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

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

                                    FORM 10-K

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

For the Fiscal year ended: June 30, 2001

                                       OR

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

For the transition period from                     to
                               -------------------    ------------------
                        Commission file number: 001-12115

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

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

              80 SW 8th STREET
                 SUITE 2350
               MIAMI, FLORIDA                                 33130
  (Address of principal executive offices)                 (Zip Code)

Registrant's telephone number, including area code: (305) 350-7515

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

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

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

     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 amendments to
this Form 10-K. [X]

     Aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant at September 17, 2001 (computed by reference to
the last reported sale price of the registrant's Common Stock on the American
Stock Exchange on such date): $26,437,933.

     Number of shares outstanding of each of the registrant's classes of Common
Stock at September 17, 2001: 39,459,601 shares of Common Stock, $.0001 par value
per share.

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                                     GENERAL

         Unless otherwise indicated or the context otherwise requires, all
references in this Form 10-K to "we," "us," "Continucare" or the "Company"
refers to Continucare Corporation and our consolidated subsidiaries. We disclaim
any intent or obligation to update "forward looking statements." All references
to a Fiscal year are to our fiscal year which ends June 30. As used herein,
Fiscal 2002 refers to fiscal year ending June 30, 2002, Fiscal 2001 refers to
fiscal year ending June 30, 2001, Fiscal 2000 refers to fiscal year ending June
30, 2000 and Fiscal 1999 refers to Fiscal year ending June 30, 1999.

              CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

OPERATING HISTORY

         During Fiscal 2001 we have continued to focus on strengthening our core
business unit by enhancing the services provided to members, strengthening our
medical management capabilities and improving our physician network. During the
first and second quarters of Fiscal 2001, we experienced rapid increases in
medical and pharmacy costs without counterbalancing increases in premium revenue
which negatively impacted earnings. While premium revenue increases began in the
third quarter of Fiscal 2001, the increases have not completely offset the
significant increases in medical and pharmacy costs incurred in previous
quarters. The management team continues to focus on streamlining our operations
and enhancing cost-efficiency.

         Our working capital deficit was approximately $8,188,000 at June 30,
2001. We continue to take steps to improve our cash flow and profitability. We
believe that we will be able to fund all of our capital commitments, operating
cash requirements and satisfy our obligations as they become due from a
combination of cash on hand, expected operating cash flow improvements through
HMO premium increases and advantageous HMO benefit changes, and our credit
facility. However, there can be no assurances that our cash flows and
profitability will be sufficient to fund our operations and satisfy our
obligations as they become due. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 1 of the Consolidated
Financial Statements.

RISKS OF FINANCIAL LEVERAGE

         Our indebtedness has changed substantially since June 30, 2000.
Effective June 30, 2001, we completed a restructuring (the "Fiscal 2001
Restructuring") of our Convertible Subordinated Notes due 2002 (the "Notes").
The Fiscal 2001 Restructuring resulted in the conversion of $6,219,511 of Notes
into common stock and the issuance of a new convertible note in the principal
amount of $912,195 which matures in October 2005. Additionally, holders of the
remaining $3,780,489 of outstanding Notes have agreed to restructure various
terms of the Notes which include, among other things, extending the maturity of
the Notes through October 2005.


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Our total indebtedness accounts for approximately 74% of our total
capitalization as of June 30, 2001. While we believe that we will be able to
service our debt, there can be no assurance to that effect. The degree to which
we are leveraged could affect our ability to service our indebtedness, make
capital expenditures, respond to market conditions and extraordinary capital
needs, take advantage of certain business opportunities or obtain additional
financing. Unexpected declines in our future business, or the inability to
obtain additional financing on terms acceptable to us, if required, could impair
our ability to meet our debt service obligations or fund acquisitions and
therefore, could have a material adverse effect on our business and future
prospects.

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

         Our provider entities have entered into several managed care agreements
including certain capitated arrangements with managed care organizations. Under
capitated contracts, the health care provider typically accepts a pre-determined
amount for professional services per patient per month from the managed care
payor in exchange for our assumption of responsibility for the provision of
medical services for each covered individual. The capitated contracts pass much
of the financial risk of providing care, such as over-utilization of healthcare
services, from the payor to the provider. Under the capitated contracts, we
incur costs based on the frequency and extent of medical services provided and
receive a fixed fee for agreeing to assume responsibility for the provision of
such services. To the extent that the patients covered by such managed care
contracts require more frequent or extensive care than is anticipated, our
operating margins may be reduced and, in certain cases, the revenue derived from
such contracts may be insufficient to cover the costs of the services provided.
In either event, our business prospects, financial condition and results of
operations may be materially adversely affected. Our future success will depend
in part upon our ability to negotiate contracts with managed care payors on
terms favorable to us and upon our effective management of health care costs
through various methods, including competitive pricing and utilization
management. The proliferation of capitated contracts in markets served by us
could result in decreased operating margins. There can be no assurance that we
will be able to negotiate satisfactory arrangements on a capitated basis or that
such arrangements will be profitable to us in the future. In addition, in
certain jurisdictions, capitated agreements in which the provider bears the risk
are regulated under state insurance laws. The degree to which these capitated
arrangements are regulated by insurance laws varies on a state by state basis,
and as a result, we may be limited in certain states, such as Florida, in which
we may seek to enter into or arrange capitated agreements for our affiliated
physicians when those capitated contracts involve the assumption of risk. There
can be no guarantee that the state of Florida will continue to maintain the
position that we are not regulated as an insurer. See "Dependence on Contracts
with Managed Care Organizations."

DEPENDENCE ON CONTRACTS WITH MANAGED CARE ORGANIZATIONS

         Our ability to expand is dependent in part on increasing the number of
managed care patients served by our staff model clinics, primarily through
negotiating additional and renewing existing contracts with managed care
organizations. Our capitated managed care agreements with Foundation Health
Corporation Affiliates ("Foundation") are ten-year agreements with the initial
terms expiring on June 30, 2008, unless terminated earlier for cause. In the
event of termination of the Foundation agreements, we must continue to provide
services on a fee for service basis to a patient with a life-threatening or
disabling and degenerative condition for sixty days as medically necessary. Our
capitated managed care agreements with Humana Medical Plans, Inc. ("Humana") are
ten-year agreements expiring July 31, 2008, unless terminated earlier for cause.
The agreements automatically renew for subsequent one-year terms unless either
party provides 180-days written notice of such party's intent not to renew. In
addition, the Humana agreements may be terminated by the mutual consent of both
parties at any time. Under certain limited circumstances, Humana may immediately
terminate the agreements for cause, otherwise termination for cause shall
require ninety (90) days prior written notice with an opportunity to cure, if
possible. In the event of termination of the Humana agreements, we must continue
to provide or arrange for services on a fee for service basis to any member
hospitalized on the date of termination until the date of discharge or until we
have made


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arrangements for substitute care. In some cases, Humana may provide 30 days
notice as to an amendment or modification of the agreements, including but not
limited to, renegotiation of rates, covered benefits and other terms and
conditions. We maintain other managed care relationships subject to various
negotiated terms. There can be no assurance that we will be able to renew any of
these managed care agreements or, if renewed, that they will contain terms
favorable to us and affiliated physicians. The loss of any of these contracts or
significant reductions in capitated reimbursement rates under these contracts
could have a material adverse effect on our business, financial condition and
results of operations. See "Reliance on Key Customers; Related Party Issues",
"Risks Associated with Capitated Arrangements Including Risk of Over-Utilization
by Managed Care Patients, Risk of Reduction of Capitated Rates and Regulatory
Risks," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Business-Managed Care."

FEE FOR SERVICE ARRANGEMENTS

         Certain of our managed care physicians also render services under a
fee-for-service arrangement on a limited basis, as opposed to capitation, and
typically bill various payors, such as governmental programs (e.g. Medicare and
Medicaid), private insurance plans and managed care plans, for these health care
services provided to their patients. In 1992, the Medicare program began
reimbursing physicians and certain non-physician professionals such as physical,
occupational and speech therapists, clinical psychologists and clinical social
workers, pursuant to a fee schedule derived using a resource-based relative
value scale ("RBRVS"). Reimbursement amounts under the physician fee schedule
are subject to periodic review and adjustment and may affect our revenues to the
extent they are dependent on reimbursement under the fee schedule. There can be
no assurance that payments under governmental programs or from other payors will
remain at present levels. In addition, payors can deny reimbursement if they
determine that treatment was not performed in accordance with the cost-effective
treatment methods established by such payors or was experimental or for other
reasons. Also, fee-for-service arrangements involve credit risks related to the
uncollectibility of accounts receivable.

