<PAGE>
                                                 Draft 7/28/1997 
                                                 ---------------



                          UNITED STATES
              SECURITIES AND EXCHANGE COMMISSION
                  Washington, D.C. 20549
 
                                   FORM 10-K
 
    [ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED APRIL 30, 1997 OR [ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    Commission File Number: 0-16235
 
                           PHP HEALTHCARE CORPORATION
           (Exact name of registrant as specified in its charter)

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

                  
                 
       11440 Commerce Park Drive  
           Reston, Virginia                              22091
      (Address of principal office)                    (zip code)

 (Registrant's Telephone Number, Including Area Code): (703) 758-3600
 
    Securities registered pursuant to Section 12(b) of the Act:
 
    Title of each class:            Name of each exchange on which registered:
    --------------------            ------------------------------------------
Common Stock, $0.01 par value,                New York Stock Exchange
with associated Preferred Stock
     Purchase Rights
 

    Securities registered pursuant to Section 12(g) of the Act: None
 
    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  X   No
                                              ----    ----
 
    Indicate by check mark if disclosure of delinquent filers pursuant to 
Item 405 of Regulation S-K is not contained herein, and will not be 
contained, to the best of registrant's knowledge, in definitive proxy or 
information statements incorporated by reference in Part III of this Form 
10-K or any amendment to this Form 10-K.-------
                                        
    The aggregate market value of the voting stock held by nonaffiliates of the
registrant (based on the closing price of such stock as reported on June 30,
1997 through the New York Stock Exchange) was approximately $128 MILLION. 

                                       1

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There were 11,474,139 shares of common stock, $0.01 par value per share, 
outstanding as of June 30, 1997.
 
                    DOCUMENTS INCORPORATED BY REFERENCE:
 
    Portions of the registrant's definitive proxy statement, which is 
expected to be filed with the Securities and Exchange Commission within 120 
days after the end of the registrant's fiscal year, are incorporated by 
reference into Part III, Items 10, 11, 12 and 13 of this report.
















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                              TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
ITEM                                                                                    PAGE
<S>                                                                                     <C>
                                    PART I

Item 1.  Business.....................................................................    4
Item 2.  Properties...................................................................   26
Item 3.  Legal Proceedings............................................................   27
Item 4.  Submission of Matters to a Vote of Security Holders..........................   27
         Executive Officers of the Registrant.........................................   27

                                   PART II

Item 5.  Market for the Registrant's Common Stock and Related Stockholder Matters.....   29
Item 6.  Selected Financial Data......................................................   30
Item 7.  Management's Discussion and Analysis of Financial Condition and
          Results of Operations.......................................................   31
Item 8.  Financial Statements and Supplementary Data..................................   39
Item 9.  Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosure....................................................   39

                                   PART III

Item 10. Directors and Executive Officers of the Registrant...........................   39
Item 11. Executive Compensation.......................................................   39
Item 12. Security Ownership of Certain Beneficial Owners and Management...............   39
Item 13. Certain Relationships and Related Transactions...............................   40
  
                                    PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............   40
</TABLE>

                         FORWARD-LOOKING INFORMATION

    This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
For this purpose, any statements contained herein that are not statements of
historical fact, including without limitation, certain statements under "Item 1.
Business" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and located elsewhere herein regarding
industry prospects and the Company's results of operations or financial
position, may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects," and similar
expressions are intended to identify forward-looking statements. The important
factors discussed below under the caption "Business --Risk Factors," among
others, could cause actual results to differ materially from those indicated by
forward-looking statements made herein and presented elsewhere by management
from time to time. Such forward-looking statements represent management's
current expectations and are inherently uncertain. Investors are warned that
actual results may differ from management's expectations.

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                                       PART I
                                          
ITEM 1.  BUSINESS

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

Overview

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

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

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

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

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


                                          4
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health care services as well as conducting all contract negotiations between the
network and its customers, such as HMOs, insurers, self-insured employers, and
government agencies.  This provider sponsored network structure provides
physicians with the opportunity to operate under a variety of payor arrangements
and provides hospitals additional market share through low capital intensive
affiliation with a sufficient number of networked physicians, while aligning the
incentives of all network participants through equity participation.  In
addition to its equity position for its participation and management of the
provider sponsored network, PHP typically receives an ongoing management fee
based on a percentage of revenues.

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

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

Industry

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

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

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

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

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

Strategy

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

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<PAGE>

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

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

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

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

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

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

Development

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

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

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

Operations

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

  Commercial Managed Care

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

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

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

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

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

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

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

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

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

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

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

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

                                          11
<PAGE>

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

    In April 1996, the United States Congress enacted legislation which 
requires the Company's contracts with the Department to be settled 
retroactively on a capitated-rate-per-enrollee basis.  Prior to the enactment 
of the legislation, the terms of the contracts provided that the final 
settlements would be on a non-risk basis, calculated in part on a cost-based 
methodology covering the period October 1, 1991 through October 1, 1999.  As 
a result, CHP's non-risk provider agreements will be retroactively 
superseded with risk provider agreements.  Under a risk provider agreement, 
CHP will be paid a monthly capitation amount for all medical services 
provided during the retroactive period and in the future.

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

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

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

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

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

                                          12
<PAGE>

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


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

  Government Managed Care Division

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

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

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

                                          13
<PAGE>

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

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

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

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

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

    Total Managed Care.  PHP provides specialized comprehensive managed health
care programs for maximum, medium and minimum security correctional facilities. 
Correctional facilities are complex and unique environments for delivering
medical and mental health care services. The Company incorporates into its
correctional facilities programs its understanding of how these facilities must
be managed and how security and other special issues affect program design and
administration.  The Company presently provides such a program for the Arkansas
Department of Corrections under a unit-price contract. The units 

                                          14
<PAGE>

upon which payment is based are average number of inmates per month. This
contract was re-awarded to the Company in July 1991 and was completed June 30,
1997.  In July 1996 the Company began operating a similar contract with the
Maryland Department of Corrections with an initial term of one year and two
one-year options.

Government Contract Backlog.  As of April 30, 1997 and 1996, the approximate
aggregate amounts of the remaining portions of the then current terms of the
Company's government contracts and all related renewal options were $276 million
and $411 million, respectively.  There can be no assurance that these contracts
will not be terminated early by the government or that the renewal options under
any of the Company's government contracts will be exercised.  The realization of
these potential revenues is dependent upon the ordering by the government entity
of the estimated contract quantities and a variety of contract and other
contingencies, many of which are beyond the control of the Company.  See "--
Government Contracting Regulation."

Government Contracting Regulation 

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

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


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

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

                                          15
<PAGE>

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

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

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

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

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

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

Limitations on Reimbursement

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

                                          16
<PAGE>

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

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

Government Regulation

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

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

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

                                          17
<PAGE>

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

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

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

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

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

                                          18
<PAGE>


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

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

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

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

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

                                          19
<PAGE>

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

Competition

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

Insurance

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

Employees

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

Risk Factors

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

  Government Regulation

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

                                          20
<PAGE>

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

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

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

                                          21
<PAGE>

  Dependence on Certain Contracts

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

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

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

  Capitated Nature of Revenue

    The Company provides a portion of its services on a capitated basis, and
the Company intends to negotiate additional capitated agreements with managed
care organizations or assume such contracts in connection with its affiliation
with primary care practices.  Such contracts, typically referred to as "risk
sharing" contracts, are arrangements between the Company and a managed care
organization under which the Company agrees to provide certain health care
services, as required by members of such managed care organization, in exchange
for a fixed fee per member per month.  Under these contracts, the Company bears
the risk that the cost of the services it is required to provide will exceed the
fixed fees it is entitled to receive.  In order for such risk sharing contracts
to be profitable for the Company, the Company must effectively manage the
utilization rate of primary care services, specialty physician services, and
hospital services delivered to members of the managed care organization.  There
can be no assurance that the Company will receive fees under such risk sharing
arrangements which will permit it to recover the costs of the health care
services it will be required to provide.

                                          22
<PAGE>

  Dependence on Primary Care Physicians

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

  Limitations on Reimbursement

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


  Management Information Systems

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

  Dependence on Government Contracts

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

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

                                          23
<PAGE>

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

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

  Dependence on Key Personnel

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

  Competition

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

  Exposure to Professional Liability

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


                                          24
<PAGE>

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

  Historical Losses

    The Company reported net losses of $4.1 million, $9.3 million and $3.8 
million for the fiscal years ended April 30, 1997, 1994 and 1993, 
respectively. Although the Company was profitable for the fiscal years ended 
April 30, 1996 and 1995, there can be no assurance that it will operate 
profitably in the future, or have earnings or cash flow sufficient to comply 
with the financial covenants to which it is subject or to cover its fixed 
charges.  As a consequence of the losses reported in fiscal 1993 and 1994, 
the Company failed to comply with certain financial covenants under its 
credit agreement. The Company obtained waivers for such noncompliance and the 
Company's bank modified the applicable financial covenants.  In the future, 
any failure by the Company to comply with the financial covenants contained 
in its credit agreement (or in any replacement credit facility) could result 
in a default under such facility which could have an adverse effect on the 
Company's business, financial condition and results of operations.

  Substantial Indebtedness

    The Company's indebtedness is substantial in relation to its stockholders'
equity.  At April 30, 1997, the Company's total long-term debt, net of current
portion, accounted for 69.9% of its total capitalization.

  Possible Volatility of Stock Price

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

  Control by Management and Certain Stockholders

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

                                       25
<PAGE>

Anti-Takeover Effect of Delaware Law and Charter and By-law Provisions
 
    Certain provisions of the Company's certificate of incorporation, by-laws
and Delaware law could, together or separately, discourage potential acquisition
proposals, delay or prevent a change in control of the Company and limit the
price that certain investors might be willing to pay in the future for shares of
the Common Stock. These provisions include a classified Board of Directors, the
ability of the Board of Directors to authorize the issuance, without further
stockholder approval, of preferred stock with rights and privileges which could
be senior to the Common Stock, elimination of the stockholders' ability to take
any action without a meeting, and establishment of certain advance notice
procedures for nomination of candidates for election as directors and for
stockholder proposals to be considered at stockholders' meetings. In addition,
the Company has distributed preferred stock purchase rights which could cause
substantial dilution to a person or group that attempts to acquire a controlling
interest in the Company. The Company is also subject to Section 203 of the
Delaware General Corporation Law which, subject to certain exceptions, prohibits
a Delaware corporation from engaging in any of a broad range of business
combinations with any "interested stockholder" for a period of three years
following the date that such stockholder became an "interested stockholder."
 
ITEM 2. PROPERTIES
 
    As of June 30, 1997 the Company leased facilities for the provision of
medical services and for its corporate headquarters and other administrative
offices at 25 locations in nine states covering an aggregate of approximately
396,000 square feet of space. The leases expire at various dates from fiscal
years 1998 to 2008.
 
    In addition to leased facilities, the Company owns eight parcels of real
property on which it has constructed facilities to provide contracted services.
These facilities are located in three states and cover an aggregate of
approximately 101,000 square feet. All properties are subject to mortgages
related to the Company's primary credit agreement. See Note 4 of Notes to
Consolidated Financial Statements.
 
    All of the clinic facilities are modern and well maintained. The Company
considers these facilities to be adequate for carrying out its contract
requirements and commercial business.
 
    In May 1993, the Company purchased an office building in Reston, Virginia
for approximately $12 million. The building contains approximately 165,000
square feet of rentable commercial office space of which 113,000 square feet was
under lease at the time of purchase. The Company relocated its corporate
operations to this building. In July 1994, the Company sold the Reston, Virginia
building for approximately $14.8 million. In conjunction with the sale, the
Company signed a fifteen-year lease for 55,000 square feet of space in the
building. The Company completed its relocation to Reston in August 1994 and has
sublet the former corporate offices in Alexandria, Virginia. See Note 11(c) of
Notes to the Consolidated Financial Statements.
 
    The Company owns a 19,000 square foot building in San Diego, California and
an 8,500 square foot building in Omaha, Nebraska, neither of which is currently
needed to provide healthcare services. These buildings have been leased for
three to five year periods ending in the year 2000.
 
    The Company owns four buildings, totaling 38,000 square feet, that were
formerly used by the Company to operate healthcare services contracts with the
federal government. Those contracts have been completed and the Company is
actively pursuing tenants or buyers for these properties.

                                       26
<PAGE>

    The Company also leases three facilities, totaling 25,000 square feet, that
were formerly used by the Company to operate healthcare services contracts with
the federal government. These leases expire in September 1997 and January 1998.
 
    See Note 13(a) of Notes to Consolidated Financial Statements for information
concerning the Company's lease rental obligations.
 
ITEM 3. LEGAL PROCEEDINGS
 
    The Company is a defendant in various legal proceedings incidental to its
business, including actions involving medical malpractice claims, employment
matters and contractual arrangements. In the opinion of management, after
consultation with counsel, these proceedings will not have a material adverse
effect on the Company's financial position, results of operations or cash flows,
although there can be no assurance to this effect. See Note 13(c) of Notes to
the Consolidated Financial Statements.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
    There were no matters submitted to a vote of the stockholders of the Company
during the quarter ended April 30, 1997.
 
EXECUTIVE OFFICERS OF THE REGISTRANT
 
    Set forth below are the names and ages of the Company's executive officers
(as defined by regulations of the Securities and Exchange Commission), the
positions and offices they hold with the Company, their terms as officers and
their business experience. Executive officers are elected by the Board of
Directors and serve at the discretion of the Board.
 
<TABLE>
<CAPTION>
Name                           Age            Positions or Offices Withh the Company
----------------------------  -----  ----------------------------------------------------
<S>                           <C>    <C>
Jack M. Mazur...............    55   President and Chief Executive Officer

Michael D. Starr............    53   Senior Executive Vice President, Treasurer, and
                                     Chief Executive Officer, Government Managed Care
                                     Division

Robert L. Bowles, Jr. ......    57   President, D.C. Chartered Health Plan

William J. Lubin............    45   Executive Vice President and Chief Executive
                                     Officer, Commercial Managed Care Division

Frank L. Provato, M.D. .....   49    Executive Vice President, and Corporate Medical
                                     Director
</TABLE>

                                       27
<PAGE>

<TABLE>
<S>                           <C>    <C>
Anthony M. Picini...........    42   Executive Vice President and Chief Financial Officer
</TABLE>


    Jack M. Mazur, age 55, has been a director of the Company since 1976 and has
served as President since October 1995. Prior to his election as President, Mr.
Mazur was Chief Executive Officer of the Company's Commercial Managed Care
Division. From August 1989 to October 1995, Mr. Mazur served as Senior Executive
Vice President of the Company, from June 1986 to October 1993 as Secretary of
the Company, and from 1976 through May 1986 as an advisor to the President and
Chairman and as Assistant Secretary of the Company.
 
