certain managerial
and administrative services to and on behalf of Continucare at cost. For the
year ended June 30, 1997, total expenses incurred by the Company for these
services totaled approximately $314,000 and are recorded in the appropriate
expense categories in the Consolidated Statements of Operations. This agreement
was also terminated in connection with the Termination & Settlement Agreement
entered into in April, 1997. 

During the fiscal year ended June 30, 1997, the Company was obligated under a
note to a company owned by certain shareholders of the Company at that time. In
April 1997, the Health Care Management Partners, Inc. (HCMP) Note was settled in
connection with the Termination & Settlement Agreement between Continucare and
these shareholders.

During fiscal year ended June 30, 1998, the Company incurred expenses of
$200,000 for consulting services provided by a corporation in which one of its
shareholders is an executive officer of the Company. In August 1998, the Company
purchased the 




                                      F-15
<PAGE>   50

corporation for $115,000 in cash and 575,000 shares with a fair market value of
approximately $1,600,000 of the Company's restricted common stock.

The Company rents various medical facilities and equipment from corporations
owned by physician employees of the Company. General and administrative expenses
for fiscal years ended June 30, 1998 and June 30, 1997 included $305,000 and
$89,000, respectively, under these lease agreements.

During fiscal year ended June 30, 1998, the Company earned $381,000 in
management fees from an entity whose executive officer is a director of the
Company. At June 30, 1998, $359,000 is included in accounts receivable for these
services.

NOTE 9 - SETTLEMENT OF FORMER SHAREHOLDER CLAIM

In July 1997, the Company received a demand for arbitration relating to a claim
by a former shareholder of Old Continucare (the predecessor company prior to the
merger) alleging securities fraud in connection with the redemption of his
shares. The former shareholder sought rescission of the redemption agreement or,
in the alternative, damages in excess of $5 million. Pursuant to a settlement
agreement entered into on June 12, 1998, the Company paid $2.0 million in cash
and on July 12, 1998 issued 300,000 shares of Common Stock (with a fair market
value of $1,385,000) in settlement of this claim. The Company has reflected this
transaction at June 30, 1998 as an increase in treasury stock of $2,958,000 and
legal settlement expense of $426,000, which is reflected as general and
administrative expense in the fiscal 1998 consolidated statement of operations.
The increase in treasury stock results in recording the treasury stock acquired
at its fair market value at the redemption date.

NOTE 10 - STOCK OPTION PLAN AND WARRANTS

In January 1998, the Company's shareholders approved an amendment to the
Company's Amended and Restated 1995 Stock Option Plan (the "Stock Option Plan")
covering employees of the Company to increase the authorized shares for
issuance upon the exercise of stock options from 1,200,000 to 1,750,000. The
Stock Option Plan authorizes 1,750,000 shares for issuance upon the exercise of
stock options. The Stock Option Plan authorizes (i) the granting of Incentive or
Non-Qualified stock options to purchase Common Stock to employees of the Company
determined to contribute significantly to the successful performance of the
Company, (ii) the provision of loans for the purpose of financing the exercise
of options and the amount of taxes payable in connection therewith, and (iii)
the use of already owned common stock as payment of the exercise price for
options granted under the Stock Option Plan.

Under the terms of the Stock Option Plan, the exercise price for options granted
is required to be at least the fair market value of the Company's Common Stock
on the date of grant and expire 10 years after the date of the grant.

Pro forma information regarding net income and earnings per share is required by
FASB Statement 123, "ACCOUNTING FOR STOCK BASED COMPENSATION" and has been
determined as if the Company had accounted for its employee stock options under
the fair value method of that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 1998 and 1997, respectively:
risk-free interest rates of 5.5% and 6.32%; dividend yields of 0%; volatility
factors of the expected market price of the Company's Common Stock of 66.4% and
63.6%, and a weighted-average expected life of the options of 10 and 3 years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for earnings per share
information):




                                      F-16
<PAGE>   51
<TABLE>
<CAPTION>

                                                                             YEAR ENDED JUNE 30,
                                                                ------------------------------------------
                                                                    1998                            1997
                                                                ------------                      --------
<S>                                                             <C>                               <C>     
Pro forma net (loss) income..........................           $(17,730,428)                     $647,745
Basic pro forma net (loss) income per share..........                  (1.42)                          .06
Diluted pro forma net  (loss) income per share.......                  (1.42)                          .06
</TABLE>