RISKS RELATED TO INTANGIBLE ASSETS

         As of June 30, 2001, intangible assets, which include goodwill and
other separately identifiable intangible assets, totaled approximately 87% of
our total assets. During Fiscal 2001, these intangible assets were amortized
over periods ranging from 1 to 20 years. During Fiscal 2002, we will adopt
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS No. 141") and Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142"). These standards require
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS No. 141 also specifies criteria that
intangible assets acquired in a purchase method business combination must meet
to be recognized and reported apart from goodwill, noting that any purchase
price allocable to an assembled workforce may not be accounted for separately.
Under SFAS No. 142, goodwill and intangible assets with indefinite useful lives
are no longer amortized, but are reviewed annually, or more frequently if
impairment indicators arise, for impairment. The Company will apply the new
rules on accounting for goodwill and other intangible assets beginning July 1,
2001. Application of the non-amortization provisions of SFAS No. 142 is expected
to result in an increase in pretax income of approximately $944,000 per year. In
the event we engage in future acquisitions that result in the recognition of
additional intangible assets with definite useful lives, our amortization
expense would increase. In certain circumstances, amortization generated by
these intangible assets may not be deductible for tax purposes.

         At the time of or following each acquisition, we evaluate each
acquisition and establish an appropriate useful life for all intangible assets
identified based on the specific underlying facts and circumstances of each such
acquisition. Subsequent to such initial evaluation, we annually, or more
frequently if impairment indicators arise, reevaluate such facts and
circumstances to determine if the related intangible asset continues to be
realizable and if the useful life continues to be appropriate. As the underlying
facts and circumstances subsequent to the date of acquisition can change, there
can be no assurance that we will realize the value of such intangible assets. At
June 30, 2001, we did not consider any of the unamortized balance of intangible
assets to be impaired. Any future determination, based on reevaluation of the
underlying facts and circumstances, that a significant impairment has


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occurred would require the write-off of the impaired portion of unamortized
intangible assets, which could have a material adverse effect on our business
and results of operations.

RELIANCE ON KEY CUSTOMERS; RELATED PARTY ISSUES

         In Fiscal 2001, we generated approximately 36% of our revenue from
Foundation and approximately 60% of our revenues from Humana. The loss of any of
these contracts or significant reductions in reimbursement rates could have a
material adverse effect on us. See "Dependence on Contracts with Managed Care
Organizations".

         Medicare regulations limit cost-based reimbursement for healthcare
charges paid to related parties. A party is considered "related" to a provider
if it is deemed to be under common ownership and/or control with the provider.
One test for determining common control for this purpose is whether the
percentage of the total revenues of the party received from services rendered to
the provider is so high that it effectively constitutes control. Another test is
whether the scope of management services furnished under contract is so broad
that it constitutes control. Although we do not believe any of our contracts are
deemed to be with a related party, it is possible that such regulations or the
interpretation thereof could limit the number of management contracts and/or the
fees attributable to such contracts if a particular client of ours is deemed
"related".

MEDICARE AND MEDICAID REIMBURSEMENT CONSIDERATIONS

                  Our home health agencies ("HHAs") receive reimbursement from
the Medicare and Medicaid programs or payments from insurers, self-funded
benefit plans or other third-party payors. The Medicare and Medicaid programs
are subject to statutory and regulatory changes, retroactive and prospective
rate adjustments, administrative rulings and funding restrictions, any of which
could have the effect of limiting or reducing reimbursement levels. Although we
derived less than 5% of our net patient service revenue directly from the
Medicare and Medicaid programs in Fiscal 2001, a substantial portion of our
managed care revenues are based upon Medicare reimbursable rates. Therefore, any
changes that limit or reduce Medicare reimbursement levels could have a material
adverse effect on our business. Further, significant changes have or may be made
in the Medicare program, which could have a material adverse effect on our
business, results of operations, prospects, financial results, financial
condition or cash flows. In addition, the Congress of the United States may
enact unfavorable legislation, which could adversely affect operations by, for
example, decreasing Medicare reimbursement rates.

THE MEDICARE PROGRAM

         Traditionally, Medicare has reimbursed HHAs for the "reasonable costs"
for services provided to Medicare beneficiaries. Medicare-reimbursed costs are
subject to audit, which may result in a decrease in payments we have previously
received. The Balanced Budget Act of 1997 (the "BBA") enacted in August 1997
contains numerous provisions related to Medicare and Medicaid reimbursement. The
BBA resulted in deep cuts to provider reimbursements. Congress enacted the
Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999 ("BBRA") to
provide necessary relief to various facets of the health care delivery system
through remedies to both problematic policy and excessive payment reductions.
Prior to the BBA, Medicare reimbursed HHAs through a cost-based reimbursement
system that was criticized for providing few incentives to HHAs to maximize
efficiency or control volume. The BBA, as amended by the Omnibus Consolidated
and Emergency Supplemental Appropriations Act of 1999 ("OCESAA"), called for the
development and implementation of a prospective payment system ("PPS") for
Medicare HHA services. The BBA established an interim payment system ("IPS")
until PPS could be implemented. IPS lowered reimbursement limits for home health
visits. The IPS cost limits apply to us for the cost reporting periods beginning
after October 1997 and ending with the implementation of PPS on October 1, 2000.

         The BBA established a 15% reduction (the "Reduction") to the cost
limits and per-patient limits in place as of September 30, 1999. The BBRA
delayed implementation of the Reduction until one year after the implementation
of PPS. The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection
Act of 2000 ("BIPA") amends the BBRA to further delay the Reduction for an
additional year. BIPA also provides for restoration of the full home health
market basket update for home health services for the Centers for Medicare and
Medicaid Services ("CMS") fiscal year 2001 and establishes a special rule for
payment under the PPS for HHA


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services for CMS' fiscal year 2001 based on adjusted prospective payment
amounts. Pursuant to this special rule, BIPA provides that for purposes of
making payments for HHA services for CMS' fiscal year 2001, CMS is required to
(i) with respect to episodes and visits ending on or after October 1, 2000, and
before April 1, 2001, use the final standardized and budget neutral prospective
payment amounts for 60-day episodes and standardized average per visit amounts
for CMS' fiscal year 2001 as published in the final regulations establishing PPS
on July 3, 2000; and (ii) with respect to episodes and visits ending on or after
April 1, 2001, and before October 1, 2001, use such amounts increased by 2.2
percent. Once in effect, the Reduction may impact both Medicare and managed care
reimbursement negatively.

         For cost reporting periods beginning on or after October 1, 1997, the
BBA requires HHAs to submit claims for payment for HHA services only on the
basis of the geographic location at which the service was furnished. In the
regulation issued in July 2000, CMS estimates that the re-distributional effects
on HHAs would range from a positive $428 million for freestanding non-profit
agencies to a negative $363 million for freestanding for-profit agencies in
Fiscal 2001. Any resultant reduction in our cost limits could have a material
adverse effect on our business, financial condition or results of operation.
However, as our HHAs only operate in a single county, we have not been impacted
by these requirements.

         The BBA has also created a consolidated billing requirement pursuant to
which most services provided by a HHA must be billed by the HHA and outside
suppliers may no longer bill the Medicare program directly for services provided
by the supplier under arrangements with the HHA. Instead, the HHA will have to
provide most home health services either directly or pursuant to an arrangement
with an outside supplier where the HHA bills Medicare directly. CMS clarifies
that the law is silent regarding the specific terms of HHA payments to outside
suppliers and does not authorize Medicare to impose any such requirements. To
the extent that our HHAs utilize outside providers for the provision of
applicable home health services, we believe we are in compliance with the
consolidated billing requirements. Additionally, to the extent that we use
outside providers, our cost to obtain such services may be greater than the
reimbursement provided to by the Medicare program, especially if Medicare
reimbursement decreases but the cost of such services to us increases or stays
consistent.

THE MEDICAID PROGRAM

         Pursuant to the Medicaid program, the Federal government supplements
funds provided by the various states for medical assistance to the medically
indigent. Payment for such medical and health services is made to providers in
an amount determined in accordance with procedures and standards established by
state law under federal guidelines. Significant changes have been and may
continue to be made in the Medicaid program, which may have an adverse effect on
our financial condition, results of operations and cash flows. During certain
fiscal years, the amounts appropriated by state legislatures for payment of
Medicaid claims have not been sufficient to reimburse providers for services
rendered to Medicaid patients. Failure of a state to pay Medicaid claims on a
timely basis may have an adverse effect on our cash flow, results of operations
and financial condition.

MANAGED CARE ORGANIZATIONS

         Payments per visit from managed care organizations typically have been
lower than cost-based reimbursement from Medicare and reimbursement from other
payors for nursing and related patient services. In addition, payors and
employer groups are exerting pricing pressure on home health care providers,
resulting in reduced profitability. Such pricing pressures could have a material
adverse effect on our business, results of operations, prospects, financial
results, financial condition or cash flows.

ADDITIONAL PAYOR CONSIDERATIONS

         Congress and the State Legislature may propose legislation altering the
financing and delivery of healthcare services provided by us (beyond the changes
made by the BBA). It is difficult to predict the ultimate effect that any future
legislation will have on us.

          Medicare retrospectively audits all reimbursements paid to
participating providers, including those now or previously managed and/or owned
by us, including without limitation, hospital outpatient departments, CORFs,


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ORFs, and HHAs. Accordingly, at any time, we could be subject to overpayment
notices for Medicare reimbursement the Company has previously received and
refund obligations for prior period cost reports that have not been audited and
settled as of the date hereof.