    Michael D. Starr, age 53, has been employed by the Company in various
financial and operational positions since 1976 and has been a director since
1985. Mr. Starr was Controller of the Company from 1976 to 1981, Vice President,
Finance and Administration from 1981 to 1986, and has been Executive Vice
President since March 1986 and Chief Executive Officer of the Government Managed
Care Division since October 1995.
 
    Robert L. Bowles, Jr., age 57, joined the Company in August 1993 in
connection with the Company's acquisition of D.C. Chartered Health Plan, Inc.
Mr. Bowles is the founder of D.C. Chartered and has more than 30 years
experience in administration and management of health care services and
operations for corporations and the military.
 
    William J. Lubin, age 45, joined PHP in August 1994 as Senior Vice 
President for Managed Care. In late 1994 he assumed the position of Chief 
Operating Officer, Commercial Managed Care. In October 1995, he became Chief 
Executive Officer of the Commercial Managed Care Division. Prior to joining 
PHP, Mr. Lubin held management position with Aetna Health Plans, Travelers 
Insurance Companies, Lincoln National, and Blue Cross and Blue Shield of 
Connecticut.
 
    Frank L. Provato, M.D., age 49, has been with the Company since 1993.
Prior to joining PHP, he served as Vice President and Corporate Medical Director
for GTE Corporation, where he was responsible for the development of health care
cost management strategies and the implementation of a GTE-sponsored primary
care health center in Tampa, Florida. Dr. Provato has 23 years of diverse
background in clinical medicine, health care administration, occupational
health, and employee benefits administration.
 
    Anthony M. Picini, age 42, has been with the Company since 1989. Previously,
Mr. Picini was with the accounting firm of KPMG Peat Marwick, where he managed
the auditing and accounting of both public and private companies.

                                       28
<PAGE>

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
        STOCKHOLDER MATTERS
 
MARKET PRICE
 
    The Company's Common Stock, $.01 par value, is traded on the New York Stock
Exchange under the symbol "PPH." The following table presents, for the periods
indicated, the high and low sale prices per share of Common Stock as reported by
the New York Stock Exchange.
 

        Quarter Ended                               High        Low
        ----------------------------------------  ---------  ---------
        April 30, 1997                     
          Fourth Quarter........................    $23 7/8    $10 5/8
          Third Quarter.........................     29 1/2     20 7/8
          Second Quarter........................         31     22 7/8
          First Quarter.........................         36     20 3/8

        April 30, 1996                     
          Fourth Quarter........................    $32 5/8    $23 3/8
          Third Quarter.........................     28 1/4          20
          Second Quarter........................         20     10 5/16
          First Quarter.........................     10 7/8      8 5/16

 
NUMBER OF STOCKHOLDERS
 
    As of June 30, 1997, there were approximately 950 holders of record of the
Company's Common Stock. Based on a review of its nominee account listings, the
Company estimates that there are approximately 4,700 beneficial owners of the
Company's Common Stock.
 
DIVIDENDS
 
    The Company has never paid any cash dividends on its Common Stock and does
not expect to do so in the foreseeable future. The Company intends to retain all
future earnings to fund the operation and expansion of its business. The
Company's bank credit agreement precludes the payment of cash dividends without
the bank's approval.
 
SALES OF UNREGISTERED SECURITIES
 
    In December 1996, the Company issued 90,000 shares of its Common Stock to 
Medigroup of New Jersey, Inc. ("MGI") in consideration of MGI's providing the 
Company with access to MGI's network and providing claims payment services 
under the BCBSNJ Network Agreement. The issuance of the shares was exempt 
under Section 4(2) of the Securities Act of 1933, as amended (the "Securities 
Act").
 
    In May 1997, the Company issued 200,000 shares of its Common Stock to a
trust for the benefit of John W. Kluge for consideration of $13.00 per share.
The issuance of the shares was exempt under Section 4(2) of the Securities Act.
 
                                       29
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA
 
    The selected consolidated financial data set forth below with respect to 
the Company's consolidated statements of operations and balance sheets is 
derived from the Consolidated Financial Statements of the Company as audited 
by Coopers & Lybrand L.L.P., independent public accountants, for the years 
ended April 30, 1997, April 30, 1996 and April 30, 1995 and by KPMG Peat 
Marwick LLP, independent public accountants for the years ended April 30, 
1994 and April 30, 1993, and gives retroactive effect to the two-for-one 
stock split effected in the form of a 100% stock dividend distributed on 
November 20, 1995 to stockholders of record on November 1, 1995. The data 
presented below should be read in conjunction with and is qualified by 
reference to the consolidated financial statements of the Company and the 
notes thereto and "Management's Discussion and Analysis of Financial 
Condition and Results of Operations" included herein. See Items 7 and 8.
 
<TABLE>
<CAPTION>
                                                                          YEAR ENDED APRIL 30,
                                                              (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
                                                       ----------------------------------------------------------
<S>                                                    <C>         <C>         <C>         <C>         <C>
                                                          1993        1994      1995(1)       1996        1997
                                                       ----------  ----------  ----------  ----------  ----------
Statement of Operations Data:
Revenues.............................................  $  126,025  $  148,683  $  204,131  $  203,360  $  232,307
Direct costs.........................................     116,840     140,397     182,053     163,582     189,477
                                                       ----------  ----------  ----------  ----------  ----------
 Gross profit................  ......................       9,186       8,286      22,078      39,778      42,830
General and administrative expenses..................      13,201      16,936      19,660      27,173      30,846
Reserve for Medicaid receivables.....................      --          --          --          --           9,822
Former chairman retirement...........................      --          --          --          --           2,275
Restructuring charges................................      --          --          --          --           2,550
                                                       ----------  ----------  ----------  ----------  ----------
 Operating income (loss).............................      (4,015)     (8,650)      2,418      12,605      (2,663)
Other income (expense):
 Interest expense....................................      (1,071)     (3,288)     (2,209)     (3,363)     (5,577)
 Interest income.....................................          74         186         422       1,448       2,060
 Miscellaneous income (expense)......................        (325)       (504)      1,015          69        (222)
 Gain on sale of subsidiary stock....................      --          --          --           2,247      --
 Minority interest in earnings (losses) of
  subsidiaries.......................................        (225)       (213)       (159)        212        (196)
                                                       ----------  ----------  ----------  ----------  ----------
 Earnings(loss) before income taxes..................      (5,562)    (12,469)      1,487      13,218      (6,598)
Income tax expense (benefit).........................      (1,806)     (3,135)        535       4,100      (2,510)
                                                       ----------  ----------  ----------  ----------  ----------
 Net earnings (loss).................................  $   (3,756) $   (9,334) $      952  $    9,118  $   (4,088)
                                                       ----------  ----------  ----------  ----------  ----------
                                                       ----------  ----------  ----------  ----------  ----------
Net earnings (loss) per common share
 Primary.............................................  $    (0.38) $    (0.93) $     0.08  $     0.68  $    (0.37)
                                                       ----------  ----------  ----------  ----------  ----------
 Fully diluted.......................................  $    (0.38) $    (0.92) $     0.08  $     0.66  $    (0.37)
                                                       ----------  ----------  ----------  ----------  ----------
Weighted average number of common shares outstanding:
 Primary.............................................       9,996      10,085      11,226      13,429      11,038
                                                       ----------  ----------  ----------  ----------  ----------
 Fully diluted.......................................       9,996      10,117      11,910      13,873      11,038
                                                       ----------  ----------  ----------  ----------  ----------
</TABLE>

                                      30

<PAGE>

<TABLE>
<CAPTION>
                                                                                  AT APRIL 30,
                                                                                 (IN THOUSANDS)
                                                              -----------------------------------------------------
<S>                                                           <C>        <C>        <C>        <C>        <C>
                                                                1993       1994       1995       1996       1997
                                                              ---------  ---------  ---------  ---------  ---------
Balance Sheet Data:
Working Capital.............................................  $  20,753  $   7,736  $  15,422  $  68,562  $  27,183
Total Assets................................................     73,821     87,111     71,150    135,355    153,304
Short-term debt.............................................      4,283      4,589      2,247        545     10,916
Long-term debt..............................................     28,888     39,643     24,454     67,529     69,996
Stockholders' equity........................................     25,733     17,296     20,328     30,747     30,078
</TABLE>
 
------------------------

(1) Includes $30 million of non-recurring start-up and construction revenues and
    costs related to the Company's BCBSNJ project.


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS
 
    The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
consolidated financial statements and related notes thereto included elsewhere
in this report.
 
GENERAL
 
    Over the past four years, the Company has altered its focus from an historic
dependence on government contracts to a focus on commercial managed care
markets. Prior to 1993, over 98% of PHP's revenue came from government-related
contracts. PHP's government service contracts required the Company to manage
health care providers in a variety of delivery settings. In 1992, management
realized that the knowledge, expertise and skills which the Company had acquired
in managing health care providers for government agencies could also be applied
to serve the commercial managed care market. At the same time, management
supplemented the Company's existing competencies with additional skills and
capabilities in order to take full advantage of the opportunities available in
commercial managed care. The Company added to existing capabilities by making
several key acquisitions, investing in information networks and recruiting
experienced managed care executives.
 
    Revenues from the Commercial Managed Care Division have grown, in part as a
result of acquisitions, to $134.9 million or 58.1% of total revenues in 1997
from $1.3 million or 1% of total revenues in 1992. Operations in this division
consist of the Company's integrated health care delivery networks applied in
whole or in part to: (i) the Company's HMOs in the District of Columbia and
Virginia, primarily serving the government assisted Medicaid population, (ii)
the Company's statewide ISOC in New Jersey which contracts to provide services
with HMOs and insurance companies, and (iii) family health centers which are
operated on a contract basis for large employers. Also, in November 1995, PHP
and St. Vincent's Health Services Corporation ("St. Vincent's"), an affiliate of
the Daughters of Charity National Health System East, Inc. (the "Daughters of
Charity"), formed Connecticut Health Enterprises, L.L.C. ("Connecticut Health
Enterprises"), a limited liability company, for the purpose of developing a
provider sponsored integrated health care delivery network in Fairfield County,
Connecticut. Connecticut Health Enterprises commenced operations in April 1996
and functions as an alliance between PHP, St. Vincent's, Fairfield County
physicians and other hospitals and ancillary providers. These systems of health
care are marketed to insurers, HMOs, and government agencies, which contract for
a total health 

                                      31

<PAGE>

care delivery system. In April 1996, the Company also agreed to form Georgia 
Health Enterprise, L.L.C., a limited liability company, with St. Mary's 
Health Care System, Inc., of Athens Georgia, for the purpose of developing a 
provider service network in Athens, Georgia. The Company is compensated for 
its commercial managed health care services in a variety of methodologies, 
including cost plus fee, percentage of revenue, percentage of savings, 
fee-for-service, capitation, or some combination of the foregoing.
 
    Revenues from the Government Managed Care Division have decreased slightly
from a peak of $116.4 million in 1992 to $97.4 million in 1997. Operations in
this division consist of health care services provided to government agencies
across a diverse scope of service groups including ambulatory care, medical
staffing, mental health, long-term care, and total managed care. The Company
generally performs these services under unit-price, fixed-price,
cost-reimbursement-plus-fee, and fixed-rate-labor hour contracts.
 
    The Company's revenues have increased from $118.0 million in 1992 to 
$232.3 million in 1997. Gross profit margins increased to 18% and 19% in 1997 
and 1996, respectively, after having decreased to 6% and 7% in 1994 and 1993, 
respectively. The Company incurred a net loss of $4.1 million in 1997 after 
earning net income of $9.1 million and $952,000 in 1996 and 1995, 
respectively. The 1997 loss resulted from a $9.8 million reserve for Medicaid 
receivables, $2.6 million in restructuring charges, and a $2.3 million charge 
related to the retirement of the Company's former chairman. In 1994 and 1993 
the Company incurred losses of $9.3 million and $3.8 million, respectively, 
due to a decrease in gross profits resulting from some significant 
nonrecurring events including certain contract receivable write-offs, 
increased corporate staff costs and increased commercial business development 
costs.
 
    The following table sets forth, for the years indicated, certain items in
the Company's Consolidated Statements of Operations expressed as a percentage of
revenues:
 
<TABLE>
<CAPTION> 
                                                YEAR ENDED APRIL 30,
                                           -------------------------------
<S>                                        <C>        <C>        <C>
                                             1997       1996       1995
                                           ---------  ---------  ---------
Revenues.................................    100.0%     100.0%     100.0%
Direct costs.............................     81.6       80.4       89.2
                                           ---------  ---------  ---------
Gross Profit.............................     18.3       19.6       10.8
General and administrative expenses......     13.2       13.4        9.6
Reserve for Medicaid receivables.........      4.2       --         --
Former chairman retirement package.......      1.0       --         --
Restructuring charges....................      1.1       --         --
                                           ---------  ---------  ---------
Operating income (loss)..................     (1.1)       6.2        1.2
Other income (expense)...................     (1.7)       0.3       (0.5)
                                           ---------  ---------  ---------
Earnings (loss) before income taxes......     (2.8)       6.5        0.7
Income tax expense (benefit).............     (1.1)       2.0        0.2
                                           ---------  ---------  ---------
Net earnings (loss)......................     (1.7)       4.5        0.5
                                           ---------  ---------  ---------
                                           ---------  ---------  ---------

</TABLE>
 
    The following table indicates revenues by the Company's service divisions
and the related percentage of total revenues:
<TABLE>
<CAPTION>
                                                     YEAR ENDED APRIL 30,
                              -------------------------------------------------------------------
<S>                           <C>         <C>        <C>         <C>        <C>         <C>
                                      1997                  1996                   1995(1)
                              ---------------------  ---------------------  ---------------------

                                      32

<PAGE>
 
<CAPTION>
                               REVENUES       %       REVENUES       %       REVENUES       %
                              ----------  ---------  ----------  ---------  ----------  ---------
<S>                           <C>         <C>        <C>         <C>        <C>         <C>
Division
Government..................    $ 97,400       41.9  $   96,424       47.4    $101,455       49.7
Commercial..................     134,907       58.1     106,936       52.6     102,220       50.1
Other.......................      --           --     --         --                456        0.2
                              ----------  ---------  ----------  ---------  ----------  ---------
  TOTAL.....................    $232,307      100.0  $  203,360      100.0    $204,131      100.0
                              ----------  ---------  ----------  ---------  ----------  ---------
                              ----------  ---------  ----------  ---------  ----------  ---------
</TABLE>
 
------------------------
 
(1) Includes $30 million of non-recurring start-up and construction revenues
    related to the Company's BCBSNJ project.
 
RESULTS OF OPERATIONS
 
    Fiscal Year 1997 Compared to Fiscal Year 1996
 
    The Company's revenues increased by $28.9 million or 14.2% to $232.3 million
in fiscal year 1997 compared to $203.4 million for the prior fiscal year. This
increase is due to a significant increase in the Commercial Managed Care
Division and a slight increase in the Government Managed Care Division.
 