The following table summarizes information related to the Company's stock option
activity for the years ended June 30, 1998 and 1997:


<TABLE>
<CAPTION>
                                                    YEAR ENDED JUNE 30, 1998             YEAR ENDED JUNE 30, 1997
                                                -------------------------------      ------------------------------
                                                  NUMBER       WEIGHTED AVERAGE       NUMBER       WEIGHTED AVERAGE
                                                OF SHARES       EXERCISE PRICE       OF SHARES      EXERCISE PRICE
                                                ---------      ----------------      ---------     ----------------
<S>                                              <C>                 <C>              <C>                <C>  
     Outstanding at beginning of the year        376,400             $6.26            100,000            $5.46
     Granted...............................    1,238,000              5.53            276,400             6.54
     Exercised.............................      (17,000)             6.00                 --              --
     Forfeited.............................     (208,900)             7.19                 --              --
                                              -----------                             -------
     Outstanding at end of the year........    1,388,500                              376,400
                                              ==========                              =======
     Exercisable at end of the year........      727,171                              266,400
                                              ==========                              =======
     Weighted average fair value of
       options granted during the year.....   $     4.10                              $  3.98
                                              ==========                              =======
</TABLE>


Stock options outstanding as of July 1, 1996 relate to options issued by
pre-Merger Zanart.

The following table summarizes information about the options outstanding at June
30, 1998:

<TABLE>
<CAPTION>

                                       OPTIONS OUTSTANDING                              OPTIONS EXERCISABLE
       RANGE          ------------------------------------------------------      ---------------------------------
        OF                               WEIGHTED AVERAGE
     EXERCISE         OUTSTANDING AT        REMAINING       WEIGHTED AVERAGE        NUMBER         WEIGHTED AVERAGE
      PRICES           JUNE 30, 1998      CONTRACT LIFE      EXERCISE PRICE       EXERCISABLE       EXERCISE PRICE
     --------         --------------     ----------------   ----------------      -----------      ----------------
<S>                       <C>               <C>                   <C>               <C>                 <C>  
       $4.00                25,000          1.33 Years            $4.00              25,000             $4.00
     5.00-6.75           1,343,500          9.06 Years             5.25             682,171              4.73
       8.25                 20,000          2.50 Years             8.25              20,000              8.25
                         ---------                                                 --------
                         1,388,500                                                  727,171
                         =========                                                  =======
</TABLE>

In connection with the sale of the Notes (see Note 6), the Company issued
warrants to purchase 200,000 shares of the Company's common stock with exercise
prices ranging from $8.00 to $12.50 per share as a placement fee. The fair
market value of the warrants at date of issuance was $775,000. This amount is
being amortized, using the interest method, over the life of the Notes. During
fiscal 1997, approximately $5,440,000 was received by the Company pursuant to
the exercise of certain warrants which had been issued by premerger Zanart.
During fiscal 1998 warrants to purchase 250,000 shares of common stock at $3.15
per share were exercised. The Company has 760,000 warrants outstanding at June
30, 1998 exercisable through December 31, 2007, with exercise prices ranging
from $7.25 to $12.50 per share.

Shares of common stock have been reserved for future issuance at June 30, 1998
as follows:

Convertible subordinated notes...........................        6,344,828
Warrants.................................................          760,000
Stock Options............................................        1,388,500
                                                                ----------
Total....................................................        8,493,328
                                                                 =========


NOTE 11 - INCOME TAXES

The Company accounts for income taxes under FASB Statement No. 109, ACCOUNTING
FOR INCOME TAXES. Deferred income tax assets and liabilities are determined
based upon differences between the financial reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse.