INCREASED SCRUTINY OF HEALTHCARE INDUSTRY

         The healthcare industry has in general been the subject of increased
government and public scrutiny in recent years, which has focused on the
appropriateness of the care provided, referral and marketing practices and other
matters. Increased media and public attention has recently been focused on the
outpatient services industry in particular as a result of allegations of
fraudulent practices related to the nature and duration of patient treatments,
illegal remuneration and certain marketing, admission and billing practices by
certain healthcare providers. The alleged practices have been the subject of
federal and state investigations, as well as other legal proceedings. There can
be no assurance that we will not be subject to federal and state review or
investigation from time to time.

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

GOVERNMENT REGULATION

         The state in which we currently operate passed new legislation
effective October 2, 2001, which will require us to register with the state our
medical centers as clinics. This registration may also require us to make
changes in our policies and practices in order to meet the requirements for
obtaining registration as clinics. The new legislation also places some
restrictions on reimbursement for certain services, such as magnetic resonance
imaging, when payable by personal injury payors. Because such services represent
a very small portion of our medical services revenue, we do not expect the new
legislation to have an impact on our revenues. We have begun the process of
registering each of our medical centers as clinics with the state of Florida.
Failure to obtain or maintain registration as clinics could have a material
adverse effect on our operations.

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

         Federal "Fraud and Abuse" Laws and Regulations. The Anti-Kickback Law
makes it a criminal felony offense to knowingly and willfully offer, pay,
solicit or receive remuneration in exchange for referrals of patients, or in
order to induce business, for items or services for which reimbursement is
payable whole or in part by the Medicare or Medicaid programs. In addition to
criminal penalties, including fines of up to $25,000 and five (5) years
imprisonment, violations of the Anti-Kickback Law can lead to civil monetary
penalties of up to $50,000 for each violation, plus up to treble damages, and
exclusion from Medicare, Medicaid and certain other state and federal health
care programs. The scope of prohibited payments in the Anti-Kickback Law is
broad and includes economic arrangements involving hospitals, physicians and
other health care providers, including joint ventures, space and equipment
rentals, purchases of physician practices and management and personal services
contracts. CMS has published regulations, which describe certain "safe harbor"
arrangements that will not be deemed to constitute violations of the
Anti-Kickback Law. Because the regulations describe safe harbors and do not
purport to describe comprehensively all lawful or unlawful economic arrangements
or other relationships between health care providers and referral sources, the
failure of an arrangement to meet the requirements of a safe harbor is not a per
se violation of the Anti-kickback Law.


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         We believe that our contracts with providers, physicians and other
referral sources are in material compliance with the Anti-Kickback Law and will
continue to make every effort to comply with the Anti-Kickback Law. However, the
Office of the Inspector General of the Department of Health and Human Services
("HHS"), the Department of Justice and other federal agencies interpret these
fraud and abuse provisions liberally and enforce them aggressively. While we
believe that we are in material compliance with such laws, there can be no
assurance that our practices, if reviewed, would be found to be in full
compliance with such laws, as such laws ultimately may be interpreted. It is our
policy to monitor our compliance with such laws and to take appropriate actions
to ensure such compliance.

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

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

         Restrictions on Physician Referrals. The federal Anti-Self Referral Law
(the "Stark Law") prohibits certain patient referrals by interested physicians.
Specifically, the Stark Law prohibits a physician, or an immediate family
member, who has a financial relationship with an entity, from referring Medicare
or Medicaid patients with limited exceptions, to that entity for the following
"designated health services": clinical laboratory services, physical therapy
services, occupational therapy services, radiology or other diagnostic services,
durable medical equipment and supplies, radiation therapy services and supplies,
parenteral and enteral nutrients, equipment and supplies, prosthetics, orthotics
and prosthetic devices, home health services, outpatient prescription drugs, and
inpatient and outpatient hospital services. A financial relationship is defined
to include an ownership or investment in, or a compensation relationship with,
an entity. The Stark Law also prohibits an entity receiving a prohibited
referral from billing the Medicare or Medicaid programs for any services
rendered to a patient. The Stark Law contains certain exceptions that protect
parties from liability if the parties comply with all of the requirements of the
applicable exception. The sanctions under the Stark Law include denial and
refund of payments, civil monetary penalties and exclusions from the Medicare
and Medicaid programs.

         On January 4, 2001, HHS issued part one of final regulations
interpreting the Stark Law. It is unclear when part two will be issued. Part one
of the final regulations becomes effective on January 4, 2002. We are currently
reviewing the part one final regulations and plan to implement any changes to
our relationships with physicians as necessary prior to the effective date. We
believe that we are presently in material compliance with the Stark Law and will
make every effort to comply with the Stark Law. However, there can be no
assurances that we will not be alleged to have violated the Stark Law, and if an
adverse determination is reached, whether any sanction imposed would have a
material adverse effect on our results of operations, financial condition or
cash flows.

         Corporate Practice of Medicine Doctrine. Many states prohibit business
corporations from providing, or holding themselves out as a provider of medical
care. Possible sanctions for violation of any of these restrictions or
prohibitions include loss of licensure or eligibility to participate in
reimbursement programs (including Medicare and Medicaid), asset forfeitures and
civil and criminal penalties. These laws vary from state to state, are often
vague and loosely interpreted by the courts and regulatory agencies. We
currently operate only in Florida, which does not have a corporate practice of
medicine doctrine with respect to the types of physicians employed by or that
contract with us at this time. There, however, can be no assurance that such
laws will not change or ultimately be interpreted in a manner inconsistent with
our practices, and an adverse interpretation could have a material adverse
effect on our results of operations, financial condition or cash flows.


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<PAGE>   9

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

GEOGRAPHIC CONCENTRATION

         All of our net revenues in Fiscal 2001 were derived from our operations
in Florida. It is anticipated that in Fiscal 2002 our net revenue will continue
to be derived from our operations in Florida. Unless and until our operations
become more diversified geographically (as a result of acquisitions or internal
expansion), adverse economic, regulatory, or other developments in Florida could
have a material adverse effect on our financial condition or results of
operations. In the event that we expand our operations into new geographic
markets, we will need to establish new relationships with physicians and other
healthcare providers. In addition, we will be required to comply with laws and
regulations of states that differ from those in which we currently operate, and
may face competitors with greater knowledge of such local markets. There can be
no assurance that we will be able to establish relationships, realize management
efficiencies or otherwise establish a presence in new geographic markets.

DEPENDENCE ON PHYSICIANS

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

CONTROL BY EXISTING SHAREHOLDER

         Dr. Phillip Frost, Vice Chairman of the Board of Directors, and
entities affiliated with Dr. Frost, own approximately 50.4% of our outstanding
common stock as of the date of this filing, assuming conversion of stock
options and the convertible promissory note. See "Certain Relationships and
Related Transactions." Based on Dr. Frost's stock ownership, the stock ownership
of his affiliates and the conversion of stock options and the convertible
promissory note, Dr. Frost could have the ability to control most corporate
actions requiring shareholder approval, including the election of directors.

COMPETITION

         The healthcare industry is highly competitive. We compete with several
national competitors and many regional and national healthcare companies, some
of which have greater resources than we do. Competition is


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<PAGE>   10

generally based upon reputation, price and the ability to offer management
expertise, financial benefits and other benefits for the particular provider in
a quality and cost-effective manner. The pressure to reduce healthcare
expenditures has emphasized the need to manage the appropriateness of health
services provided to patients.

INSURANCE

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

UPGRADE OF MANAGEMENT INFORMATION SYSTEMS; TECHNOLOGICAL OBSOLESCENCE

         Our operations are heavily dependent on our management information
systems. Both the software and hardware used by us in connection with the
services we provide have been subject to rapid technological change. Although we
believe that our technology can be upgraded as necessary, the development of new
technologies or refinements of existing technology could make our existing
equipment obsolete. Although we are not currently aware of any pending
technological developments that would be likely to have a material adverse
effect on our business, there is no assurance that such developments will not
occur.

                                  * * * * * * *

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

                                     PART I

ITEM 1.           BUSINESS

GENERAL

         We are a provider of outpatient healthcare and home healthcare services
in Florida. Our Managed Care Division, through various managed care agreements
and capitated arrangements, is responsible for providing primary care medical
services (the "Primary Care Services") to approximately 16,200 patients at June
30, 2001. The various managed care agreements and capitated arrangements under
which we provide medical services to our patients require that in exchange for a
predetermined amount, per patient per month, we assume responsibility to provide
and pay for all of our patients' medical needs. Our Home Health Division
provides home healthcare services to recovering, disabled, chronically ill and
terminally ill patients in their homes.

HISTORICAL DEVELOPMENT OF BUSINESS

         On August 9, 1996, a subsidiary of Zanart Entertainment Incorporated
("Zanart") was merged into Continucare Corporation (the "Merger"), which was
incorporated on February 1, 1996 as a Florida corporation ("Old Continucare").
As a result of the Merger, the shareholders of Old Continucare became
shareholders of Zanart, and Zanart changed its name to Continucare Corporation.
During Fiscal 1997, our business focused on managing and providing services to
behavioral health programs in hospitals and freestanding centers. We assigned
these contracts in Fiscal 1998 and began to develop our current strategy, which
currently consists of staff model clinics, Independent Practice Associations
("IPAs") and Home Health Agencies.