    The Commercial Managed Care Division revenues increased by $28 million or 
26.2% to $134.9 million in fiscal year 1997 compared to $106.9 million in 
1996. This net increase is the result of several increases and a decrease. 
The largest increase in Commercial Managed Care Division revenue resulted 
from the BCBSNJ ISOC project. Effective July 1, 1996, this business 
relationship was modified such that the Company began to provide services 
under a global capitation arrangement which significantly increased the 
revenues the Company earns as well as the scope of services and resultant 
cost of service. The second largest increase was provided by the Company's 
subsidiary, Virginia Chartered Health Plan, Inc. ("VACHP"), a Medicaid HMO 
operating in selected markets in the Commonwealth of Virginia. VACHP 
commenced operations in November 1995 and therefore was only operating for 
less than half the year during fiscal year 1996. In addition, since 
commencing operations, VACHP has continually increased its membership 
enrollment. Commercial Managed Care Division revenues also increased as a 
result of the Company's ISOC development, management and operations related 
to its strategic ventures, primarily in Connecticut.
 
    These Commercial Managed Care Division increases were offset by a decrease
in revenues at CHP, the Company's Medicaid HMO in the District of Columbia.
CHP's revenues decreased due to a gradual decrease in enrollment from
approximately 26,000 members at the end of fiscal year 1996 down to
approximately 21,000 members at the end of fiscal 1997. In addition, CHP's
revenues decreased because effective November 1, 1996, the contractual premium
rate was reduced.
 
    The Government Managed Care Division revenues increased by $1.0 million or
1.0% to $97.4 million in fiscal 1997 compared to $96.4 million in 1996. This net
increase is the result of (1) a significant new total managed care correctional
facilities project which commenced operations in July 1996, (2) two new
ambulatory care projects , one new mental health project and one new medical
staffing project, all of which commenced operations since the beginning of the
prior fiscal year, and (3) an increase in the number of inmates and in the per
inmate reimbursement rate on an existing total managed care correctional
facilities project.
 
                                      33

<PAGE>


     These revenue increases were almost entirely offset by
decreases related to the completion of seven ambulatory care projects, three
mental health projects, and one medical staffing project. The Government Managed
Care Division revenues also decreased as a result of the Company's restructuring
decisions in the third quarter of fiscal 1997 which included the Company's
decision to terminate its long-term care line of business in the Government
Managed Care Division effective December 1, 1996.  The results of
operations for these projects since December 1, 1996 are presented
on the Statement of Operations on the Restructuring Charges line
item.

    The Company's gross profit increased by 7.7% or $3 million, to
$42.8 million for fiscal year 1997 compared to $39.8 million for
the prior year.  As a percentage of revenue, gross profit decreased
to 18.4% for the current year compared to 19.6% in fiscal 1996. 
Gross profit increased in the Commercial Managed Care Division and
decreased in the Government Managed Care Division.

    The Commercial Managed Care Division gross profit increase
resulted from:  (1) the operations of VACHP which was operational a
full year in 1997 and less than half a year in fiscal 1996, as
discussed above, (2) the operations of the BCBSNJ ISOC, which
became a global capitation healthcare services contract effective
July 1, 1996, and (3) increased activity in the Company's
development, management, and operations related to its strategic
provider-based ISOC ventures, primarily in Connecticut.  These
gross profit increases were reduced by a decrease from the CHP
operations resulting from a decrease in membership enrollment and a
decrease in the premium rate.

    The Government Managed Care Division gross profit decreased
due to the completion of several projects as described above,
partially offset by increases from the commencement of operations
on new projects as described above.

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

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

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

                                      34

<PAGE>

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

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

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

    Operating income decreased by $15.3 million from $12.6 million
in operating income in fiscal 1996 to $2.7 million in operating
losses in fiscal 1997.  Operating margin decreased to a loss of
1.1% from income of 6.2%.  This decrease is primarily related to the
Medicaid receivables reserve, the restructuring charges, and the
retirement expense that was recognized in fiscal 1997.

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

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

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

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

    The Company's results of operations decreased by $13.2 million
from net earnings of $9.1 million to a net loss of $4.1 million for
fiscal years 1996 and 1997, respectively, resulting in primary
losses per share of $0.37 in 1997 ($0.37 fully diluted), compared
with primary earnings per share of $0.68 ($0.66 fully diluted) in
fiscal 1996.

   Fiscal Year 1996 Compared to Fiscal Year 1995

                                      35

<PAGE>

    The Company's revenue decreased by 0.4% or $700,000 to $203.4
million in fiscal year 1996 compared to $204.1 million for the
prior fiscal year.  This slight decrease is the net result of an
increase in the Commercial Managed Care Division and a decrease in
the Government Managed Care Division.  The fiscal 1995 Commercial
Managed Care Division revenues included $30.0 million of
non-recurring construction and pre-operational revenue on the
BCBSNJ project.

    Exclusive of the non-recurring construction and pre-operational 
revenue earned on the BCBSNJ project in fiscal year 1995, 
Commercial Managed Care Division revenue increased by $34.7 million 
or 48.1% to $106.9 million in fiscal 1996 compared to $72.2 million 
in fiscal 1995.  This net increase is the result of several 
increases and decreases.  The largest increase in Commercial 
Managed Care Division revenue was due to an increase in operational 
revenue on the BCBSNJ project which commenced operations in January 
1995 and was therefore operating throughout fiscal 1996 but only 
four months during fiscal 1995.  The second largest increase in
Commercial Managed Care Division revenue was provided by CHP, and 
resulted from an expanded enrollment and a new contract at a higher 
premium rate.  Additional revenue increases resulted from:  (1) 
revenue earned during fiscal 1996 for network development efforts 
related to strategic ventures in Connecticut, Georgia, and other 
markets, (2) revenue resulting from the commencement of operations 
in November 1995 at VACHP, (3) increased utilization at two 
existing integrated health care delivery network projects for large 
employers, (4) increased software sales at the Company's wholly 
owned subsidiary, Health Cost Consultants ("HCC"), a case 
management and utilization review services company, and (5) the 
commencement of operations at a new integrated health care delivery 
network project for a large employer in January 1995.

    In addition to the Commercial Managed Care Division revenue
decrease related to the construction and pre-operational phases of
the BCBSNJ project, other revenue decreases resulted from the sale
of two outpatient surgery centers in September 1994, and the
non-recurrence of construction and pre-operational revenues earned
in the prior year related to an integrated health care delivery
network project for a large employer which became operational in
January 1995.

    Government Managed Care Division revenue decreased by $5.0
million to $96.4 million in fiscal 1996 compared to $101.4 million
in fiscal 1995.  This decrease is primarily related to the
completion of seven ambulatory care projects, two mental health
projects, and four medical staffing projects.  Offsetting these
revenue decreases were revenue increases resulting from:  (1) the
commencement of operations on two new long-term care nursing home
projects in June 1995, (2) the commencement of operations on a new
ambulatory care project in October 1995, (3) the commencement of
operations on a new medical staffing project in January 1995, (4)
an expanded inmate population and an increase in the contract rate
on a total managed care correctional facilities project, (5) an
increased contract rate on a long-term care nursing home project,
and (6) the expansion of services and a corresponding increase in
contract rate on one PRIMUS project.

    The Company's gross profit increased by 80.1% or $17.7 million
to $39.8 million in fiscal 1996 compared to $22.1 million in fiscal
1995.  As a percentage of revenue, gross profit increased to 19.6%
in fiscal 1996 compared to 10.8% in the prior fiscal year.  This
overall gross profit improvement resulted from a significant
increase in the Commercial Managed Care Division as well as an
increase in the Government Managed Care Division.

    The Commercial Managed Care Division gross profit increase was
primarily attributable to an expanded enrollment and a new contract
at a higher premium rate at CHP.  A gross profit

                                      36

<PAGE>


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

    The Government Managed Care Division gross profit increase was
due to (1) an increased contract rate at a long-term care nursing
home project, (2) increased utilization, improved cost control, and
higher award fee revenue at three ambulatory care projects with the
Navy, (3) an expansion of services and a corresponding increase in
the contract rate on one PRIMUS project, and (4) an expanded inmate
population and an increased contract rate on a total managed care
correctional facilities project.  Government Managed Care Division
gross profits decreased due to the completion of certain projects
as cited above for causing revenues to decrease, and due to a
decrease in utilization and the contract rate at one NAVCARE
project which was completed in September 1995.

    General and administrative expenses increased 38.1% or $7.5 
million to $27.2 million in fiscal 1996 from $19.7 million in the 
prior year.  As a percentage of revenue, general and administrative 
expenses increased to 13.4% in fiscal 1996 compared to 9.7% during 
the prior year.  The increase is primarily a function of the 
Company's commercial managed care initiatives and is due to:  (1) 
increased general and administrative expenses associated with D.C. 
Chartered and its growing enrollment, (2) additional general and 
administrative expenses associated with the new VACHP subsidiary, 
(3) increased corporate compensation costs related to the hiring 
and retention of existing and additional management personnel and 
support staff, and (4) increased facility expenses resulting from 
the Company's new expanded corporate headquarters office space.

    Operating income increased more than fivefold from $2.4
million in fiscal 1995 to $12.6 million for the current year. 
Operating margin increased to 6.2% from 1.2%.  This increase was
due to the increased gross profit margins, reduced by increased
general and administrative expenses.

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

    Interest income increased by $1,026,000 from $422,000 in
fiscal 1995 to $1,448,000 in the current year.  This increase is
due to the interest earned on the approximately $40 million in cash
and cash equivalents currently available to the Company resulting
from the sale of $69 million in convertible subordinated debentures
in December 1995.

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

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

                                      37

<PAGE>

    Net earnings increased by $8.2 million, from $952,000, to $9.1
million, for fiscal years 1995 and 1996, respectively, resulting in
primary earnings per share of $.68 in 1996 ($.66 fully diluted),
compared with primary and fully diluted earnings per share of $0.08
in 1995.

LIQUIDITY AND CAPITAL RESOURCES

    Typically, the Company's principal sources of funds are
operations and bank borrowings.  In December 1995, however, the
Company issued $69 million of convertible subordinated debentures
resulting in net proceeds of $65.4 million.  The Company used these
proceeds to extinguish all outstanding bank debt and is using the
remaining amount to fund expansion of its Commercial Managed Care
Division.

    For the year ended April 30, 1997, $4.4 million in cash was used by 
operating activities.  This represents a decrease in cash provided
by operations of $10.8 million compared with the $6.4 million
provided by operations in the prior year.  The primary cause of
this decrease in cash provided by operations was a $13.2 million
decrease in earnings from $9.1 million in net earnings in 1996 to a
net loss of $4.1 million in 1997.

    The Company's number of days revenue in average outstanding
receivables was 66 days in 1997 and 57 days in 1996.  This increase
results from an increase in accounts receivable related to certain
Commercial Managed Care Division ISOC business ventures, and a new receivable 
related to a large total managed care correctional facilities project in the
Government Managed Care Division.

    Investing activities used $40.7 million in cash during 1997
compared to $400,000 used in 1996.  In 1997, the cash used relates
primarily to the purchase of certain health centers from BCBSNJ on
February 28, 1997.  The cash used during 1996 was due to
acquisitions of property and equipment reduced by proceeds from the
sale of stock in a subsidiary.

    Financing activities provided $8.6 million in 1997 compared to
$41.5 million provided by financing activities during 1996.  In
December 1995 the Company sold $69 million of convertible
subordinated debentures resulting in net proceeds of $65.4 million. 
With these proceeds the Company completely repaid all of the then outstanding
bank debt.  The cash provided by financing activities in the
current year relates to borrowings on a revolving promissory note due in 
August 1997.

    The Company believes that the current cash and cash
equivalents, anticipated cash flow generated by operations and its
borrowing capabilities will be sufficient for known future capital
needs of the Company, other than the completion of the HIP transaction, which
will require additional financing. The Company intends to finance the
consideration payable in connection with the HIP transaction through a
combination of bank borrowings and the public or private issuance of debt or
equity securities, the availability of which will depend on market conditions
and other factors. In addition, there may be further expansion
opportunities which require additional external financing and the
Company may, from time to time, consider obtaining such funds
through the public and private issuance of equity or debt
securities. There can be no assurance that the additional
financing required to complete the HIP transaction or take advantage of 
further expansion opportunities will be available to the Company on acceptable
terms or at all.

                                      38


<PAGE>

IMPACT OF INFLATION

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


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The consolidated financial statements and supplementary data
of the Company are listed in the Index to Financial Statements and
Financial Statement Schedules appearing on page F-1 of this report.


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

    Not applicable.
                                     
                                     
                                 PART III
                                     
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    The information required by this Item 10 is incorporated
herein by reference to the text appearing in Part I, Item 1 of this
report under the caption "Executive Officers of the Registrant,"
and by reference to the Company's definitive proxy statement, which
is expected to be filed with the Securities and Exchange Commission
within 120 days after the close of the Company's fiscal year.


ITEM 11. EXECUTIVE COMPENSATION

    The information required by this Item 11 is incorporated
herein by reference to the information to be set forth under the
caption "Executive Compensation" in the Company's definitive proxy
statement, which is expected to be filed with the Securities and
Exchange Commission within 120 days after the close of the
Company's fiscal year.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT

    The information required by this Item 12 is incorporated
herein by reference to the information to be set forth under the
caption "Security Ownership of Certain Beneficial Owners and
Management" in the Company's definitive proxy statement, which is
expected to be filed with the Securities and Exchange Commission
within 120 days after the close of the Company's fiscal year.

                                      39
 
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    The information required by this Item 13 is incorporated
herein by reference to the information to be set forth under the
caption "Certain Relationships and Related Transactions" in the
Company's definitive proxy statement, which is expected to be filed
with the Securities and Exchange Commission within 120 days after
the close of the Company's fiscal year.


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

FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

    The financial statements and financial statement schedules
required to be filed as part of this report are listed in the Index
to Consolidated Financial Statements elsewhere in this report,
which list is incorporated herein by reference.

EXHIBITS

    The documents required to be filed as exhibits to this report
under Item 601 of Regulation S-K are listed in the Exhibit Index
included elsewhere in this report, which list is incorporated
herein by reference.

REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER

    The Company did not file any reports on Form 8-K during the
quarter ended April 30, 1997. 

                                      40




<PAGE>

                                SIGNATURES
                                     
    Pursuant to the requirements of Section 13 or 15(d) of the Securities 
Exchange Act of 1934, the Registrant has duly caused this report to be signed 
on its behalf by the undersigned, thereunto duly authorized, in the Town of 
Reston, Commonwealth of Virginia, on this 28th day of July, 1997.