The components of the provision for income taxes for the years ended June 30,
1998 and 1997 are as follows:



                                      F-17
<PAGE>   52

<TABLE>
<CAPTION>

                                                                         YEAR ENDED JUNE 30
                                                                    -----------------------------
                                                                        1998            1997
                                                                    -----------     -------------
<S>                                                                 <C>             <C>          
                   Current income taxes:
                        Federal...................................  $(1,448,000)    $   1,410,318
                        State.....................................       33,000           241,423
                                                                    -----------     -------------
                             Total current........................   1,415,000          1,651,741
                                                                    ----------      -------------
                   Deferred income taxes:
                        Federal...................................      435,000          (398,752)
                        State.....................................       71,000           (52,072)
                                                                    -----------     -------------
                             Total deferred.......................      506,000          (450,824)
                                                                    -----------     -------------
                   Total (benefit) provision for income taxes.....  $  (909,000)    $   1,200,917
                                                                     ===========    =============
</TABLE>

Deferred income taxes reflect the net effect of temporary differences between
the carrying amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The tax effects of temporary
differences that give rise to deferred tax assets and deferred tax liabilities
are as follows:

<TABLE>
<CAPTION>

                                                                                 JUNE 30,
                                                                       ---------------------------
                                                                          1998            1997
                                                                       ----------     ------------
<S>                                                                    <C>             <C>          
                  Deferred tax assets:
                       Bad debt and notes receivable reserve.......     $2,610,363     $   712,418
                       Depreciable/amortizable assets..............        845,133          26,010
                       Alternative minimum tax credit..............        111,973              --   
                       Other.......................................        302,544              --
                       Net operating loss carryforward.............      1,208,747              --
                                                                         ---------    ------------
                       Deferred tax assets.........................      5,078,760         738,428
                  Deferred tax liabilities:
                       Depreciation and amortization...............       (337,034)             --
                       Change in tax accounting method.............             --        (197,770)
                       Specifically identified intangibles.........       (954,894)             --
                       Other.......................................        (23,126)        (34,959)
                       Valuation allowance.........................     (4,718,600)             --
                                                                       ------------   ------------
                       Deferred tax liabilities....................     (6,033,654)       (232,729)
                                                                       ------------   ------------
                  Net deferred tax asset (liability)...............    $  (954,894)   $    505,699
                                                                        ===========   ============
</TABLE>


SFAS No. 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. At
June 30, 1997, management believed it was more likely than not that the tax
benefit associated with certain temporary differences would be recognized. After
consideration of all the evidence, both positive and negative, during 1998
management has determined that a $4,718,600 valuation allowance at June 30, 1998
is necessary to reduce the deferred tax assets to the amount that will more than
likely not be realized. The change in the valuation allowance for the current
period is $4,718,600. At June 30, 1998, the Company had available net operating
loss carryforwards of $3,212,190, which expire in 2013.

A reconciliation of the statutory federal income tax rate with the Company's
effective income tax rate for the years ended June 30, 1998 and June 30, 1997 is
as follows:

                                                               1998        1997
                                                              -----        ----
    Statutory federal rate..................................  (34.0)%      34.0%
    State income taxes, net of federal income tax benefit...   (3.6)        4.1
    Goodwill and other non-deductible items.................    1.0         0.4
    Change in valuation allowance...........................   28.5
    Other...................................................    2.4         0.7
                                                             ------      ------
    Effective (benefit) tax rate............................   (5.7)%      39.2%
                                                             ======      ======





                                      F-18
<PAGE>   53

NOTE 12 - EMPLOYEE BENEFIT PLAN

As of January 1, 1997, the Company adopted a tax qualified employee savings and
retirement plan (the "401(k) Plan") covering the Company's employees. Pursuant
to the 401(k) Plan, eligible employees may elect to contribute to the 401(k)
Plan up to the lesser of 15% of their annual compensation or the statutorily
prescribed annual limit ($9,500 in 1998). The Company matches 33% of the
contributions of employees, up to 6% of each employee's salary. All employees
who were employed at January 1, 1997, and new hires who thereafter attain at
least three months' service, are eligible to participate in the 401(k) Plan.
Participants in the plan do not vest in the employer contribution until the end
of the plan year.

The Trustees of the 401(k) Plan, at the direction of each participant, invest
the assets of the 401(k) Plan in designated investment options. The 401(k) Plan
is intended to qualify under Section 401 of the Code, so that contributions to
the 401(k) Plan, and income earned on the 401(k) Plan contributions, are not
taxable until withdrawn. Matching contributions by the Company are deductible
when made. Such matching contributions were $51,512 for the year ending June 30,
1998.