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<PAGE>   11

RECENT DEVELOPMENTS - DEBT RESTRUCTURING

         Effective June 30, 2001, we completed a restructuring (the "Fiscal 2001
Restructuring") of our Convertible Subordinated Notes due 2002 (the "Notes"). In
a private transaction with certain noteholders, Frost Nevada Limited Partnership
("Frost Nevada"), an entity controlled by Dr. Phillip Frost, vice-chairman of
our board of directors, purchased Notes in the principal amount of $6,219,511
(the "Purchased Debt") and 9,640,244 shares of our common stock. Frost Nevada
immediately exchanged the Purchased Debt for (i) 6,219,511 shares of our common
stock and (ii) a new convertible note (the "New Note") in the principal amount
of $912,195, with an October 31, 2005 maturity date, interest at 7% due
semi-annually and convertible into shares of common stock at a $1.00 conversion
price.

         Holders of the remaining $3,780,489 of outstanding Notes have agreed to
restructure various terms of the Notes, which include, among other things, the
following: (i) adding interest of $132,317 which accrued through April 30, 2001
to the outstanding principal balance; (ii) extending the maturity date through
October 2005; (iii) reducing the conversion rate from $2.00 to $1.00; (iv)
providing for quarterly interest payments; (v) adding a call provision if the
outstanding common stock trades at or above $2.50 per share for twenty trading
days and if the common stock trades an average of at least 100,000 shares per
week for a four week period; and (vi) curing all prior defaults under the Notes.

INDUSTRY OVERVIEW

         We believe the following three principal industry elements have created
an opportunity for us: (i) the continued penetration of the managed care market;
(ii) the highly fragmented nature of the delivery of outpatient services; and
(iii) the shift in the provision of healthcare services from the hospital to
lower cost outpatient locations and the home.

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

         HIGHLY FRAGMENTED MARKET. The highly fragmented nature of the delivery
of outpatient services has created an inefficient healthcare services
environment for patients, payors and providers. Managed care companies and other
payors must negotiate with multiple healthcare services providers, including
physicians, hospitals and ancillary services providers, to provide geographic
coverage to their patients. Physicians who practice alone or in small groups
have experienced difficulty negotiating favorable contracts with managed care
companies and have trouble providing the burdensome documentation required by
such entities. In addition, healthcare service providers may lose control of
patients when they refer them out of their network for additional services that
such providers do not offer. We intend to continue affiliating with physicians
who are sole practitioners or who operate in small groups to staff and expand
our network, which should make us a provider of choice to managed care
organizations.

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


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<PAGE>   12

BUSINESS STRATEGY

         We intend to leverage the current industry dynamics by: (i) increasing
our managed care revenue; (ii) maintaining a profitable physician network; (iii)
implementing our staff model in additional selected strategic markets; and (iv)
maintaining and expanding our Home Healthcare Division.

         INCREASING MANAGED CARE REVENUE. Our core business is comprised of our
established network of staff model clinics from which we provide primary care
services to our patients and to the public at large. By securing additional and
expanding existing managed care contracts with the leading managed care
companies in Florida, we believe that we will be able to increase our managed
care enrollments. We believe that we have been successful in developing managed
care relationships due to our network of quality physicians, the provision of a
range of healthcare services, and our many locations.

         MAINTAINING PHYSICIAN NETWORK. The physician network is the platform of
our delivery system. We may expand the profitability of our physician network
by: (i) adding physicians to our IPA; (ii) terminating relationships with
physicians of our IPA that continue to operate unprofitably and/or (ii) hiring
physicians to work in our company-owned physician practices and clinics.

         IMPLEMENTING STAFF MODEL IN SELECTED MARKETS. We have successfully
implemented our staff model in south and central Florida, and intend to
selectively expand the model in other appropriate markets, primarily within
Florida, by tailoring our services and facilities to the needs of individual
markets. At June 30, 2001, we operated fifteen staff model clinics in south and
central Florida.

         MAINTAINING HOME HEALTHCARE DIVISION. The home healthcare industry
continues to undergo major restructuring in response to federal legislative
enactments. Significant changes in reimbursement occurred in October 2000.
See--"Cautionary Note Regarding Forward-Looking Statements"; "Additional Payor
Considerations"; "Increased Scrutiny of Healthcare Industry"; and "Government
Legislation." Although we have taken steps to address these scheduled
reimbursement changes, there can be no assurance that these reimbursement
changes will not have a material adverse effect on our business.

BUSINESS MODEL

         Our core business model consists of three areas: staff model clinics,
IPAs and HHAs. We provide these medical services to patients through our
employee physicians, affiliated IPA physicians, nurses, physical therapists and
nurse aides. Additionally, we provide management and administrative services to
both our employee physicians and to the physicians that are affiliated with us.
See "Medicare and Medicaid Reimbursement Considerations."

         STAFF MODEL CLINICS. Our staff model clinics are medical centers where
physicians, who are our employees, act as primary care physicians practicing in
the area of general, family and internal medicine. Our revenue is generated
through either a percentage of premium monthly capitated fee arrangement with an
HMO or a fee for service arrangement. The monthly fee arrangement is based upon
a negotiated percentage of premium which is related to either Medicare, Medicaid
or a commercial medical insurance program.

         IPAS. We have contracted with various physicians and physician
practices, on an independent contractor basis, who currently provide or are
qualified to provide medical services to our IPA members. We pay the physicians
a capitated fee for providing the services and assume a portion of the financial
risk for the physician's performance related to our IPA members. In addition to
providing certain administrative services to the physicians, we also provide
utilization assistance. Like the staff model clinics, the monthly fee
arrangement is based upon a negotiated percentage of premium, which is related
to either Medicare, Medicaid or a commercial medical insurance program.

         HOME HEALTH AGENCIES. Our home health services include four HHAs, two
located in Miami-Dade county and two located in Broward county. These agencies
provide comprehensive nursing, physical therapy, and nurse's aides to
individuals in their home who are disabled, elderly or recovering from a
debilitating illness, accident or


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<PAGE>   13

surgery. Two of the agencies are compensated by Medicare and Medicaid in
accordance with a pre-determined rate schedule. The remaining agencies are
private license HHAs. At June 30, 2001, the private license HHA servicing
Miami-Dade county was not operational.

INTEGRATED OUTPATIENT HEALTHCARE

         We are a provider of integrated outpatient healthcare. We have
established a network of physician practices as the primary caregiver to our
patients and to the public at large and we also provide home health services.

         Office and Physician/Health Center Practices. Since commencing our
operations in 1996, we have expanded our physician network through the
acquisition of physician practices, employment of new physicians and
affiliations with physicians through our IPA. As of June 30, 2001, we operated
fifteen staff model health center clinics, employed or contracted with
approximately 55 physicians all of whom are located in Florida and provided
services to approximately 16,200 patients under capitated managed care contracts
at June 30, 2001.

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

         Home Healthcare. We provide home healthcare services to recovering,
disabled, chronically ill and terminally ill patients in their homes. Typically,
a service care provider (such as a registered nurse, home health aide, therapist
or technician) will visit the patient daily, several times a week or the patient
may require around-the-clock care. Treatment may last for several weeks, several
months or the remainder of the patient's life. The services provided by us
include skilled nursing, physical therapy, speech therapy, occupational therapy,
medical social services and home health aide services. Reimbursement sources for
the home health services provided by us include Medicare, Medicaid, commercial
insurers and private individuals.

ADMINISTRATIVE SUPPORT OPERATIONS

         Administrative Functions. We enhance administrative operations of our
physician practices by providing management functions such as payor contract
negotiations, credentialing assistance, financial reporting, risk management
services, access to lower cost professional liability insurance and the
operation of integrated billing and collection systems. We believe we offer
physicians increased negotiating power associated with managing their practice
and fewer administrative burdens, which allows the physician to focus on
providing care to patients.

         Employment and Recruiting of Physicians. We generally enter into
multiple-year employment agreements that contain 90-day termination clauses with
the physicians in the practices purchased by us. These agreements usually
provide for base compensation and benefits and may contain incentive
compensation provisions based on quality indicators. The recruitment process
includes interviews and reference checks incorporating a number of credentialing
and competency assurance protocols. Our physicians are generally either board
certified or board eligible.

         Contract Negotiations. We assist our physicians in obtaining managed
care contracts. We believe that our experience in negotiating and managing risk
contracts enhance our ability to market the services of our affiliated
physicians to managed care payors and to negotiate favorable terms from such
payors. The managed care contracts are held, managed and administered by one of
our wholly-owned subsidiaries. We also perform quality assurance and utilization
management under each contract on behalf of our affiliated physicians.

         Information Systems. We support freestanding systems for our physician
practices to facilitate patient scheduling, patient management, billing,
collection and provider productivity analysis. We have upgraded these
information systems as necessary during Fiscal 2001. Although we are not
currently aware of any pending additional technological developments that will
likely require additional upgrades, there is no assurance that such


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<PAGE>   14

developments will not occur. See "Risk Factors -- Upgrade of Management
Information Systems; Technological Obsolescence."