                                        PHP HEALTHCARE CORPORATION
                                        (Registrant)

                                        By: /s/ Jack M. Mazur
                                            ------------------------------------
                                            Name:  Jack M. Mazur
                                            Title: President and Chief Executive
                                                   Officer


                            POWER OF ATTORNEY
                                     
                                     
    KNOW ALL MEN BY THESE PRESENTS that each person whose
signature appears below constitutes and appoints Jack M. Mazur,
Anthony M. Picini and Ben Rosenbaum III, and each of them, as his
true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities to sign any and all amendments to
this report, and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of
them, or their or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
 
                                       41



<PAGE>

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

Name                                 Position                         Date


/s/ Jack M. Mazur               President, Chief Executive       July 28, 1997
---------------------------     Officer and Director        
Jack M. Mazur                   


/s/ Michael D. Starr            Senior Executive Vice            July 28, 1997
---------------------------     President and Director
Michael D. Starr                


/s/ Anthony M. Picini           Executive Vice President and     July 28, 1997
---------------------------     Chief Financial Officer 
Anthony M. Picini               (Chief Accounting Officer)              


/s/ William J. Lubin            Executive Vice President and     July 28, 1997
---------------------------     Director                                      
William J. Lubin                


/s/ Robert L. Bowles, Jr.       President, D.C. Chartered        July 28, 1997
---------------------------     Health Plan, Inc. and 
Robert L. Bowles, Jr.           Director 


/s/ Frank L. Provato, M.D.      Executive Vice President,        July 28, 1997
---------------------------     Corporate Medical Director,                   
Frank L. Provato, M.D.          and Director                                  
                               


/s/ George E. Schafer, M.D.
---------------------------      Director                        July 28, 1997
George E. Schafer, M.D.


/s/ Paul T. Cuzmanes
---------------------------      Director                         July 28, 1997
Paul T. Cuzmanes


---------------------------      Director                         July 28, 1997
Joseph G. Mathews


---------------------------     Chairman of the Board            July 28, 1997
Charles P. Reilly               and Director                                  
    


/s/ Donald J. Ruffing
---------------------------     Director                         July 28, 1997
Donald J. Ruffing


---------------------------     Director                         July 28, 1997
John J. McDonnell


---------------------------     Director                         July 28, 1997
Jerry W. Carlton


                                      42

<PAGE>
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                                                               PAGE
                                                                                                             ---------
<S>                                                                                                          <C>
Consolidated Financial Statements:
---------------------------------

Report of Independent Accountants..........................................................................     F-2

Consolidated Balance Sheets at April 30, 1997 and 1996.....................................................     F-4

Consolidated Statements of Operations for the Years Ended April 30, 1997,
  1996 and 1995............................................................................................     F-6

Consolidated Statements of Stockholders' Equity for the Years Ended
  April 30, 1997, 1996 and 1995............................................................................     F-7

Consolidated Statements of Cash Flows for the Years Ended
  April 30, 1997, 1996, and 1995...........................................................................     F-8

Notes to Consolidated Financial Statements.................................................................     F-10

Consolidated Financial Statement Schedule:
-----------------------------------------

Schedule II - Valuation and Qualifying Accounts,
  Years ended April 30, 1997, 1996 and 1995................................................................     F-22 
</TABLE>
 
                                       F-1
<PAGE>
                   DRAFT 07/28/97 7:30 PM
              REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors 
PHP Healthcare Corporation:

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

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

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

                                       Coopers & Lybrand L.L.P.




Washington, D.C.
July 25, 1997





                                       F-2




<PAGE>

                 PHP HEALTHCARE CORPORATION AND SUBSIDIARIES

                         CONSOLIDATED BALANCE SHEETS

                            April 30, 1997 and 1996
                      (In thousands, except share data)
 
<TABLE>
<CAPTION>
ASSETS                                                                                         1997        1996
------------------------------------------------------------------------------------------  ----------  ----------
<S>                                                                                         <C>         <C>
Current assets:
  Cash and cash equivalents...............................................................  $   15,765  $   48,647
  Accounts receivable, net (note 2).......................................................      45,800      46,578
  Pharmaceutical and medical supplies.....................................................       1,460       1,039
  Receivables from officers (note 12).....................................................       4,442       3,263
  Income tax receivable (note 6)..........................................................         882         410
  Deferred income taxes (note 6)..........................................................         539        --
  Other current assets....................................................................       4,273       3,638
                                                                                            ----------  ----------
    Total current assets..................................................................      73,161     103,575
Property and equipment, net (note 3)......................................................      58,444      22,685
Intangible assets, net of accumulated amortization of $1,236 in 1997 and $991 in 1996
  (note 1)................................................................................      14,989       2,942
Deferred income taxes (note 6)............................................................        --           543
Receivables from officers (note 12).......................................................       1,202       1,072
Other assets (note 12)....................................................................       5,508       4,538
                                                                                            ----------  ----------
                                                                                            $  153,304  $  135,355
                                                                                            ----------  ----------
                                                                                            ----------  ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Note payable to bank (note 4)...........................................................  $    9,200  $     --
  Current maturities of notes payable--other (note 4).....................................       1,716         545
  Accounts payable........................................................................      12,036       9,520
  Claims payable--medical services........................................................       8,739       9,154
  Accrued salaries and benefits...........................................................      13,219      11,228
  Deferred income taxes (note 6)..........................................................        --         4,322
  Billings in excess of costs.............................................................       1,068         244
                                                                                            ----------  ----------
    Total current liabilities.............................................................      45,978      35,013
Notes payable--other, net of current maturities (note 4)..................................       3,964       1,921
Convertible subordinated debentures (note 5)..............................................      66,032      65,608
Deferred income taxes (note 6)............................................................       1,274        --
Deferred gain on sale of building (note 11)...............................................         916       1,002
Other liabilities (note 13)...............................................................         759         519
                                                                                            ----------  ----------
    Total liabilities.....................................................................     118,923     104,063
                                                                                            ----------  ----------
Minority interest (note 11)...............................................................       4,303         545
                                                                                            ----------  ----------
Stockholders' equity (notes 7, 8, 11 and 12):
  Preferred stock, $.01 par value, 500,000 shares authorized, none issued.................        --          --
  Common stock, $.01 par value, 25,000,000 shares authorized, 14,369,849 shares issued 
    in 1997 and 14,203,987 shares issued in 1996..........................................         144         142
  Additional paid-in capital..............................................................      33,946      30,529
  Note receivable from sale of stock (note 7).............................................        (900)       (900)
  Retained earnings.......................................................................       3,460       7,548
  Treasury stock, 3,258,485 common shares in 1997 and 1996, at cost.......................      (6,572)     (6,572)
                                                                                            ----------  ----------
    Total stockholders' equity............................................................      30,078      30,747
                                                                                            
Commitments and contingencies (notes 2, 4, 11,12 and 13)..................................  
                                                                                            ----------  ----------
                                                                                            $  153,304  $  135,355
                                                                                            ----------  ----------
                                                                                            ----------  ----------
See accompanying notes to consolidated financial statements.
</TABLE>
                                     F-3



<PAGE>

                 PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
 
                    CONSOLIDATED STATEMENTS OF OPERATIONS
 
                 Years Ended April 30, 1997, 1996, and 1995
                    (In thousands, except per share data)
 
<TABLE>
<CAPTION>
                                                                                  1997        1996        1995
                                                                               ----------  ----------  ----------
<S>                                                                            <C>         <C>         <C>
Revenues.....................................................................  $  232,307  $  203,360  $  204,131
Direct costs.................................................................     189,477     163,582     182,053
                                                                               ----------  ----------  ----------
    Gross profit.............................................................      42,830      39,778      22,078
General and administrative expenses..........................................      30,846      27,173      19,660
Reserve for Medicaid receivables (note 2)....................................       9,822        --          --
Former chairman retirement package (note 9)..................................       2,275        --          --
Restructuring charges (note 10)..............................................       2,550        --          --
                                                                               ----------  ----------  ----------
    Operating income (loss)..................................................      (2,663)     12,605       2,418
Other income (expense):
  Interest expense...........................................................      (5,577)     (3,363)     (2,209)
  Interest income............................................................       2,060       1,448         422
  Miscellaneous income (expense).............................................        (222)         69       1,015
  Gain on sale of subsidiary stock...........................................        --         2,247         --
  Minority interest in (earnings) losses of subsidiaries.....................        (196)        212        (159)
                                                                               ----------  ----------  ----------
    Earnings (loss) before income taxes......................................      (6,598)     13,218       1,487
Income tax expense (benefit).................................................      (2,510)      4,100         535
                                                                               ----------  ----------  ----------
    Net earnings (loss)......................................................  $   (4,088) $    9,118  $      952
                                                                               ----------  ----------  ----------
                                                                               ----------  ----------  ----------
Net earnings (loss) per common share:
  Primary....................................................................  $     (.37) $      .68  $      .08
                                                                               ----------  ----------  ----------
                                                                               ----------  ----------  ----------
  Fully diluted..............................................................  $     (.37) $      .66  $      .08
                                                                               ----------  ----------  ----------
                                                                               ----------  ----------  ----------
Weighted average number of common shares outstanding:
  Primary....................................................................      11,038      13,429      11,226
                                                                               ----------  ----------  ----------
                                                                               ----------  ----------  ----------
  Fully diluted..............................................................      11,038      13,873      11,910
                                                                               ----------  ----------  ----------
                                                                               ----------  ----------  ----------
</TABLE>
 
    See accompanying notes to consolidated financial statements.

                                     F-4



<PAGE>
                  PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
                   YEARS ENDED APRIL 30, 1997, 1996, AND 1995
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                            COMMON STOCK                    NOTE
                                            ADDITIONAL   RECEIVABLE   RETAINED    TREASURY STOCK       TOTAL
                           --------------    PAID-IN     FROM SALE    EARNINGS   ----------------  STOCKHOLDERS'
                           SHARES  AMOUNT    CAPITAL      OF STOCK    (DEFICIT)  SHARES   AMOUNT      EQUITY
                           ------  ------   ----------   ----------   --------   ------   -------  -------------
<S>                        <C>     <C>      <C>          <C>          <C>        <C>      <C>      <C>
Balances at April 30,
1994.....................  14,142   $141     $27,723       $--        $(2,522)   3,990    $(8,046)    $17,296
  Shares issued to
    directors............   --      --            60       --           --         (26)     52            112
  Exercise of stock
    options..............     4     --            14       --           --        --       --              14
  Treasury stock issued
    in acquisition.......   --      --         1,079       --           --        (434)    875          1,954
  Sale of treasury
    stock................   --      --           497        (900)       --        (200)    403         --
  Net earnings...........   --      --         --          --             952     --       --             952
                           ------  ------   ----------     -----      --------   ------   -------  -------------
Balances at April 30,
  1995...................  14,146    141      29,373        (900)      (1,570)   3,330    (6,716)      20,328
  Shares issued to
    directors............    21     --           136       --           --        --       --             136
  Exercise of stock
    options including
    related income tax
    benefits.............    37        1       1,020       --           --         (72)    144          1,165
  Net earnings...........   --      --         --          --           9,118     --       --           9,118
                           ------  ------   ----------     -----      --------   ------   -------  -------------
Balances at April 30,
  1996...................  14,204    142      30,529        (900)       7,548    3,258    (6,572)      30,747
  Exercise of stock
    options including
    related income tax
    benefits.............    76        1       1,018       --           --        --       --           1,019
  Shares issued in
    acquisition..........    90        1       2,399       --           --        --       --           2,400
  Net loss...............   --      --         --          --          (4,088)    --       --          (4,088)
                           ------  ------   ----------     -----      --------   ------   -------  -------------
Balances at April 30,
  1997...................  14,370   $144     $33,946       $(900)     $ 3,460    3,258    $(6,572)    $30,078
                           ------  ------   ----------     -----      --------   ------   -------  -------------
                           ------  ------   ----------     -----      --------   ------   -------  -------------
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-5
<PAGE>
                  PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
 
                     Consolidated Statements of Cash Flows
 
                   Years Ended April 30, 1997, 1996, and 1995 
                                  (In thousands)
 
<TABLE>
<CAPTION>
                                                                                       1997       1996       1995
                                                                                     ---------  ---------  ---------
<S>                                                                                  <C>        <C>        <C>
Cash flows from operating activities:
  Net earnings (loss)..............................................................  $  (4,088) $   9,118  $     952
  Adjustments to reconcile net earnings (loss) to net cash provided by (used in)
  operating activities:
    Gain on sale of subsidiary stock...............................................       --       (2,247)      --
    Minority interest in earnings (losses) of subsidiaries.........................        196       (212)       159
    Depreciation and amortization..................................................      5,372      3,944      3,401
    Increase (decrease) in deferred income taxes...................................     (3,044)     3,955        382
    Other items, net...............................................................        (86)       (83)      (378)
    Changes in operating assets and liabilities, net of effects from purchase/sale
      of subsidiaries:
      Increase in accounts receivable, net.........................................     (5,967)   (14,019)    (7,391)
      Decrease (increase) in income tax receivable.................................       (471)       182      2,741
      Decrease in pharmaceutical and medical supplies..............................        209         50        264
      Increase in other current assets.............................................       (636)    (1,539)      (499)
      Increase in other assets.....................................................     (1,014)    (2,015)    (1,081)
      Increase (decrease) in accounts payable......................................      2,516      3,115     (1,539)
      Increase (decrease) in claims payable........................................       (415)     3,154       (388)
      Increase in accrued salaries and benefits....................................      1,991      3,199        852
      Increase (decrease) in billings in excess of costs...........................        824       (475)    (1,465)
      Increase in other liabilities................................................        240        247         63
                                                                                     ---------  ---------  ---------
        Net cash provided by (used in) operating activities........................    (4,373)      6,374     (3,927)
                                                                                     ---------  ---------  ---------
Cash flows from investing activities:
  Acquisition of property and equipment............................................     (9,601)    (3,383)    (6,217)
  Net proceeds from the sale of property and equipment.............................       --         --       14,045
  Acquisition of subsidiaries, net of cash acquired (note 11)......................    (31,053)      --         (811)
  Disposition of subsidiaries, net of cash conveyed (note 11)......................       --         --       10,790
  Sale of subsidiary stock.........................................................       --        3,000       --
                                                                                     ---------  ---------  ---------
    Net cash provided by (used in) investing activities............................    (40,654)      (383)    17,807
                                                                                     ---------  ---------  ---------
</TABLE>
 
(Continued)

                                      F-6

<PAGE>

                  PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
 
               Consolidated Statements of Cash Flows (Continued)
 
                   Years Ended April 30, 1997, 1996, and 1995 
                                  (In thousands)


<TABLE>
<CAPTION>
                                                                                     1997        1996       1995
                                                                                   ---------  ----------  ---------
<S>                                                                                <C>        <C>         <C>
Cash flows from financing activities:
  Net proceeds (repayments) under revolving promissory notes.....................  $   9,200  $  (20,546) $   6,590
  Borrowings on notes payable....................................................        241       1,918        751
  Repayments on notes payable....................................................       (568)     (5,607)   (20,845)
  Receivables from officers......................................................     (1,309)       (538)    (1,561)
  Issuance of treasury stock to directors........................................       --           136        112
  Proceeds from the exercise of stock options....................................      1,019         507         14
  Capital contributions from other shareholders in subsidiaries..................      3,562        --         --
  Distributions paid to limited partners.........................................       --          --         (133)
  Net proceeds from issuance of convertible subordinated debentures..............       --        65,608       --
                                                                                   ---------  ----------  ---------
    Net cash provided by (used in) financing activities..........................     12,145      41,478    (15,072)
                                                                                   ---------  ----------  ---------
      Net increase (decrease) in cash and cash equivalents.......................    (32,882)     47,469     (1,192)

Cash and cash equivalents, beginning of year.....................................     48,647       1,178      2,370
                                                                                   ---------  ----------  ---------
Cash and cash equivalents, end of year...........................................  $  15,765  $   48,647  $   1,178
                                                                                   ---------  ----------  ---------
                                                                                   ---------  ----------  ---------
Supplemental disclosure of cash flow information:
  Cash paid during the year for:
    Interest.....................................................................  $   4,987  $    1,876  $   1,922
    Income taxes.................................................................        586          42         22

Supplemental disclosure of non-cash investing and financing activities (note 11):
  Sale of treasury stock for note receivable.....................................       --          --    $     900
  Forfeiture of acquisition note and corresponding excess
    cost over fair value of assets acquired......................................       --          --    $      50
</TABLE>
 
    See accompanying notes to consolidated financial statements.