NOTE 13 - COMMITMENTS AND CONTINGENCIES

Employment Agreements - The Company maintains employment agreements with certain
officers and key executives expiring at various dates through July 2002. In
addition, one employment agreement provides for one additional year term for
each year of service by the executive. The agreements provide for base salaries
in aggregate of approximately $1.3 million, annual increases, bonuses and stock
option grants. The employment agreements with certain officers also provide that
in the event of a change in control of the Company, as defined therein, each
officer is entitled to an acceleration of the remainder of the officer's term
and the automatic vesting of any unvested stock options.

Insurance - The Company maintains policies for general and professional
liability insurance jointly with each of the providers. Coverage under the
policies are $1,000,000 per incident and $3,000,000 aggregate. It is the
Company's intention to renew such coverage on an on-going basis.

Leases - The Company leases office space and equipment under various
non-cancelable operating leases. Rent expense under such operating leases was
$2,426,416 for the year ended June 30, 1998 and $357,339 for the year ended June
30, 1997. Future annual minimum payments under such leases as of June 30, 1998
are as follows:

For the fiscal year ending June 30, 1998

          1999.....................................     $ 3,366,759
          2000.....................................       2,862,486
          2001.....................................       1,979,166
          2002.....................................       1,502,471
          2003.....................................       1,159,086
                                                        -----------
                 Total.............................     $10,869,968
                                                        ===========

Concentrations of Revenues - For the year ended June 30, 1998, the Company
generated approximately 36% of total revenues from Foundation Health Corporation
Affiliates. Humana Medical Plans, Inc. accounted for an additional 17% of total
revenues in fiscal 1998.

For the year ended June 30, 1997, the Company generated approximately 68.0% of
total revenues from Community Mental Health Centers owned by two individuals.
Additionally, during the same period, approximately 10.5% of total revenues were
derived from a certain hospital chain. No other facility and/or chain accounted
for 10% or more of the Company's total revenues.




                                      F-19
<PAGE>   54

The Company is a party to the case of JAMES N. HOUGH, PLAINTIFF, V. INTEGRATED
HEALTH SERVICES, INC., A DELAWARE CORPORATION, AND REHAB MANAGEMENT SYSTEMS,
INC., A FLORIDA CORPORATION ("RMS"), AND CONTINUCARE REHABILITATION SERVICES,
INC., A FLORIDA CORPORATION, in the Circuit Court of the Tenth Judicial Circuit
in and for Polk County, Florida, Civil Division. Mr. Hough was the founder and
former Chief Executive Officer and President of RMS. Mr. Hough sold RMS to
Integrated Health Services, Inc. ("IHS"), and entered into an Employment
Agreement (the "Employment Agreement") with IHS. RMS was acquired by Continucare
in February 1998. Mr. Hough is seeking damages from the Employment Agreement and
is alleging breach of contract. His initial demand of $1.1 million was rejected
by the Company and the Company intends to vigorously defend the claim.

The Company is a party to the case of MANAGED HEALTH CARE SYSTEMS AND AFFILIATES
("MHS") V. CONTINUCARE ACQUISITION CORP. AND CONTINUCARE HOME HEALTH SERVICES,
INC. MHS is seeking in excess of $1 million damages for an alleged breach of
contract. The Company believes the claim has little merit and intends to
vigorously defend the claim.

The Company is also involved in various legal proceedings incidental to its
business, substantially all of which involve claims related to the alleged
malpractice of employed and contracted medical professionals.

In the opinion of the Company's management, no individual item of litigation or
group of similar items of litigation, taking into account the insurance coverage
maintained by the Company and any accounts for self-insured retention, is likely
to have a material adverse effect on the Company's financial position, results
of operations or liquidity.




                                      F-20
<PAGE>   55


                                  EXHIBIT INDEX


    Exhibit    Description
    -------    -----------------------------------------------------------------

     21.1      Subsidiaries of the Company.

     23.1      Consent of Ernst & Young LLP

     23.2      Consent of Deloitte & Touche LLP.

     27.1      Financial Data Schedule.