MANAGED CARE

         Our strategy is to increase enrollment by adding new payor
relationships and new providers to the existing network and by expanding the
network into new geographic areas where the penetration of managed healthcare is
growing. We believe new payor and provider relationships are possible because of
our ability to manage the cost of health care without sacrificing quality.
During Fiscal 2001, substantially all of the revenues from the Managed Care
Division were generated under a percentage of premium monthly capitated fee
arrangement with HMOs.

         Contracts with Payors. Contracts with payors generally provide for
terms of one to ten years, may be terminated earlier upon notice for cause or
upon renewal and in some cases without cause. Additionally the contracts are
subject to renegotiation of capitation rates, covered benefits and other terms
and conditions. Pursuant to payor contracts, the physicians provide covered
medical services and receive capitation payments from payors for each enrollee
who selects one of our network physicians as his or her primary care physician.
To the extent that patients require more care than is anticipated or require
supplemental medical care that is not otherwise reimbursed by payors, aggregate
capitation payments may be insufficient to cover the costs associated with the
treatment of patients. We maintain stop-loss insurance coverage, which mitigates
the effect of occasional high utilization of health care services. If revenues
are insufficient to cover costs or we are unable to maintain stop-loss coverage
at favorable rates, our business results of operations and financial condition
could be materially adversely affected. The loss of significant payor contracts
and/or the failure to regain or retain such payor's patients or the related
revenues without entering into new payor relationships could have a material
adverse effect on our business results of operations and financial condition.

         Our capitated managed care agreements with Foundation are ten-year
agreements with the initial term expiring on June 30, 2008, unless terminated
earlier by Foundation for cause. In the event of termination of the Foundation
agreements, we must continue to provide services on a fee for service basis to a
patient with a life-threatening or disabling and degenerative condition for
sixty days as medically necessary. The agreements are automatically renewed for
another five-year period unless notice by either party is provided 120 days in
advance of the expiration date. Any negotiation must be completed 90 days prior
to the expiration of the term. Foundation can terminate the agreements with
respect to one or more benefit programs; however, we may only terminate the
agreements in their entirety. Foundation may also terminate its agreements with
us for cause upon thirty (30) days written notice of a material breach; provided
however, that we are afforded an opportunity to cure such breach. However, if
the breach is one that cannot reasonably be corrected within thirty (30) days,
the agreements will not be terminated if Foundation determines that we are
making substantial and diligent progress toward correcting the breach.
Foundation may also, in a limited number of circumstances, immediately terminate
its agreements with us. Immediate termination is allowable upon: (1) our
documented violation of any applicable law, rule or regulation; (2) our
documented failure to assist Foundation in upholding the terms, conditions or
determinations of any Utilization Management Program or Quality Management
Program or other Benefit Program Requirements; or (3) Foundation's determination
that the health, safety or welfare of any member may be in jeopardy if the
Agreement is not terminated. Foundation may also terminate the agreements,
effective the first day of the following month, upon at least three (3) business
days written notice prior to the end of the month, notifying us of our failure
to pay any capitation payment which we have received from Foundation, either to
the applicable provider or back to Foundation, during the period between our
receipt of the compensation from Foundation and the last business day of the
same month. Under the Foundation agreements, Foundation may, subject to our
mutual agreement, amend the Medicare compensation rates under the contract with
us upon thirty (30) days written notice. For all other purposes, Foundation may
upon twenty (20) days written notice amend the contracts, provided that we do
not object to the amendment within that time frame.

         Effective March 31, 2001, we negotiated an amendment to our
professional provider agreement with Foundation (the "2001 Amendment"). The 2001
Amendment eliminated the medical claims liability incurred by the IPA through
March 31, 2001 and reduced other liabilities to Foundation by $1,000,000. The
2001 Amendment also


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<PAGE>   15

terminated our association with certain physician practices effective May 31,
2001, which represented approximately 70% of the IPA's membership at that time.

         Our capitated managed care agreements with Humana are ten-year
agreements expiring July 31, 2008, unless terminated earlier for cause. The
agreements shall automatically renew for subsequent one-year terms unless either
party provides 180-days written notice of its intent not to renew. In addition,
the Humana agreements may be terminated by the mutual consent of both parties at
any time. Under certain limited circumstances, Humana may immediately terminate
the agreements for cause, otherwise termination for cause shall require ninety
(90) days prior written notice with an opportunity to cure, if possible.
Immediate termination is allowable if Humana reasonably determines that: (1) we
and/or any of our physician's continued participation in the agreements may
affect adversely the health, safety or welfare of any Humana member; (2) we
and/or any of our physician's continued participation in the agreements may
bring Humana or its health care networks into disrepute; (3) in the event of one
of our doctor's death or incompetence; (4) if any of our physicians fail to meet
Humana's credentialing criteria; (5) if we engage in or acquiesce to any act of
bankruptcy, receivership or reorganization; or (6) if Humana loses its authority
to do business in total or as to any limited segment or business (but only to
that segment). In the event of termination of the Humana agreements, we must
continue to provide or arrange for services on a fee for service basis to any
member hospitalized on the date of termination until the date of discharge or
until we have made arrangements for substitute care. In some cases, Humana may
provide 30 days' notice as to an amendment or modification of the agreements,
including but not limited to, renegotiation of rates, covered benefits and other
terms and conditions. In the event that Humana exercises its right to amend the
agreements upon thirty (30) days written notice, we may object to such amendment
within the thirty (30)-day notice period. Such amendments may include changes to
the compensation rates. If we object to such amendment within the requisite time
frame, Humana may terminate the agreements upon ninety (90) days written notice.

         Effective August 1, 1998, we entered into two amendments to our
professional provider agreements with Humana. The amendments, among other
things, extended the term of the original agreement from six to ten years and
increased the percentage of Medicare premiums received by the Company, effective
January 1, 1999.

         Neither the Foundation nor the Humana agreements imposes a limit on the
number of adjustments that may be made to their provider agreement.

         We continually review and attempt to renegotiate the terms of our
managed care agreements in an effort to obtain more favorable terms.

         As of June 30, 2001, we maintained three additional managed care
relationships, none of which individually or in the aggregate are material.
There can be no assurance that we will be able to renew any of our managed care
agreements or, if renewed, that they will contain terms favorable to us and our
affiliated physicians. Although we did not lose, on an aggregate basis, any
significant payor contracts in Fiscal 2001, the loss of any of our current
managed care contracts or significant reductions in capitated reimbursement
rates under these contracts could have a material adverse effect on our
business, financial condition and results of operations. See "Risk
Factors--Risks Associated with Capitated Arrangements Including Risk of
Over-Utilization by Managed Care Patients, Risk of Reduction of Capitated Rates
and Regulatory Risks," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business --Managed Care."

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


                                       14
<PAGE>   16

COMPLIANCE PROGRAM

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

COMPETITION

         The healthcare industry is highly competitive. We compete with several
national competitors and many regional and national healthcare companies, some
of which have greater resources than we do. Competition is generally based upon
reputation, price and the ability to offer management expertise, financial
benefits and other benefits for the particular provider in a quality and
cost-effective manner. The pressure to reduce healthcare expenditures has
emphasized the need to manage the appropriateness of health services provided to
patients.

GOVERNMENT REGULATION

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

         Present and Prospective Federal and State Reimbursement Regulation. Our
operations are affected on a day-to-day basis by numerous legislative,
regulatory and industry-imposed operational and financial requirements, which
are administered by a variety of federal and state governmental agencies as well
as by self-regulatory associations and commercial medical insurance
reimbursement programs.

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

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

         Prior to the implementation of PPS on October 1, 2000, Medicare
reimbursed the "reasonable costs" for services up to program limits. Medicare
reimbursed costs are subject to audit, which may result in either decreases or
increases in payments we have previously received. With respect to our prior
services, including management of outpatient hospital departments, the operation
of ORFs and CORFs, the payments received from the Medicare program may still be
subject to audit and may result in either overpayment or underpayment notices
with respect to payments we have already received. Further our current medical
services revenue for which the Company receives or has received payment from the
Medicare or Medicaid program may be subject to medical review, which could
result in determinations of unnecessary care and require repayment of amounts
already received

         The BBA enacted in August 1997 contains numerous provisions related to
Medicare and Medicaid reimbursement. The BBA resulted in deep cuts to provider
reimbursements. Congress's response to these


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<PAGE>   17

unintended consequences was the November 1999 enactment of the Medicare,
Medicaid and SCHIP Balanced Budget Refinement Act of 1999 and the Medicare,
Medicaid and SCHIP Benefits Improvement Act. The BBRA and BIPA attempts to
provide relief to various facets of the health care delivery system through
remedies to both problematic policy and excessive payment reductions.

         The BBA required the Secretary of HHS to implement a PPS for home
health agency services that became effective October 1, 2000. The BBA also
reduced the amount of Medicare reimbursement for HHA services. The BBRA and the
BIPA have delayed the effective date of this reduction until 2002. Under such a
PPS system, providers are reimbursed a fixed fee per treatment unit, and those
having costs greater than the prospective amount will incur losses.