                                      F-7


<PAGE>
                  PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                         APRIL 30, 1997, 1996 AND 1995
 
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
    (a) Organization and Business
 
    PHP Healthcare Corporation and its subsidiaries (the Company) operate in 
a single industry providing health care and related support services 
primarily on a contractual basis to federal, state and local government 
agencies, and commercial entities.
 
    In fiscal 1992, the Company commenced the management of ambulatory 
surgery centers acquired or developed through its majority owned subsidiary, 
Paragon Ambulatory Surgery, Inc. (Paragon). In fiscal 1995, the Company 
acquired the remaining ownership interest in Paragon. Immediately thereafter, 
the Company sold all of its interest in the remaining two ambulatory surgery 
centers managed by Paragon.
 
    In fiscal 1994, the Company acquired the operations of a health 
maintenance organization, D.C. Chartered Health Plan, Inc. (CHP), serving the 
District of Columbia Medicaid and Aid for Families with Dependent Children 
(AFDC) residents.
 
    In November 1995, the Company formed and commenced operating Virginia 
Chartered Health Plan, Inc. (VACHP), a Medicaid HMO operating in select 
markets in Virginia.

    (b) Principles of Consolidation
 
    The consolidated financial statements include the accounts of PHP 
Healthcare Corporation and its majority owned subsidiaries. All significant 
intercompany account balances and transactions have been eliminated in 
consolidation.
 
    (c) Use of Estimates
 
    The preparation of financial statements in conformity with generally 
accepted accounting principles requires management to make estimates and 
assumptions that affect the reported amounts of assets and liabilities and 
disclosure of contingent assets and liabilities at the date of the financial 
statements and the reported amounts of revenues and expenses during the 
reporting period. Actual results could differ from those estimates.
 
    (d) Revenue Recognition
 
    The Company engages in fixed-price, unit-price, 
cost-reimbursement-plus-fee, and fixed-rate-labor hour contracts. Revenue on 
fixed-price contracts and unit-price contracts is recognized using either the 
percentage-of-completion method or as services are performed based on 
contracted rates. The percentage-of-completion method measures revenue 
principally by comparing the cost of services performed to date with the 
total estimated cost of services required through completion applied to the 
entire estimated contract value. Revenue on cost-reimbursement-plus-fee 
contracts is recognized on the basis of direct and indirect costs incurred 
during the period plus the fee earned. Revenue on fixed-rate-labor hour 
contracts is recognized as services are performed based on contractual rates.
 
    Billings in excess of costs represents amounts billed in accordance with 
contract provisions for which future contract services are to be performed.
 
    Costs to complete estimates are reviewed periodically and revised as 
required. Provisions are made for the full amount of anticipated losses, if 
any, on all contracts in the period in which they are first determinable.
 
    Costs under cost-reimbursement contracts with the federal government are 
subject to government audit upon contract completion. Therefore, all contract 
costs, including direct and indirect expenses, are potentially subject to 
adjustment prior to final reimbursement. Management believes that adequate 
provisions for such adjustments, if any, have been made in the accompanying 
consolidated financial statements. All indirect expense recovery rates for 
fiscal year 1990 and prior have been approved by the U.S. government.

                                      F-8

<PAGE>
                  PHP HEALTHCARE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

    Revenue on prepaid Medicaid HMO contracts is recognized based on premiums 
earned during the period in which the HMO is obligated to provide services, 
including estimated amounts relating to final settlements upon contract 
completion, if applicable.
 
    Revenue on prepaid global capitation healthcare services contracts is 
recognized based on premiums earned during the period in which the Company is 
obligated to provide services.
 
    Patient service revenue is reported at the estimated net realizable 
amounts from patients, third party payors, and others for services rendered 
primarily based on contractually determined rates.
 
    The percentages of the Company's revenues derived from individual 
customers comprising more than 10% of consolidated revenues were as follows: 
21%, 24% and 33% for 1997, 1996 and 1995, respectively, from the federal 
government; 20%, 28% and 22% for 1997, 1996 and 1995, respectively, from the 
District of Columbia; 14%, 10% and 17% for 1997, 1996 and 1995, respectively, 
from Blue Cross/Blue Shield of New Jersey.
 
    The Company's net accounts and contract settlement receivables related to 
the individual customers noted above are $5.3 million, $12.1 million, and 
$0.5 million from the federal government, the District of Columbia, and Blue 
Cross/Blue Shield of New Jersey, respectively, at April 30, 1997, and
$6.1 million, $19.1 million, and $8.5 million at April 30, 1996, respectively.
 
    (e) Cash Equivalents
 
    For purposes of the statement of cash flows, the Company considers all 
highly liquid investments with original maturities of 3 months or less to be 
cash equivalents. Cash equivalents consist of money market accounts, 
certificates of deposit and debt instruments amounting to $13.4 million and 
$46.0 million at April 30, 1997 and 1996, respectively.
 
    (f) Property and Equipment
 
    Property and equipment are stated at cost. Depreciation on buildings, 
furniture and fixtures, and equipment is computed on a straight-line or 
accelerated method over estimated useful lives of 3 to 30 years. Leasehold 
improvements and equipment under capital lease are amortized using the 
straight-line method over the shorter of the lease term or estimated useful 
lives of the assets.
 
    Construction in progress consists of all construction related costs, 
excluding land acquisition cost, incurred for property under development. 
Depreciation on these properties commences when construction is complete and 
the assets are placed into service.
 
    Property held for sale, consisting of land and equipment, are stated at 
the lower of cost or net realizable value. Property held for sale is included 
as other current assets.
 
    (g) Intangible Assets
 
    Intangible assets primarily represent the excess of the purchase price of 
acquisitions over the fair value of the net assets acquired. Such excess 
costs are being amortized on a straight-line basis over periods of estimated 
benefit of 10 to 40 years. The Company assesses the recoverability of 
goodwill by determining whether the balance can be recovered through 
estimated undiscounted future operating cash flows of the acquired operation. 
The amount of impairment, if any, is measured based on projected discounted 
future operating cash flows. Intangible assets also represent costs allocated 
to network agreements, physician practices and other specifically 
identifiable assets arising from business acquisitions. These assets are 
amortized on a straight-line basis over their estimated useful lives which 
range from 3 to 25 years.

                                      F-9

<PAGE>

                  PHP HEALTHCARE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
    (h) Precontract Costs and License Acquisition Costs
 
    Recoverable costs directly related to contracts incurred prior to 
commencement of services are capitalized as precontract costs and amortized 
to contract expense over the estimated period of benefit, generally 1 to 2 
years and are included as other current assets. Direct costs associated with 
obtaining health care regulatory licensure are capitalized and amortized over 
the estimated period of benefit, not to exceed 5 years, and are included as 
other assets.
 
    (i) Income Taxes
 
    Deferred tax assets and liabilities are recognized for the estimated 
future tax consequences attributable to differences between the financial 
statement carrying amounts of existing assets and liabilities and their 
respective tax bases. Deferred tax assets and liabilities are measured using 
enacted tax rates in effect for the year in which those temporary differences 
are expected to be recovered or settled. The effect on deferred tax assets 
and liabilities of a change in tax rates is recognized in income in the 
period that includes the enactment date.
 
    (j) Health Care Services Expense and Claims Payable
 
    Medical health care services expense includes claims paid and payable and 
capitation payments paid to certain providers. Claims payable are estimated 
based on actuarial evaluations of providers' claims submitted and include 
provisions for incurred but not reported claims. Health care services expense 
is included as direct costs.
 
    (k) Sales of Subsidiary Stock
 
    Gains or losses related to the sales of stock by a subsidiary are 
included in the statements of operations.
 
    (l) Additional Paid-In Capital
 
    The Company realizes a tax benefit from the exercise of certain stock 
options. This benefit results in a decrease in current income taxes payable 
and an increase in additional paid-in capital.
 
    (m) Treasury Stock
 
    The Company uses the cost method of accounting for treasury stock. Issuances
of treasury stock are relieved from treasury at the then weighted average cost
per share. The difference between the issuance value of the shares and the
weighted average cost per share is recorded as additional paid-in-capital.
 
    (n) Earnings (Loss) Per Common Share
 
    Earnings per common share is computed by dividing net earnings by the
weighted average number of common shares outstanding, which are adjusted for the
assumed exercise of stock options, stock warrants, and convertible debt, if
dilutive. Common share equivalents, which include dilutive stock options and
warrants, are computed using the treasury stock method. Loss per common share is
computed excluding common share equivalents because they are antidilutive. The
convertible debt is computed using the "if converted" method.
 
(2) ACCOUNTS RECEIVABLE
 
    Accounts receivable, net includes the following at April 30 (in thousands):
<TABLE>
<CAPTION>
                                                                                      1997       1996
                                                                                    ---------  ---------
<S>                                                                                 <C>        <C>
    Contract receivables:
      Billed:
        Contracts in process.......................................................  $   9,087  $  10,844
        Final billings on completed contracts......................................        168         --
                                                                                    ---------  ---------
                                                                                        9,255     10,844
                                                                                    ---------  ---------
    Unbilled:
      Incurred costs and accrued profits..........................................     23,596     19,842
      Retainages..................................................................        468        468
                                                                                    ---------  ---------
                                                                                       24,064     20,310
                                                                                    ---------  ---------
      Contract settlement........................................................     21,841     14,397
      Less reserve for Medicaid receivable.......................................     (9,822)        --
                                                                                    ---------  ---------
                                                                                       12,019     14,397
                                                                                    ---------  ---------
</TABLE>
 


                                      F-10
<PAGE>
                  PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<S>                                                                                 <C>        <C>

         Total contract receivables...............................................     45,338     45,551
    Patient service receivables...................................................        226        276
    Other receivables.............................................................        423        945
                                                                                    ---------  ---------
         Total....................................................................     45,987     46,772
    Less allowance for doubtful accounts receivable...............................       (187)      (194)
                                                                                    ---------  ---------
         Accounts receivable, net.................................................  $  45,800  $  46,578
                                                                                    ---------  ---------
                                                                                    ---------  ---------
 

    Substantially all net receivables are expected to be collected within one year.
</TABLE>

    CONTRACT SETTLEMENT RECEIVABLE
 
    CHP, a wholly-owned health maintenance organization, earns substantially all
of its revenue as a prepaid Medicaid contractor with the D.C. Department of
Human Services (DCDHS) providing health care services to Medicaid recipients in
the District of Columbia. The Medicaid program is jointly funded by the District
of Columbia and Health Care Finance Administration (HCFA) of the Department of
Health and Human Services (HHS).
 
    CHP receives interim payments on an estimated basis with a final 
settlement occurring at the end of the contract period for the difference 
between amounts earned and the interim payments received. The final 
settlement process with DCDHS and HCFA is subject to defined upper payment 
limits and requires an audit of CHP's activities. Due to the unique nature of 
these contracts, DCDHS has not undergone a final settlement process for this 
type of contract.
 
    In April 1996, the U.S. Government enacted a law, the effect of which
requires the Company's contracts with DCDHS to be settled retroactively on a
capitated-rate-per-enrollee basis. Prior to the enactment of the law, the terms
of the contracts provided that the final settlements would be on a non-risk
basis, calculated in part on a cost-based methodology.
 
    For several years the Company engaged in on-going good faith discussions 
and negotiations with the District regarding the amounts due for the 1992 
through 1994 contract periods. In February 1997, that process ultimately 
resulted in an agreement to settle these amounts due the Company for $18.9 
million. The agreement was signed and approved by two different departments 
in the District government, but required approval for payment by the 
District's Chief Financial Officer. In early March 1997, through comments in 
the local press, the Company learned that the Chief Financial Officer was not 
going to approve payment. Consequently, in light of the clearly prolonged 
timeframe to resolve the issues surrounding payment of these receivables, and 
in particular to receive a formal response from the District providing 
substantiation for the denial of payment, the Company recognized reserves of 
$9.8 million against its Medicaid receivables from the District of Columbia, 
principally relating to services provided during the 1992 to 1994 contract 
periods. The Company remains committed to pursuing its contractual rights for 
the amounts it is due from the District.
 
    The Company believes that the final settlement of these contracts under the
method prescribed by the new law may result in payments to the Company
materially in excess of the $12.0 million and $14.4 million in receivables
recorded at April 30, 1997 and 1996, respectively, which amounts have been
consistently estimated based on the Company's conservative interpretation of
amounts due based on the methods in effect prior to the enactment of the new
law.
 
(3) PROPERTY AND EQUIPMENT
 
    Property and equipment consist of the following at April 30 (in thousands):
 
<TABLE>
<CAPTION>
                                                              1997       1996
                                                           ---------  ---------
<S>                                                        <C>        <C>
Land.....................................................  $   9,491  $   3,969
Buildings................................................     25,597      9,227
Leasehold improvements...................................     13,385      7,644
Equipment................................................     20,509     13,363
 
                                      F-11
<PAGE>
                  PHP HEALTHCARE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<S>                                                        <C>        <C>
 
Furniture and fixtures...................................      4,958      4,236
Vehicles.................................................        228        182
Construction in progress.................................        126         --
                                                           ---------  ---------
                                                              74,294     38,621
Less accumulated depreciation and amortization...........    (15,850)   (15,936)
                                                           ---------  ---------
Property and equipment, net..............................  $  58,444  $  22,685
                                                           ---------  ---------
                                                           ---------  ---------
</TABLE>
 
    As of April 30, 1997 and 1996, $1.1 million in furniture and fixtures and
related accumulated depreciation of $787,000 and $627,000, respectively, were
financed by capital leases. As of April 30, 1997, $3.5 million in equipment and
related accumulated depreciation of $148,000 were financed by capital leases.

    Depreciation and amortization expense for property and equipment totaled
$4.6 million, $3.7 million and $3.1 million for the years ended April 30, 1997,
1996 and 1995, respectively.
 