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

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

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

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

         State Fraud and Abuse Regulations. Various States also have
anti-kickback laws applicable to licensed healthcare professionals and other
providers and, in some instances, applicable to any person engaged in the


                                       16
<PAGE>   18

proscribed conduct. For example, Florida enacted "The Patient Brokering Act"
which imposes criminal penalties, including jail terms and fines, for receiving
or paying any commission, bonus, rebate, kickback, or bribe, directly or
indirectly in cash or in kind, or engage in any split-fee arrangement, in any
form whatsoever, to induce the referral of patients or patronage from a
healthcare provider or healthcare facility.

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

         Restrictions on Physician Referrals. The federal Anti-Self Referral Law
(the "Stark Law") prohibits certain patient referrals by interested physicians.
Specifically, the Stark Law prohibits a physician, or an immediate family
member, who has a financial relationship with an entity, from referring Medicare
or Medicaid patients with limited exceptions, to that entity for the following
"designated health services", clinical laboratory services, physical therapy
services, occupational therapy services, radiology or other diagnostic services,
durable medical equipment and supplies, radiation therapy services and supplies,
parenteral and enteral nutrients, equipment and supplies, prosthetics, orthotics
and prosthetic devices, home health services, outpatient prescription drugs, and
inpatient and outpatient hospital services. A financial relationship is defined
to include an ownership or investment in, or a compensation relationship with,
an entity. The Stark Law also prohibits an entity receiving a prohibited
referral from billing the Medicare or Medicaid programs for any services
rendered to a patient. The Stark Law contains certain exceptions that protect
parties from liability if the parties comply with all of the requirements of the
applicable exception. The sanctions under the Stark Law include denial and
refund of payments, civil monetary penalties and exclusions from the Medicare
and Medicaid programs.

         On January 4, 2001, HHS issued part one of final regulations
interpreting the Stark Law, which become effective on January 4, 2002. We are
currently reviewing the part one final regulations and plan to implement any
changes to our relationships with physicians as necessary prior to the effective
date. We believe that we are presently in material compliance with the Stark Law
and will make every effort to continue to comply with the Stark Law. However,
there can be no assurances that we will not be alleged to have violated the
Stark Law, and if an adverse determination is reached, whether any sanction
imposed would have a material adverse effect on our results of operations,
financial condition or cash flows.

         Corporate Practice of Medicine Doctrine. Many states prohibit business
corporations from providing, or holding themselves out as a provider of medical
care. Possible sanctions for violation of any of these restrictions or
prohibitions include loss of licensure or eligibility to participate in
reimbursement programs (including Medicare and Medicaid), asset forfeitures and
civil and criminal penalties. These laws vary from state to state, are often
vague and loosely interpreted by the courts and regulatory agencies. Currently,
we only operate in Florida, which currently does not have a corporate practice
of medicine doctrine with respect to the types of physicians employed with us.
There, however, can be no assurance that such laws will not change or ultimately
be interpreted in a manner inconsistent with our practices, and an adverse
interpretation could have a material adverse effect on our results of
operations, financial condition or cash flows.

         Certificates of Need and Certificates of Exemption. Many states,
including the state in which we operate, have procedures for the orderly and
economical development of health care facilities, the avoidance of unnecessary
duplication of such facilities and the promotion of planning for development of
such facilities. Such states require health care facilities to obtain
Certificates of Need ("CONs") or Certificates of Exemption ("COEs") before
initiating projects in excess of a certain threshold for the acquisition of
major medical equipment or other capital expenditures; changing the scope or
operation of a health care facility; establishing or discontinuing a health care
service or facility; increasing, decreasing or redistributing bed capacity;
and/or changing of ownership of a health care facility, among others. Possible
sanctions for violation of any of these statutes and regulations include loss of
licensure or eligibility to participate in reimbursement programs and other
penalties. These laws vary from state to state and are generally administered by
the respective state department of health. We seek to structure our business
operations in compliance with these laws and has sought guidance as to the
interpretation of such laws and the


                                       17
<PAGE>   19

procurement of required CONs and/or COEs. There can be no assurance, however,
that we or any of our client hospitals, or HHAs will be able to obtain required
CONs and/or COEs in the future.

         Clinic Registration. The State of Florida has recently enacted new
legislation which will require the Company to register each of its medical
centers as clinics. The new legislation becomes effective on October 1, 2001.
The Company has begun the process to comply with this requirement and expects to
have each medical center registered in a timely manner.

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

EMPLOYEES

         At June 30, 2001, we employed or contracted with approximately 371
individuals of whom approximately 55 are IPA and staff model physicians. We do
not have any collective bargaining agreements with any unions and believe that
our overall relations with our employees are good.

INSURANCE

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

SEASONALITY

         All of our net revenues in Fiscal 2001 were derived from our operations
in Florida. Florida has historically been a transient state with the transient
factor being directly related to seasonal climate changes. It is anticipated
that in Fiscal 2002 all of our net revenue will also be derived from our
operations in Florida. While there are some seasonal fluctuations in our
business, management does not believe that seasonality will play an adverse role
in the our future operations.

ITEM 2.           PROPERTIES

         We lease approximately 10,000 square feet of space for our corporate
offices in Miami, Florida under a lease expiring in September 2004 with average
annual base lease payments of approximately $200,000. Of the fifteen staff model
clinics that we operated as of June 30, 2001, three are leased from independent
landlords and the other twelve clinics are leased from Humana. The twelve
wholly-owned Humana centers are leased on a month to month basis and these
leases are not tied to our managed care arrangement with Humana. As a month to
month tenant, we have limited tenancy rights. These month-to-month lease
arrangements can be cancelled at the option of Humana, without cause, on 30 days
written notice. A termination of one or all of the Humana leases could have an
adverse effect on Continucare because we would, on 30 days written notice, be
forced to find replacement facilities at which to provide medical services to
our members. If we were unable to find adequate replacement facilities, then we
could experience a disenrollment of our members.

ITEM 3.           LEGAL PROCEEDINGS

         The case of CONTINUCARE CORPORATION, A FLORIDA CORPORATION, CONTINUCARE
PHYSICIAN PRACTICE MANAGEMENT, INC. ("CPPM"), v. JAY A. ZISKIND, AN INDIVIDUAL,


                                       18
<PAGE>   20

KENNETH I. ARVIN, AN INDIVIDUAL, TRACY ARVIN, AN INDIVIDUAL, ZISKIND & ARVIN,
P.A., A PROFESSIONAL ASSOCIATION, NORMAN B. GAYLIS, M.D., AN INDIVIDUAL AND ZAG
GROUP, INC., A FLORIDA CORPORATION, was filed on November 15, 1999 in the
Circuit Court of the 11th Judicial District in and for Miami-Dade County,
alleging breach of fiduciary duties, improper billing, and seeking the return of
all consideration previously paid by us to ZAG, and damages, as well as seeking
rescission of the Agreement and Plan of Merger and the Registration Rights
Agreement. On July 13, 2001, the counterplaintiffs filed their Third Amended
Counterclaim against us and included Mr. Charles Fernandez as a defendant in the
action. The Third Amended Counterclaim alleges counts for (i) breach of contract
against us and CPPM based on the alleged failure to register stock pursuant to
the Registration Rights Agreement, the alleged failure to pay contingent merger
consideration and the alleged failure to fulfill obligations pursuant to Rule
144 of the Securities Act of 1933; (ii) fraud in the inducement against us, CPPM
and Mr. Fernandez in connection with the execution of the Registration Rights
Agreement and the Agreement and Plan of Merger; (iii) violation of Florida Blue
Sky Laws against us, CPPM and Mr. Fernandez; and (iv) conversion against us and
CPPM. The Third Amended Counterclaim seeks an amount in excess of $4,000,000 in
damages. On August 31, 2001, an Answer and Affirmative Defenses to the Third
Amended Counterclaim was filed by us, CPPM and Mr. Fernandez. The matter has
been taken off the trial calendar and is not currently scheduled for trial.
Discovery is ongoing. The Company believes that there is little merit to the
counterclaim and intends to vigorously defend the claims.

         We are a party to the case of WARREN GROSSMAN, M.D., ALAN REICH, M.D.,
AND RICHARD STRAIN, M.D. v. CONTINUCARE PHYSICIAN PRACTICE MANAGEMENT, INC. AND
CONTINUCARE CORPORATION. This case was filed in May 1999 in the Circuit Court
for Broward County, Florida. The complaint alleges breach of employment
contracts based on the early termination of the Plaintiffs' employment and seeks
damages in excess of $250,000. On January 5, 2000, we filed a counterclaim
alleging breach of contract in connection with the Plaintiff's failure to return
certain computer equipment, as well as a breach of the non-compete covenant. On
February 18, 2000, we filed a Motion for Summary Judgment as to all Plaintiffs.
On April 28, the Plaintiffs filed a Motion for Summary Judgment as to the issue
of liability. On June 5, 2000, we filed a Motion for Judgment on the Pleadings
as to all Plaintiffs. All of the aforementioned motions were heard on June 15,
2000. On November 14, 2000, the court granted our motion as to one of the
Plaintiffs' claims for deferred and incentive compensation, but reserved as to
his claim for post termination compensation related to follow-up patient care,
if any. The Court denied our motions as to the other two Plaintiffs. Also on
November 14, 2000, the court denied the Plaintiffs' Motion for Summary Judgment
in all respects. The trial started on February 13, 2001. As of the date of this
filing, the trial is still in progress and is scheduled to continue in October,
2001. We believe the action has little merit and intend to vigorously defend the
claims.