(4) NOTES PAYABLE
 
    (a) Note Payable to Bank
 
    The note payable to bank at April 30, 1997 is a revolving promissory note
due August 28, 1997, collateralized by all of the Company's assets, with a
maximum credit line of $12.2 million, and interest due monthly at 1.5% above
LIBOR.
 
    The revolving promissory note contains a letter of credit facility whereby
the bank will issue for the account of the Company, irrevocable stand-by letters
of credit in connection with certain contract performance requirements. The
amount of outstanding stand-by letters of credit reduces the amount of funds
available under the revolving note agreement. Under this agreement, the Company
had issued stand-by letters of credit amounting to approximately $3.0 million
and $1.1 million at April 30, 1997 and 1996, respectively. The revolving
promissory note functions similar to a line of credit with daily advances and
repayments. Accordingly, revolving promissory note activity is presented as a
net amount in the consolidated statements of cash flows.
 
    The Company's credit agreement, as amended, contains certain covenants
which, in addition to other restrictions, limit the amount of capital
expenditures and additional borrowings. The Company is also precluded from the
payment of cash dividends without the bank's approval, and is required to
maintain certain financial ratios.
 
    (b) Notes Payable--Other
 
    The notes payable--other consists of the following at April 30 (in
thousands):
 
<TABLE>
<CAPTION>
                                                                                                   1997       1996
                                                                                                 ---------  ---------
<S>                                                                                              <C>        <C>
Collateralized term note of $1.4 million, interest at 10.5%, monthly payments 
  of principal and interest of $31,000, due October 2000.......................................  $   1,079  $   1,321
Insurance note of $242,000, monthly payments of principal and interest of 
  $25,000, interest at 5.4%, due January 1998..................................................        218         --
Obligations under capital leases, for certain equipment and fixtures, monthly 
  payments of principal and interest of $58,000, interest from 4.1% to 8.4%, 
  due February 2001............................................................................      3,883        645
Convertible promissory notes of $500,000, interest due annually on April 30 at 7%, 
  convertible into common stock at $4.50 per share commencing September 1995, 
  due September 1999 (notes 7(b) and 11(a))....................................................        500        500
                                                                                                 ---------  ---------
Total notes payable--other.....................................................................      5,680      2,466
      Less current maturities..................................................................     (1,716)      (545)
                                                                                                 ---------  ---------
    Notes payable--other, net of current maturities............................................  $   3,964  $   1,921
                                                                                                 ---------  ---------
                                                                                                 ---------  ---------
</TABLE>

                                      F-12

<PAGE>

                  PHP HEALTHCARE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
    Scheduled maturities of notes payable-other at April 30, 1997 are as follows
(in thousands): $1,716 in 1998, $1,183 in 1999, $1,763 in 2000, $1,018 in 2001,
and none in 2002.
 
     The Company's weighted average interest rate on short-term borrowings
outstanding at April 30, 1997 and 1996 was 7.2% and 7.0%, respectively.
 
(5) CONVERTIBLE SUBORDINATED DEBENTURES
 
    On December 18, 1995, the Company completed the sale of $69 million in
convertible subordinated debentures due December 15, 2002. The Company received
$65.4 million in net proceeds after commissions and other offering costs. The
Company used a portion of the proceeds to repay all existing bank debt and
several other notes payable. The debentures bear interest at a rate of 6.5%,
payable on June 15 and December 15, and are convertible into PHP common stock at
a conversion price of $27.25 per share.
 
    The debentures are redeemable at the option of the Company, in whole or in
part, at the redemption prices set forth in the indenture, together with accrued
interest, except that no redemption may be made prior to December 17, 1998. Upon
a repurchase event, each holder of debentures shall have the right, at the
holder's option, to require the Company to repurchase such holder's debenture at
a purchase price equal to 100% of the principal amount thereof, plus accrued
interest. The debentures are unsecured obligations of the Company and are
subordinated to all present and future senior indebtedness of the Company.
 
(6) INCOME TAXES
 
    Income tax expense (benefit) consists of the following at April 30 (in
thousands):
 
<TABLE>
<CAPTION>
                                                       CURRENT    DEFERRED     TOTAL
                                                     -----------  ---------  ---------
<S>                                                  <C>          <C>        <C>
1997:
   Federal........................................   $      --   $  (2,250) $  (2,250)
   State..........................................          --        (260)      (260)
                                                          -----   ---------  ---------
                                                     $      --   $  (2,510) $  (2,510)
                                                          -----   ---------  ---------
                                                          -----   ---------  ---------
1996:
   Federal........................................   $      --   $   3,400  $   3,400
   State..........................................          --         700        700
                                                         -----   ---------  ---------
                                                     $      --   $   4,100  $   4,100
                                                         -----   ---------  ---------
                                                         -----   ---------  ---------
1995:
   Federal........................................   $    (270)  $     752  $     482
   State..........................................         (30)         83         53
                                                         -----   ---------  ---------
                                                     $    (300)  $     835  $     535
                                                         -----   ---------  ---------
                                                         -----   ---------  ---------
</TABLE>

    Income tax expense (benefit) differs from the amounts computed by applying
the U.S. federal income tax rate of 34 percent to earnings (loss) before income
taxes as follows:
 
<TABLE>
<CAPTION>
                                                                                        1997       1996       1995
                                                                                      ---------  ---------  ---------
<S>                                                                                   <C>        <C>        <C>
Computed "expected" tax expense (benefit)...........................................  $  (2,243) $   4,494  $     506
Increase (decrease) in income tax resulting from:
  State income tax expense (benefit), net of federal
    income taxes....................................................................       (261)       434         69
  Non-taxable gain on sale of stock in subsidiary...................................         --       (853)        --
  Amortization of excess cost over fair value of 
    assets acquired.................................................................         51         64        196
  Non-deductible items related to sale of subsidiary................................         --         --      1,489
 
                                      F-13


<PAGE>
                  PHP HEALTHCARE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
   Change in the valuation allowance allocated to 
    income tax expense..............................................................         --         --     (1,707)
   Other............................................................................        (57)       (39)       (18)
                                                                                      ---------  ---------  ---------
                                                                                      $  (2,510) $   4,100  $     535
                                                                                      ---------  ---------  ---------
                                                                                      ---------  ---------  ---------
  Effective income tax rate.........................................................       38.0%      31.0%      36.0%
                                                                                      ---------  ---------  ---------
                                                                                      ---------  ---------  ---------
</TABLE>
 
    The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at April 30,
1997 and 1996, are as follows:
 
<TABLE>
<CAPTION>
                                                                                                 1997       1996
                                                                                               ---------  ---------
<S>                                                                                            <C>        <C>
  Deferred tax assets:
    Accounts receivable, principally due to differing recognition methods........................  $   1,208  $     746
    Property and equipment, principally due to difference in depreciation........................        396        349
    Land and building, due to valuation methods..................................................        230        230
    Accrued employee benefits....................................................................      2,263      1,616
    Accrued contract and sublease losses.........................................................        237        270
    State and federal net operating loss and contribution carryforwards..........................      2,773      2,725
    Alternative minimum tax credit carryforwards.................................................        361        361
                                                                                                   ---------  ---------
      Total gross deferred tax assets............................................................      7,468      6,297
    Less valuation allowance.....................................................................         --         --
                                                                                                   ---------  ---------
      Net deferred tax assets....................................................................  $   7,468  $   6,297
                                                                                                   ---------  ---------
    Deferred tax liabilities:
      Accounts receivable, principally due to differing recognition methods......................  $   5,132  $   9,334
      Property and equipment, principally due to difference in depreciation......................         45         35
      Precontract costs..........................................................................      3,008        688
      Deferred lease obligations.................................................................         18         19
                                                                                                   ---------  ---------
        Total deferred tax liabilities...........................................................  $   8,203  $  10,076
                                                                                                   ---------  ---------
        Net deferred income tax liability........................................................  $     735  $   3,779
                                                                                                   ---------  ---------
                                                                                                   ---------  ---------
</TABLE>
 
    The valuation allowance for deferred tax assets was zero as of April 30, 
1997 and 1996.
 
    As of April 30, 1997, the Company has federal and state net operating 
loss carryforwards of approximately $7.5 million, available to offset future 
federal and state taxable income, expiring principally in fiscal years 2008 
and 2009. Certain of these carryforwards have annual dollar limits. In 
addition, the Company has alternative minimum tax credit carryforwards of 
approximately $360,000 which are available to reduce future federal regular 
income taxes, if any, over an indefinite period.
 
(7) CAPITAL STOCK
 
    (a) Stock Split
 
    On October 16, 1995, the Board of Directors of the Company declared a
two-for-one split of its Common Stock payable on November 20, 1995. This was
effected in the form of a 100 percent stock dividend of 7,073,351 shares to
shareholders on record as of November 1, 1995. Stockholders' equity has been
restated to give retroactive recognition to the stock split for all periods
presented by reclassifying from additional paid-in-capital to common stock the
par value of the additional shares arising from the split. In addition, for all
periods presented, all references in the consolidated financial statements and
footnotes thereto to number of shares, earnings per share amounts, weighted
average shares outstanding, as well as stock option, stock warrant and related
price information have been restated to give retroactive effect to the
two-for-one stock split effected on November 20, 1995.

 
                                      F-14

<PAGE>
                  PHP HEALTHCARE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
    (b) Note Receivable
 
    On September 29, 1994, the Company sold 200,000 shares of treasury stock at
$4.50 per share for a note receivable in the amount of $900,000 to a financial
advisory services firm in which the managing director is also a director of the
Company. The note receivable is collateralized by a pledge and escrow of 300,000
shares of the Company's common stock and by convertible notes payable of
$500,000 by the Company to the same parties.
 
    (c) Treasury Stock
 
    In September 1994, the Company issued 380,000 shares of treasury stock in
exchange for the minority interests in Paragon and issued 54,286 shares of
treasury stock in exchange for 100% of the common stock of J.P. Cole &
Associates. In December 1996, 88,572 additional shares of the Company's treasury
stock which had been issued as future consideration in the J.P. Cole &
Associates acquisition were released from escrow (note 12(d)).
 
    (d) Stock Rights
 
    On April 10, 1992, the Board of Directors of the Company declared a 
dividend distribution of one preferred stock purchase right (the Rights) for 
each share of common stock outstanding at April 20, 1992 or issued 
thereafter. The Board of Directors also designated and reserved 50,000 shares 
of preferred stock as "Series A Junior Preferred Stock". Each Right when 
exercisable, entitles the registered holder to purchase from the Company one 
one-thousandth of a share of Series A Junior Participating Preferred Stock, 
at an exercise price of $42.50, subject to adjustment. The Rights will become 
exercisable after public announcement that, without consent of a majority of 
disinterested members of the Board of Directors, a third party has acquired 
or obtained beneficial ownership of 15% or more of the outstanding Common 
Shares or 10 business days after commencement or public announcement of an 
offer of such an event. The Rights, which do not have voting rights, expire 
in April 2002, and may be redeemed in whole by the Company at $.01 per Right 
at any time prior to their expiration or the acquisition by a third party of 
15% or more of the Company's Common Stock. In the event that the Company is 
acquired in a merger or other business combination transaction or 50% or more 
of its consolidated assets or earning power is sold, provision shall be made 
so that each holder of a Right shall have the right to receive, upon exercise 
thereof at the then current exercise price, that number of shares of common 
stock of the surviving company which at the time of such transaction would 
have a market value of two times the exercise price of the Right. At April 
30, 1997, and 1996, 11,111,364 and 10,945,502 rights are outstanding, 
respectively.
 
    (e) Directors' Retainer Plan
 
    Commencing on May 1, 1993, and thereafter for any fiscal quarter, each
Director of the Company may elect to have the full amount of his retainer paid
in the form of common shares of the Company under this plan. The number of
shares issued is calculated based on the then current market value of the stock.
The Board of Directors of the Company has authorized 100,000 common shares for
issuance under this plan. In April 1996 and October 1994, the Company issued
20,449 shares and 25,778 shares, respectively, to the Board of Directors,
pursuant to the Directors' Plan.
 
    (f) Subsequent Event--Sale of Stock
 
    On May 2, 1997, the Company sold 200,000 shares of stock at $13 per share to
an investor in a private transaction.
 
(8) STOCK OPTIONS AND WARRANTS
 
    In November 1986, the Board of Directors adopted and the shareholders
approved the Company's 1986 Stock Option Plan. Effective May 1, 1991, the Board
of Directors adopted, and effective September 30, 1991 the shareholders
approved, the Amended and Restated PHP Healthcare Corporation 1986 Stock Option
Plan (the Plan).
 
    The Plan provided for the granting of options to purchase a maximum of
1,500,000 shares of the Company's stock to eligible employees and officers of
the Company. In November 1994, the shareholders approved an increase in the
maximum to 3,500,000 shares. The Plan provides for the granting of options which
qualify as incentive stock options as well as non-qualified stock options. All
incentive stock options granted under the Plan must have an exercise price of
not less than 100% of the fair market value of the common stock on the date of
grant, and non-qualified stock options must have an exercise price of not less
than 60% of the fair market value of the common stock on the date of grant. All

 
                                       F-15
<PAGE>
                  PHP HEALTHCARE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
options granted prior to April 30, 1991, under the Plan, may be exercised no
earlier than two years from the date of grant. All options granted since April
30, 1991, are exercisable ratably on an annual basis over two to five years from
the date of grant. Options are canceled 90 days after termination of employment
if not exercised.

    The following is a summary of activity of the stock option plan in 1995,
1996 and 1997:
 
<TABLE>
<CAPTION>
                                                                                                                    Weighted
                                                                                                                    Average
                                                                        SHARES        PRICE         AMOUNT       Exercise Price
                                                                      ----------  -------------  -------------   --------------
<S>                                                                    <C>         <C>            <C>             <C>
    Options outstanding at April 30, 1994...........................   1,494,800  $  1.95-11.25  $  12,936,975      $ 8.65
      Options granted in 1995.......................................   2,697,200      3.04-5.94     11,793,908        4.37
      Options exercised in 1995.....................................       5,000          2.875         14,375        2.88
      Options canceled in 1995......................................   1,342,700     3.04-11.25     12,263,377        9.13
                                                                      ----------  -------------  -------------   --------------
    Options outstanding at April 30, 1995...........................   2,844,300     1.95-11.25     12,453,131        4.38
      Options granted in 1996.......................................     267,000     9.25-27.25      3,977,375       14.90
      Options exercised in 1996.....................................     108,372     1.95-11.25        506,196        4.67
      Options canceled in 1996......................................      15,378     3.04-11.25         83,745        5.45
                                                                      ----------  -------------  -------------   --------------
    Options outstanding at April 30, 1996...........................   2,987,550     3.00-27.25     15,840,565        5.30
      Options granted in 1997.......................................     380,084    11.63-35.00      9,810,648       25.81
      Options exercised in 1997.....................................      75,862     3.03-10.50        504,013        6.64
      Options canceled in 1997......................................      24,676     3.04-34.13        442,970       17.95
                                                                      ----------  -------------  -------------   --------------
    Options outstanding at April 30, 1997...........................   3,267,096  $  3.00-35.00  $  24,704,230      $ 7.56
                                                                      ----------  -------------  -------------   --------------
                                                                      ----------  -------------  -------------   --------------
    Options exercisable at April 30, 1997...........................   1,835,496                                    $ 4.76
                                                                      ----------                                 --------------
                                                                      ----------                                 --------------
</TABLE>
 
    On June 10, 1994, the Stock Option Committee of the Board of Directors
adopted a resolution whereby each holder of outstanding stock options under the
Plan was allowed to surrender outstanding stock options on or before September
15, 1994, in return for an equal number of options with an exercise price equal
to 60% of the fair market value of the Company's common stock on June 10, 1994.
The new options vest ratably in one-third increments over three years and expire
in ten years. A total of 1,315,700 options were surrendered and canceled with a
corresponding issuance of new options with a grant price of $3.04 under the
provisions of this resolution.
 