         We settled the case of GE MEDICAL SYSTEMS, AN UNINCORPORATED DIVISION
OF GENERAL ELECTRIC COMPANY v. CONTINUCARE OUTPATIENT SERVICES, INC. n/k/a
OUTPATIENT RADIOLOGY SERVICES, INC., A FLORIDA CORPORATION AND CONTINUCARE
CORPORATION, A FLORIDA CORPORATION with GE Medical Systems ("GE") on April 5,
2001 with no admission of liability. As part of the settlement, GE assigned to
us all of its claims associated with the litigation. We intend to continue to
litigate our claims of indemnification through our pending cross-claims and/or
third party claims.

         Two of our subsidiaries are parties to the case of NANCY FEIT ET AL. v.
KENNETH BLAZE, D.O., KENNETH BLAZE., D.O., P.A.; SHERIDEN HEALTHCORP, INC.;
WAYNE RISKIN, M.D.; KAHN AND RISKIN, M.D., P.A.; CONTINUCARE PHYSICIAN PRACTICE
MANAGEMENT, INC., D/B/A ARTHRITIS AND RHEUMATIC DISEASE SPECIALTIES, INC.; JAMES
JOHNSON, D.C. AND JOHNSON & FALK, D.C., P.A. The case was filed in December,
1999 in the Circuit Court of the 17th Judicial Circuit in and for Broward
County, Florida and served on the companies in April, 2000. The complaint
alleges vicarious liability and seeks damages in excess of $15,000. We filed an
answer on May 3, 2000. Discovery is still in process. We have made a demand for
assumption of defense and indemnification from Kahn and Riskin, M.D., P.A. and
Wayne Riskin, M.D. The demand was initially rejected, but is currently being
re-evaluated. We have been discussing with the carriers for Kahn & Riskin, M.D.
apportionment of responsibility. We believe we have meritorious defenses and
intend to vigorously pursue them.


                                       19
<PAGE>   21

         In Fiscal 1999, we closed or dissolved certain subsidiaries, some of
which had pending claims against them. We are also involved in various other
legal proceedings incidental to our business that arise from time to time out of
the ordinary course of business--including, but not limited to, claims related
to the alleged malpractice of employed and contracted medical professionals,
workers' compensation claims and other employee-related matters, and minor
disputes with equipment lessors and other vendors.

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

         No matters were submitted to a vote of security holders during the
fourth quarter of Fiscal 2001.


                                       20
<PAGE>   22

                                     PART II

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

MARKET PRICE

         The principal U.S. market in which our common stock is traded is the
American Stock Exchange ("AMEX") (symbol: CNU). The following table shows the
high and low sales prices as reported on AMEX for our common stock for the
periods indicated below. These quotations have been obtained from AMEX.

<TABLE>
<CAPTION>
              PRICE PERIOD                    HIGH        LOW
              ------------                   ------      -----
              <S>                            <C>         <C>
              Fiscal Year 2000
                  First Quarter              $ 1.31      $ .31
                  Second Quarter               1.06        .38
                  Third Quarter                1.50        .63
                  Fourth Quarter               1.06        .50

              Fiscal Year 2001
                  First Quarter              $  .94      $ .50
                  Second Quarter                .69        .25
                  Third Quarter                 .50        .27
                  Fourth Quarter                .40        .15
</TABLE>

         As of September 17, 2001, there were 129 holders of record of our
common stock.

DIVIDEND POLICY

         We have never declared or paid any cash dividends on our common stock
and have no present intention to declare or pay cash dividends on our common
stock in the foreseeable future. We intend to retain earnings, if any, which we
may realize in the foreseeable future, to finance our operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The payment of future cash dividends on our common stock will be at
the discretion of our board of directors and will depend on a number of factors,
including future earnings, capital requirements, the financial condition and
prospects of the Company and any restrictions under credit agreements existing
from time to time. There can be no assurance that we will pay any cash dividends
on the common stock in the future.

ISSUANCE OF SECURITIES

         In connection with the Fiscal 2001 Restructuring, effective June 30,
2001, we issued 6,219,511 shares of common stock to Frost Nevada. We believe the
shares were issued pursuant to the exemption provided by Section 4(2) of the
Securities Act of 1933, as amended.

ITEM 6.           SELECTED FINANCIAL DATA

         Set forth below is our selected historical consolidated financial data
for the five fiscal years ended June 30, 2001.

         The selected historical consolidated financial data for the three
fiscal years ended June 30, 2001, 2000, and 1999, are derived from our audited
consolidated financial statements included herein. The selected historical
consolidated financial data should be read in conjunction with our consolidated
financial statements and related notes included elsewhere herein.


                                       21
<PAGE>   23

                         SELECTED FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                                FOR THE YEAR ENDED JUNE 30,
                                                        ---------------------------------------------------------------------------
                                                            2001             2000            1999           1998           1997
                                                        ---------------------------------------------------------------------------

<S>                                                     <C>             <C>             <C>             <C>            <C>
OPERATIONS

  Medical services revenue, net .....................   $ 112,607,916   $ 116,582,895   $ 182,526,752   $ 65,584,293   $ 13,916,385

  Expenses
   Medical services .................................      99,763,805      97,623,502     163,237,820     54,695,446      4,493,195
   Payroll and employee benefits ....................       5,689,206       5,687,030      13,797,555      5,714,653      1,855,000
   Provision for bad debts ..........................          50,000              --       6,196,384      5,778,216      1,818,293
   Professional fees ................................       1,180,438         895,716       1,886,661      1,637,957      1,450,790
   General and administrative .......................       5,466,496       5,777,317      10,198,385      8,435,001      1,176,516
   Gain on disposal of property and equipment .......        (383,375)             --              --             --             --
   Writedown of long-lived assets ...................              --              --      11,717,073             --             --
   Loss on disposal of subsidiaries .................              --              --      15,361,292             --             --
   Depreciation and amortization ....................       2,883,287       2,918,534       5,791,982      3,247,717        208,936
                                                        ---------------------------------------------------------------------------
     Subtotal .......................................     114,649,857     112,902,099     228,187,152     79,508,990     11,002,730
                                                        ---------------------------------------------------------------------------

(Loss) Income from operations .......................      (2,041,941)      3,680,796     (45,660,400)   (13,924,697)     2,913,655

Other income (expense)
  Interest income ...................................          32,358          43,147         138,963        932,397        165,253
  Interest expense-convertible subordinated notes ...              --      (2,054,710)     (3,639,433)    (2,453,333)            --
  Interest expense-other ............................      (1,632,932)     (1,182,794)     (1,505,779)      (553,998)      (162,235)
  Other .............................................           1,425         383,623          24,906        107,696         (9,081)
                                                        ---------------------------------------------------------------------------

(Loss) income before income taxes and
  extraordinary items ...............................      (3,641,090)        870,062     (50,641,743)   (15,891,935)     2,907,592
(Benefit) provision for income taxes ................              --              --              --       (909,000)     1,200,917
                                                        ---------------------------------------------------------------------------
(Loss) income before extraordinary items ............      (3,641,090)        870,062     (50,641,743)   (14,982,935)     1,706,675

   Extraordinary gain on extinguishment of debt .....       3,503,188      13,247,907         130,977             --             --

                                                        ---------------------------------------------------------------------------
Net (loss) income ...................................   $    (137,902)  $  14,117,969   $ (50,510,766)  $(14,982,935)  $  1,706,675
                                                        ===========================================================================

Basic and diluted (loss) income before
  extraordinary item per common share ...............   $        (.11)  $         .04   $       (3.50)  $      (1.20)  $        .16

Cash dividends declared .............................   $          --   $          --   $          --   $         --   $         --

FINANCIAL POSITION
Total assets ........................................   $  21,670,238   $  27,545,180   $  30,419,978   $ 69,486,105   $ 19,851,309
                                                        ===========================================================================

Long-term obligations, including
  current portion ...................................   $  12,306,623   $  19,269,246   $  53,490,787   $ 47,675,061   $  3,367,106
                                                        ===========================================================================
</TABLE>


                                       22
<PAGE>   24

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

GENERAL

         We are a provider of outpatient healthcare services in Florida. We
provide healthcare services through our network of staff model clinics, IPA and
Home Health Agencies. As a result of our ability to provide quality healthcare
services through fifteen staff model clinics, approximately 28 IPA associated
physicians and four Home Health agencies, we have become a preferred healthcare
provider in Florida to some of the nation's largest managed care organizations,
including: (i) Humana for which, as of June 30, 2001, we managed the care for
approximately 11,800 patients on a capitated basis; and (ii) Foundation, for
which, as of June 30, 2001, we managed the care for approximately 4,400 patients
on a capitated basis.