    The Company has also granted options outside of the Plan. The following is a
summary of stock option activity outside of the Plan in 1995, 1996 and 1997:
 
<TABLE>
<CAPTION>
                                                                                                                       Weighted
                                                                                                                       Average
                                                                              SHARES       PRICE        AMOUNT      Exercise Price
                                                                             ---------  -----------  ------------   --------------
<S>                                                                          <C>        <C>          <C>             <C>
    Options outstanding at April 30, 1994..................................     85,000  $ 3.80-5.50  $    426,750        $5.02
      Options granted in 1995..............................................    324,286         4.50     1,459,287         4.50
      Options exercised in 1995............................................         --           --            --           --
      Options canceled in 1995.............................................         --           --            --           --
                                                                             ---------  -----------  ------------   --------------
    Options outstanding at April 30, 1995..................................    409,286    3.80-5.50     1,886,037         4.61
      Options granted in 1996..............................................         --           --            --           --
      Options exercised in 1996............................................         --           --            --           --
      Options canceled in 1996.............................................         --           --            --           --
                                                                             ---------  -----------  ------------   --------------
    Options outstanding at April 30, 1996..................................    409,286    3.80-5.50     1,886,037         4.61
      Options granted in 1997..............................................         --           --            --           --
      Options exercised in 1997............................................         --           --            --           --
      Options canceled in 1997.............................................         --           --            --           --
                                                                             ---------  -----------  ------------   --------------
    Options outstanding at April 30, 1997..................................    409,286  $ 3.80-5.50  $  1,886,037        $4.61
                                                                             ---------                              --------------
                                                                             ---------                              --------------
    Options exercisable at April 30, 1997..................................    409,286                                   $4.61
                                                                             ---------                              --------------
                                                                             ---------                              --------------
</TABLE>

                                      F-16

<PAGE>
                  PHP HEALTHCARE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
    To the extent any options are granted at an exercise price less than the
fair market value at the date of the grant, the Company records compensation
expense equal to the difference in such prices ratably over the applicable
vesting period. The Company recorded compensation expense of $1.3 million, $1.0
million and $1.1 million in 1997, 1996, and 1995, respectively, in the
consolidated statement of operations relating to options.
 
    The Company has adopted the disclosure-only provisions of Statement of 
Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for 
Stock-Based Compensation." Accordingly, no compensation cost has been 
recognized for the stock option plan, except as required by Accounting 
Principles Board Opinion No. 25 (APB No. 25) "Accounting for Stock Issued to 
Employees", as noted above. Had compensation cost for the Company's stock 
option plan been determined based on the fair value at the grant date for 
awards in 1997 and 1996 consistent with the provisions of SFAS No. 123, the 
Company's net earnings per share would have been reduced to the pro forma 
amounts indicated below:

                                                           1997       1996
                                                           ----       ----

    Net earnings (loss) - as reported (000's)........... $(4,088)    $9,118
    Net earnings (loss) - pro forma (000's)............. $(4,999)    $8,995
    Earnings (loss) per share - as reported............. $  (.37)    $  .68
    Earnings (loss) per share - pro forma............... $  (.45)    $  .67

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

    Dividend Yield......................................       0%        0%
    Expected volatility.................................      60%       60%
    Risk-free Interest Rate.............................    6.03%     6.03%
    Expected Lives......................................  5 years   5 years

    In conjunction with the acquisition of EastWest Research Corporation on
November 1, 1992, the Company issued 20,000 stock warrants at $5.75 per share,
20,000 stock warrants at $7.50 per share, and 20,000 stock warrants at $12.00
per share. In December 1994, 25% of these warrants were canceled. The 45,000
remaining warrants are exercisable in varying percentages after two years and
expire seven years from the date of issuance. The value assigned to these
warrants was immaterial. The number of these stock warrants which are
exercisable at April 30, 1997 is 45,000.
 
(9) RETIREMENT OF FORMER CHAIRMAN
 
    On January 31, 1997, the Company's Founder, Chairman and Chief Executive
Officer, Charles H. Robbins, retired. The Board of Directors provided Mr.
Robbins a retirement agreement that included a one-time $2 million payment and a
payment of $275,000 related to a one-year noncompetition agreement. In
connection with the agreement, on May 2, 1997, Mr. Robbins repaid all
outstanding notes receivable and accrued interest due the Company under the
Senior Executive Loan Program and notes receivable related to certain life
insurance policies. The agreement contains additional clauses which include,
among other things, a "standstill" provision and restrictions on the timing of
any dispositions of Mr. Robbins' holdings in the Company. For the year ended
April 30, 1997, the Company recognized $2.275 million in expense related to this
retirement agreement.
 
(10) RESTRUCTURING CHARGES
 
    During the third quarter ended January 31, 1997, the Company incurred
restructuring charges of $2.55 million. Within a broad restructuring effort,
this charge resulted from two specific decisions made by the Board of Directors.
 
    In November 1996, the Company made the strategic decision to terminate its
long-term care line of business, resulting in restructuring charges of $1.8
million.
 
    Effective January 31, 1997, the Company made the strategic decision to
terminate the Company's facilities development and maintenance function operated
out of the corporate offices through the Company's wholly-owned subsidiary,
Sterling Communities Corporation. Future buildings and facilities management
needs will be fulfilled through outsourced vendor relationships. The Company
incurred a restructuring charge of $750,000 for severance and other termination
costs associated with the elimination of this function.
 
(11) ACQUISITION, DEVELOPMENT, AND SALE OF SUBSIDIARIES
 
    (a) Acquisition of Remaining Interests in Paragon
 
    Effective September 29, 1994, the Company acquired the remaining 49%
ownership interest in Paragon for $125,000 in cash, notes payable of $917,000
and 380,000 shares of the Company's treasury stock. After one year, $500,000 of
the notes payable are convertible into Company stock at a conversion price of
$4.50 per share. The acquisition was accounted for using the purchase method of
accounting and accordingly, the purchase price was allocated to the acquired
share of tangible and identifiable intangible assets and liabilities based on
their respective fair values. The excess cost over the estimated fair value of
the acquired share of net assets approximated $1.9 million. Subsequent to the
acquisition, Paragon was merged into the Company. The results of operations for
Paragon have been included in the consolidated statements from November 5, 1991,
when the Company first purchased the majority interest.

 
                                      F-17
<PAGE>
                  PHP HEALTHCARE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
    (b) Sale of Surgery Centers
 
    Effective September 30, 1994, the Company sold 100% of its interest in two
ambulatory surgery centers for approximately $11.75 million in cash plus the
assumption of related notes payable of approximately $5 million. The related
gain on disposition after the write-off of the excess cost over the estimated
fair value of net assets resulting from the acquisition of the centers is
approximately $340,000 and is included as miscellaneous income in fiscal year
1995.
 
    (c) Sale of Office Building
 
    In July 1994, the Company, through a wholly owned subsidiary, sold an 
office building in Reston, Virginia for approximately $14.8 million. The 
Company leases approximately 55,000 square feet of the building under a 15 
year lease and accordingly, the gain on this sale of approximately $1.2 
million has been deferred and is being amortized ratably over the life of 
this lease. In conjunction with this sale, the Company repaid in full 
non-recourse mortgage notes of approximately $9.4 million.
 
    (d) Sale of Partial Interest in Health Maintenance Organization
 
    On January 31, 1996, Virginia Chartered Health Plan, Inc. (VACHP), a 
wholly owned subsidiary of the Company, sold a 30% interest to University 
Health Services, Inc. (UHS), an affiliate of the Medical College of 
Virginia, for $3.0 million in cash. The Company recognized a gain of $2.2 
million related to this sale, which is presented separately in the 
consolidated statement of operations for the year ended April 30, 1996. Since 
this was a sale of previously unissued VACHP shares the resulting gain is not 
taxable and accordingly, no corresponding provision for income taxes was 
recognized. In conjunction with the sale of stock, VACHP entered into a 
five-year Network Agreement with UHS for inpatient services. The sale of 
stock agreement provides that at the termination of the five-year Network 
Agreement, if not renewed or terminated due to breach, UHS may put or VACHP 
may call the shares purchased at the then fair market value.
 
    (e) Acquisition of Primary Care Facilities and Related Network Services
Agreement
 
    On February 28, 1997, the Company and a real estate investment trust 
subsidiary in which the Company owns a minority interest (the REIT), acquired 
certain primary care facilities located throughout New Jersey formerly 
operated by Blue Cross and Blue Shield of New Jersey, Inc. (BCBSNJ). The 
total purchase price, including transaction costs and other consideration, 
was approximately $44.7 million, of which $22.3 million was paid by the REIT 
and the balance of the other consideration was provided by the Company in the 
form of $8.8 million in cash, $7.7 million in other non-cash consideration, 
$3.5 million in new lease financing, and 90,000 shares of the Company's 
common stock. In addition, in connection with the transaction, the Company 
made a $0.9 million capital contribution to the REIT and advanced the REIT an 
additional $18 million, including $16 million in short-term loans and $2 
million in long-term secured loans until permanent financing is obtained. 
Since the Company funded substantially all of the funds at closing, in 
concert with certain ownership risk provisions of the lease agreements, the 
Company has consolidated the operations of the REIT since February 1997. The 
Company's portion of the cash consideration paid to BCBSNJ and the amounts 
contributed or advanced to the REIT were obtained from a combination of cash 
on hand, equipment lease financing, and borrowings on its bank line of credit.
 
    This acquisition was accounted for using the purchase method of 
accounting and accordingly, the purchase price was allocated to the acquired 
tangible ($32.6 million) and identifiable intangible ($4.4 million) assets 
and assumed liabilities based on their respective fair market values. The 
identifiable intangible assets are being amortized on a straight-line basis 
over periods ranging from 3 to 25 years. The excess cost over the
estimated fair market value of the acquired net assets of approximately
$7.7 million is being amortized on a straight line basis over 25 years. 

    On February 28, 1997, the Company and BCBSNJ replaced an existing 
operating agreement with a network services agreement effective July 1, 1996, 
pursuant to which the Company provides certain health care services to 
enrolled BCBSNJ beneficiaries through global capitation. As a result of the 
new agreement, BCBSNJ paid the Company global capitation from July 1, 1996 
amounting to $9,977,000 of additional revenue for the period July 1, 1996 
through February 28, 1997, recorded in the fourth quarter of fiscal 1997. 
Also, under the network services agreement, the Company was responsible for 
all costs associated with global capitation services for the period July 1, 
1996 through February 1997 resulting in incremental costs of 10,018,000, 
recorded in the fourth quarter of fiscal 1997. Accordingly, the results of 
operations under the network services agreement are included in the 
consolidated financial statements from July 1, 1996.

    If these transactions occurred on May 1, 1995 or 1996, the effect on the 
Company's results of operations and net earnings would have been immaterial. 
Unaudited pro forma consolidated revenues of the Company would have been 
approximately $235 million and $212 million for the years ended April 30, 
1997 and 1996, respectively.

                                      F-18


<PAGE>
                  PHP HEALTHCARE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
    (f) Supplemental Disclosure of Noncash Investing and Financing Activities
 
<TABLE>
<CAPTION>
                                                                                         1997        1996        1995
                                                                                       ---------     -----     ---------
<S>                                                                                    <C>        <C>          <C>
Acquisition of subsidiaries
  Fair value of assets acquired......................................................  $  36,977          --   $   1,343
  Excess of cost over fair value of assets acquired..................................      7,762          --       2,439
  Other non-cash consideration.......................................................     (7,745)         --          --
  Notes payable issued...............................................................     (3,541)         --      (1,017)
  Value of stock and guarantee issued................................................     (2,400)         --      (1,954)
                                                                                       ----------    -------    ---------
  Cash paid..........................................................................     31,053          --         811
  Less cash acquired.................................................................         --          --          --
                                                                                       ----------    -------    ---------
  Acquisition of subsidiaries, net of cash acquired..................................  $  31,053          --   $     811
                                                                                       ----------    -------    ---------
                                                                                       ----------    -------    ---------
Disposition of subsidiaries
  Fair value of assets sold..........................................................         --          --   $   5,964
  Write-off of excess of cost over fair value of assets..............................         --          --      11,130
  Liabilities assumed by purchaser...................................................         --          --      (5,721)
                                                                                       ----------    -------    ---------
  Cash received......................................................................         --          --      11,373
  Less cash conveyed.................................................................         --          --        (583)
                                                                                       ----------    -------    ---------
  Disposition of subsidiaries, net of cash...........................................         --          --   $  10,790
                                                                                       ----------    -------    ---------
                                                                                       ----------    -------    ---------
</TABLE>
 
(12) RELATED-PARTY TRANSACTIONS
 
    (a) Legal and Financial Advisory Services
 
    During 1997, 1996, and 1995, legal services were provided by law firms in
which one director of the Company is a partner. During the years ended April 30,
1997, 1996, and 1995, total billings approximated $321,000, $300,000, and
$257,000, respectively, all of which was expensed in the consolidated statements
of operations. At April 30, 1997, 1996, and 1995 amounts due the law firms
approximated $112,000, $19,000, and $142,000, respectively.
 
    In 1997, 1996, and 1995, financial advisory services were provided the
Company by a firm in which the managing general partner was a director of the
Company, and became Chairman of the Company on February 1, 1997. In addition,
the two partners in the firm were also employees of the Company from September
1994 to September 1995. During 1997, 1996 and 1995, total billings approximated
$233,000, $211,000, and $86,000, respectively. At April 30, 1997, 1996, and
1995, the amounts due the firm were none, $11,000, and none, respectively.
 
    (b) Senior Executive Loan Program
 
    On November 5, 1992, the Board of Directors approved a Senior Executive Loan
Program (the Program). Loans made pursuant to this Program may not exceed three
and one-half times the executive's annual salary. The loans are to be repaid in
one year and bear interest at two percent above the Company's short-term
borrowing rate. The loans are collateralized by Company stock owned by the
senior executive or a second position in stock previously pledged provided there
remains sufficient equity in the stock. As of April 30, 1997 and 1996, a total
of $4.4 and $3.3 million, respectively, was outstanding (including accrued
interest) to five officers under the Program. The current outstanding amounts
have been renewed and are now due March 1998. On May 2, 1997, one loan in the
amount of $1.6 million, including accrued interest, was repaid in full.

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

                                      F-19

<PAGE>
                  PHP HEALTHCARE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
    In accordance with the Board of Directors' approval, the Company makes
premium payments relating to certain insurance policies on behalf of certain
officers of the Company. These advances are owed to the Company and are
collateralized by assignment of the underlying cash surrender value and related
death benefit. During 1994, $650,000 of these amounts were reserved,
representing the excess of the advances over the accumulated cash surrender
value. During 1995, the officers signed promissory notes bearing interest at 7%
and due in April 2002 for the amounts advanced; accordingly, the previously
recorded reserve was eliminated. The elimination of this reserve is included in
miscellaneous income in fiscal year 1995. The promissory notes total $1.2 and
$1.1 million at April 30, 1997 and 1996, respectively. On May 2, 1997, one note
in the amount of $745,000, including accrued interest, was repaid in full.
 
    (d) J.P. Cole & Associates
 
    During fiscal year 1994 the Company entered into an agreement with an
affiliate, J.P. Cole & Associates, which performed exclusive marketing services
for the Company. The operating results of the affiliate have been combined with
the Company's consolidated financial statements since August 1993. One of the
minority shareholders of the affiliate is a director of the Company. A sales and
service agreement with the affiliate provided for the payment of commissions
related to successful marketing efforts as defined.
 
    Effective September 30, 1994, the Company purchased the affiliate for
$100,000 in cash, 142,858 shares of the Company's common stock, and options to
purchase 142,858 shares of the Company's common stock at $4.50 per share. Under
the terms of the purchase agreement, 88,572 shares of the 142,858 shares of the
common stock issued were held in escrow until December 1996 subject to certain
performance conditions. Additionally, options to purchase 54,286 shares of
common stock were immediately exercisable and options to purchase 88,572 shares
of common stock which were subject to certain performance conditions became
exercisable in December 1996.
 
(13) COMMITMENTS AND CONTINGENCIES
 
    (a) Leases as Lessee
 
    The Company has several noncancelable operating leases, principally for
office space and equipment, that expire on various dates over the next fifteen
years. The office leases provide for increased real estate taxes and building
operating costs through annual adjustments. Total rental expense for operating
leases for the years ended April 30, 1997, 1996 and 1995 was approximately $7.2
million, $4.9 million, and $4.3 million, respectively.
 
    Future minimum rental payments under noncancelable operating leases at April
30, 1997, are as follows: $6.9 million in 1998, $5.9 million in 1999, $5.5
million in 2000, $5.1 million in 2001, $4.3 million in 2002, and $18.7 million
thereafter.
 
    At April 30, 1997 and 1996, deferred lease obligations of $680,000 and
$458,000, respectively, presented as other long-term liabilities in the
financial statements, represent the excess of rent expense, recorded on a
straight-line basis, over the cash payments required under certain leases.
 
    (b) Leases as Lessor
 
    The Company leased office space in the building which it owned to third
parties (see note 11(c)). These leases expire on various dates over the next
nine years and provide for increased real estate taxes and building operating
costs through annual adjustments. For the year ended April 30, 1995, total
rental income from operating leases of $450,000 is included in revenues.
 
    The Company also sublets office space at other facilities. These leases
expire on various dates over the next four years and provide for increased real
estate taxes and building operating costs through annual adjustments.
 
    In fiscal year 1995, the Company removed a $540,000 valuation allowance
related to a tenant note receivable because its collectibility was no longer
considered uncertain. Payments on this note commenced in August 1995 for a
period of two years.

                                      F-20
 
<PAGE>

                  PHP HEALTHCARE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

    In July 1994, the Company entered into a sublease agreement as lessor for
approximately 15,700 square feet of office space in Alexandria, Virginia. The
resultant net loss for amounts due under the original lease for this space of
approximately $750,000 is included as miscellaneous expense in fiscal year 1995.
 
    (c) Commitments and Contingencies--Other
 
    THE COMPANY IS A DEFENDANT IN VARIOUS LEGAL ACTIONS.  The principal actions
allege or involve claims under contractual arrangements, employment matters and
medical malpractice with an estimated possible range of loss between zero and
approximately $200,000. The Company does not believe that it has a material,
estimable and probable liability related to these various legal actions and
therefore has not recorded any reserves at April 30, 1997.
 
    The Company maintains medical malpractice insurance coverage which provides
for reimbursement of any claim amounts in excess of $250,000 per incident on
government service division projects and $50,000 per incident on commercial
service division projects.
 
(14) EMPLOYEE BENEFIT PLAN
 
    The Company has a qualified defined contribution savings plan covering
substantially all full-time employees as allowed under Section 401(k) of the
Internal Revenue Code. The plan permits participant contributions and requires a
minimum contribution from the Company, which vests over two years, based on
participants' contribution. Participants may elect to defer up to 12% of their
annual compensation by contributing to the plan. Total expenses related to this
plan for the years ended April 30, 1997, 1996 and 1995 were $476,000, $327,000
and $187,000, respectively.
 
(15) SUBSEQUENT EVENT
 
    On July 24, 1997, the Company announced a strategic alliance with HIP 
Health Plan of New Jersey. The Company will acquire the assets of HIP Health 
Plan of New Jersey's 18 health care centers and its ancillary services, such 
as pharmacy and optical. The Company will provide and manage healthcare 
services for HIP Health Plan of New Jersey's 200,000 members through a 
20-year exclusive global capitation arrangement. These members will have 
access to a consolidated network of more than 3,000 community physicians and 
an additional 10 health care centers in the Company's existing network. The 
consideration payable for these transactions totals approximately $73 
million. The Company intends to finance this transaction through a 
combination of debt and equity.  
                                       








                                      F-21
<PAGE>
                  PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
                                  SCHEDULE II
                       VALUATION AND QUALIFYING ACCOUNTS
 
                   YEARS ENDED APRIL 30, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
                                                             ADDITIONS             DEDUCTIONS
                                                     ---------------------------  ------------  
                                        BALANCE AT    CHARGED TO       CHARGED                       BALANCE
                                        BEGINNING      COSTS AND       TO OTHER    RECEIVABLE        AT END
                                         OF YEAR       EXPENSES        ACCOUNTS   CHARGE-OFFS        OF YEAR
                                       ------------  -------------    ----------  ------------    -------------
<S>                                    <C>           <C>              <C>         <C>             <C>
YEAR ENDED APRIL 30, 1997                                                                       
                                                                                                
Allowance for doubtful accounts                                                                 
  (deducted from accounts                                                                       
  receivable)........................      $194,025  $    --          $   --      $      6,580    $     187,445
Allowance for Medicaid receivables...       --           9,822,025(c)     --           --             9,822,025
                                       ------------  -------------    ----------  ------------    -------------
                                           $194,025  $   9,822,025    $   --      $      6,580    $  10,009,470
                                       ------------  -------------    ----------  ------------    -------------
                                       ------------  -------------    ----------  ------------    -------------
                                                                                                
YEAR ENDED APRIL 30, 1996                                                                       
                                                                                                
Allowance for doubtful accounts                                                                 
  (deducted from accounts                                                                       
  receivable)........................      $138,495  $      55,530    $   --      $    --         $     194,025
Claim allowance......................     1,900,000       --              --         1,900,000(b)      --
                                       ------------  -------------    ----------  ------------    -------------
                                         $2,038,495  $      55,530    $   --      $  1,900,000    $     194,025
                                       ------------  -------------    ----------  ------------    -------------
                                       ------------  -------------    ----------  ------------    -------------
                                                                     
YEAR ENDED APRIL 30, 1995                                            
                                                                     
Allowance for doubtful accounts                                      
  (deducted from accounts                                            
  receivable)........................      $186,170  $      38,132    $   --      $     85,807(a)   $   138,495
Claim allowance......................     1,900,000       --              --           --             1,900,000
Note receivable allowance............       536,879       (536,879)       --           --                --
Allowance for receivables from
  officers...........................       650,000       (650,000)       --           --                --
Deferred tax asset valuation
  allowance..........................     2,160,000     (2,160,000)       --           --                --
                                       ------------  -------------    ----------  ------------    -------------
                                         $5,433,049  $  (3,308,747)   $   --      $     85,807    $   2,038,495
                                       ------------  -------------    ----------  ------------    -------------
                                       ------------  -------------    ----------  ------------    -------------
</TABLE>
 
 
(a) Represents allowance for doubtful accounts receivable for two ambulatory
    surgery centers sold during fiscal year 1995.
 
(b) Claim was settled in September 1995 for $300,000 and the allowance and
    related receivable were charged off.
 
(c) Represents allowance for Medicaid receivables due from the District of
    Columbia for the 1992 to 1994 contract years.
 
                                      F-22
<PAGE>

                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
EXHIBIT NO.   DESCRIPTION
------------  -----------
<C>           <S>
 
   3.1        Amended and Restated Certificate of Incorporation of the Company. (13)
 
   3.2        Bylaws of the Company.
 
   4.1        Rights Agreement between the Company and Riggs National Bank, N.A., as Rights Agent, dated as of
              April 10, 1992. (7)
 
  10.2        Credit Agreement by and between the Company and NationsBank of Virginia, N.A., dated effective 
              March 8, 1994. (10)
 
  10.2A       Second Amendment to Amended and Restated Credit Agreement by and between the Company and NationsBank
              of Virginia, N.A., dated effective April 26, 1995. (10)
 
  10.3        Form of Indemnification Agreements between PHP Healthcare Corporation and each of Charles H.
              Robbins, Michael D. Starr, George E. Schafer, M.D., Jack M. Mazur, Stephen I. Frates, Ronald J.
              Raben, David M. Thomas, Julien J. Lavoie, Paul T. Cuzmanes, George B. Randolph, Charles P. Reilly
              and Donald J. Ruffing. (3)
 
* 10.4        Form of "Split Dollar Agreement" entered into between PHP Healthcare Corporation and each of 
              Charles H. Robbins, Jack M. Mazur and Michael D. Starr. (9)
 
* 10.5        Terms of Senior Executive Loan Program adopted by the Board of Directors November 5, 1992. (9)
 
  10.8        Articles of Merger of PHP Healthcare Corporation and PHP Corporation.(1)
  
  10.10.1     Lease Agreement between PHP Healthcare Corporation and Commerce Park Development Corporation dated
              May 5, 1993 (relating to current executive offices of the Company at 11440 Commerce Park Drive,
              Reston, Virginia.) (10)
 
  10.10.1A    Amendment No. 1 to Lease Agreement dated July 14, 1994. (10)
 
* 10.11       Employment Agreements dated May 1, 1992 by and between the Company and each of Charles H. Robbins,
              Jack M. Mazur and Michael D. Starr. (10)
 
* 10.12       Amended and Restated PHP Healthcare Corporation 1986 Stock Option Plan, as amended. (10)

* 10.12A      PHP Healthcare Corporation 1996 Incentive Plan, filed as Annex A to the Company's 1996
              Definitive Proxy Statement and incorporated herein by reference.


</TABLE>
                               

<PAGE>

<TABLE>
<CAPTION>

<C>           <S>
 
* 10.13       Stock Option Agreement by and between the Company and Julien J. Lavoie, dated as of November 26,
              1990. (5) [Exhibit 10.21]
 
* 10.14       Stock Option Agreement by and between the Company and Anthony M. Picini, dated as of December 4,
              1990. (5) [Exhibit 10.22]
 
 








</TABLE>

                                   

<PAGE>


<TABLE>
<CAPTION>

<C>           <S>

  10.15       Provider Agreement between the District of Columbia Department of Human Services and D.C. Chartered
              Health Plan, Inc. dated September 24, 1991. (10)
 
  10.16       District of Columbia Medicaid Managed Care Program, Provider Agreement dated September 15, 1994 by
              and between the Department of Human Services and D.C. Chartered Health Plan, Inc. (11)
 
* 10.17       Employment Agreement dated September 29, 1994 by and between the Company and John. P. Cole. (12)
              [Exhibit 8]
 
* 10.28       Employment Agreement dated August 1, 1994 by and between the Company and Charles P. Reilly. (12)
              [Exhibit 6]
 
  11          Statement re Computation of Per Share Earnings.
 
  21          List of Subsidiaries.
 
  23          Consent of Independent Accountants.
 
    27          Financial Data Schedule.
</TABLE>
 
------------------------
 
(1) Indicates an exhibit to the Company's Registration Statement on Form S-18
    (Registration No. 33-9372, effective November 20, 1986), bearing the same
    exhibit number, which is incorporated herein by reference.
 
(2) Indicates an exhibit to the Company's 10-K Report (File No. 33-9372) for the
    period ended April 30, 1987, bearing the same exhibit number, which is
    incorporated herein by reference.
 
(3) Indicates an exhibit to the Company's 10-K Report (File No. 0-16235) for the
    period ended April 30, 1989, bearing the same exhibit number, which is
    incorporated herein by reference.
 
(4) Indicates an exhibit to the Company's 10-K Report (File No. 0-16235) for the
    period ended April 30, 1990, bearing the exhibit number, which is
    incorporated herein by reference.
 
(5) Indicates an exhibit to the Company's 10-K Report (File No. 0-16235) for the
    period ended April 30, 1991, bearing the exhibit number in brackets, which
    is incorporated herein by reference.
 
(6) Indicates an exhibit to the Company's 8-K Current Report (File No. 0-16235)
    reporting an event on November 5, 1991, bearing the exhibit number in
    brackets, which is incorporated herein by reference.
 
(7) Indicates an exhibit to the Company's 8-K Current Report (File No. 0-16235)
    reporting an event on April 10, 1992, bearing the same exhibit number, which
    is incorporated herein by reference.
 
(8) Indicates an exhibit to the Company's 10-K Report (File No. 0-16235) for the
    period ended April 30, 1992, bearing the same exhibit number, which is
    incorporated herein by reference.

                                  

<PAGE>
 
(9) Indicates an exhibit to the Company's 10-K Report (File No. 0-16235) for the
    period ended April 30, 1993, bearing the same exhibit number, which is
    incorporated herein by reference.
 
(10) Indicates an exhibit to the Company's 10-K Report (File No. 0-16235) for
     the period ended April 30, 1994, bearing the same exhibit number, which is
     incorporated herein by reference.

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

(12) Indicates an exhibit to the Company's 8-K Report (File No. 0-16235),
     reporting an event on October 3, 1994, bearing the exhibit number in
     brackets, which is incorporated herein by reference.
 
(13) Indicates an exhibit to the Company's 10-Q Report (File No. 0-16235) for
     the period ended January 31, 1997, which is incorporated herein by
     reference.

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