         Certain statements included herein which are not statements of
historical fact are intended to be, and are hereby identified as,
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Without limiting the foregoing, the words
"believe," "anticipate," "plan," "expect," "estimate," "intend" and other
similar expressions are intended to identify forward-looking statements. We
caution readers that forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievement expressed or implied by such forward-looking statements. Such
factors include, among others, the following: our success or failure in
implementing our current business and operational strategies; the availability,
terms and access to capital and customary trade credit; general economic and
business conditions; competition; changes in our business strategy;
availability, location and terms of new business development; availability and
terms of necessary or desirable financing or refinancing; labor relations; the
outcome of pending or yet-to-be instituted legal proceedings; and labor and
employee benefit costs.


                                       23
<PAGE>   25

RESULTS OF OPERATIONS

         The following discussion and analysis should be read in conjunction
with the consolidated financial statements and notes thereto appearing elsewhere
in this annual report. The following tables set forth, for the periods
indicated, the percentage of total revenues represented by certain items in our
Consolidated Statements of Operations.

<TABLE>
<CAPTION>
                                                              PERCENT OF REVENUE FOR JUNE 30,
                                                                   2001     2000     1999
                                                              -------------------------------

<S>                                                               <C>      <C>      <C>
   Medical services revenue, net ......................           100.0%   100.0%   100.0%

   Expenses
     Medical services .................................            88.6     83.7     89.4
     Payroll and employee benefits ....................             5.1      4.9      7.6
     Provision for bad debts ..........................              --       --      3.4
     Professional fees ................................             1.0      0.8      1.0
     General and administrative .......................             4.8      5.0      5.6
     Gain on disposal of property and equipment........             (.3)
     Write down of long-lived assets ..................              --       --      6.4
     Loss on disposal of subsidiaries .................              --       --      8.5
     Depreciation and amortization ....................             2.6      2.5      3.2
                                                              -------------------------------
       Subtotal .......................................           101.8     96.9    125.1

(Loss) income from operations .........................            (1.8)     3.1    (25.1)

Other income (expense)
   Interest income ....................................              --      0.1      0.1
   Interest expense-convertible subordinated notes ....              --     (1.8)    (2.0)
   Interest expense-other .............................            (1.4)    (1.0)    (0.8)
   Other ..............................................              --      0.3       --
                                                              -------------------------------

(Loss) income before extraordinary items ..............            (3.2)     0.7    (27.8)
Extraordinary gain on extinguishment of debt ..........             3.1     11.4      0.1
                                                              -------------------------------
Net (loss) income .....................................             (.1)%   12.1%   (27.7)%
                                                              ===============================
</TABLE>


                                       24
<PAGE>   26

THE FINANCIAL RESULTS DISCUSSED BELOW RELATE TO OUR OPERATIONS FOR THE FISCAL
YEAR ENDED JUNE 30, 2001 AS COMPARED TO THE FISCAL YEAR ENDED JUNE 30, 2000.

Revenue

         Medical services revenues for Fiscal 2001 decreased 3.4% to
approximately $112,608,000 from approximately $116,583,000 in Fiscal 2000. We
provided managed care services for approximately 252,000 and 257,000 member
months (members per month multiplied by the months for which services were
available) during Fiscal 2001 and 2000, respectively.

         Revenue generated by our managed care entities under of contracts with
HMO's as a percentage of medical services revenue was approximately 96% during
Fiscal 2001 and 2000. Revenue generated by the Humana contract was 60% and 57%
of medical service revenue for Fiscal 2001 and 2000, respectively. Revenue
generated by the Foundation contracts was 36% and 39% during Fiscal 2001 and
2000, respectively.

         Our home health agencies' revenue was approximately 4% of medical
services revenue during Fiscal 2001 and 2000 and consisted primarily of Medicare
reimbursement.

Expenses

         Effective March 31, 2001, the Company negotiated an amendment to its
IPA contract with Foundation (the "2001 Amendment"). The 2001 Amendment, among
other things, eliminated the medical claims liability incurred by the IPA
through March 31, 2001 and reduced other liabilities to Foundation. As a result,
the Company recorded a contractual revision of previously recorded medical
claims liability of approximately $4,638,000 (the "2001 Contractual
Adjustment"). (See Note 7 of the Company's Consolidated Financial Statements).

         Effective December 31, 1999, we amended our IPA contract with
Foundation which reduced our prior medical claims and long-term debt liabilities
to Foundation for prior medical claims by approximately $3,054,000, resulting in
a corresponding decrease in medical services expense (the "2000 Contractual
Adjustment").

         Medical services expenses for Fiscal 2001 were approximately
$99,764,000 or 88.6% of medical services revenue after giving effect to the 2001
Contractual Adjustment, compared to approximately $97,624,000 or 83.7% of
medical services revenue for Fiscal 2000 after giving effect to the 2000
Contractual Adjustment. Excluding the 2001 and 2000 Contractual Adjustments,
medical services expenses were approximately $104,402,000 or 92.7% of medical
services revenue for Fiscal 2001 and $100,677,000 or 86.4% of medical services
revenue for Fiscal 2000.

         Medical claims represent the costs of medical services provided by
providers other than us but which are to be paid by us for individuals covered
by our capitated risk contracts with HMOs. Claims expense was approximately
$88,341,000 and $82,480,000 for Fiscal 2001 and 2000, respectively, or 81.8% and
73.9% of medical services revenues derived from our managed care entities prior
to the 2001 and 2000 Contractual Adjustments of claims expense. Our claim loss
ratio varies due to fluctuations in utilization, the timing of claims paid by
the HMOs on our behalf, as well as increases in medical costs without
counterbalancing increases in premium revenues.

         Other direct costs include the salaries and benefits of health
professionals providing primary care services, capitation payments to our
contracted primary care IPA physicians, and other costs necessary to operate our
facilities. Other direct costs were approximately $16,061,000 and $18,197,000
during Fiscal 2001 and 2000, respectively, or 14.3% and 15.6% of medical
services revenues. The decrease primarily resulted from cost containment
measures which began in Fiscal 2000 and continued throughout Fiscal 2001.

         Payroll and employee benefits for administrative personnel was
approximately $5,689,000 or 5.1% of revenues during Fiscal 2001 compared to
approximately $5,687,000 or 4.9% of revenue during Fiscal 2000.

         General and administrative expenses during Fiscal 2001 were
approximately $5,466,000 or 4.8% of revenues compared to approximately
$5,777,000 or 5.0% of revenues during Fiscal 2000. The decrease in general


                                       25
<PAGE>   27

and administrative expense as a percent of revenues primarily resulted from cost
containment measures which began in Fiscal 2000 and continued throughout Fiscal
2001.

Income/Loss from Operations

         Loss from operations for Fiscal 2001 was approximately $2,042,000 or
1.8% of total revenues, compared to operating income of approximately $3,681,000
or 3.2% of total revenues for Fiscal 2000.

Interest Expense

         Interest expense during Fiscal 2001 was approximately $1,633,000 or
1.4% of revenues compared to approximately $3,238,000 or 2.8% of revenues during
Fiscal 2000. Interest expense during Fiscal 2001 consisted primarily of
approximately $1,281,000 related to amortization of deferred financing costs,
approximately $110,000 of imputed interest expense on non-interest bearing notes
and interest expense of approximately $242,000 related to various notes payable.
Interest expense during Fiscal 2000 was comprised of approximately $784,000
related to amortization of deferred financing costs, approximately $212,000 of
imputed interest expense on non-interest bearing notes, interest expense of
approximately $184,000 related to various notes payable and approximately
$2,055,000 of interest on the Notes. The Notes were restructured on February 15,
2000 and again on June 30, 2001. In accordance with Statement of Financial
Accounting Standards, No. 15, "Accounting by Debtors and Creditors for Troubled
Debt Restructurings," ("SFAS No. 15") all interest which would accrue over the
remaining term of the Notes is included in the outstanding Notes on the balance
sheet. Therefore, no interest expense will be recorded on the Notes through the
maturity date. (See Note 7 of the Company's Consolidated Financial Statements.)

Extraordinary Gain on Extinguishment of Debt

         In July, 1999, we recorded an extraordinary gain on extinguishment of
debt of approximately $3,800,000 as a result of repurchasing $4,000,000 of our
Notes for a cash payment of $210,000 and the write-off of related deferred
financing costs and accrued interest payable. We have not provided for income
taxes on the gain because we believe that we will be able to utilize certain of
our net operating loss carryforwards to offset any income tax liability related
to this transaction.

         On February 15, 2000, we recorded an extraordinary gain on
extinguishment of debt of approximately $9,472,000 as a result of restructuring
the Notes, net of restructuring costs (the "Fiscal 2000 Restructuring"). The
gain resulted primarily from the conversion of $31,000,000 of the outstanding
principal balance into 15,500,000 shares of common stock, which were valued at
approximately $21,312,500 based on the closing price of our common stock on
February 15, 2000, the forgiveness of approximately $4,237,000 of accrued
interest, the write off of approximately $1,929,000 of unamortized deferred
financing costs and the recording of $2,100,000 of interest which will accrue on
the remaining balance of the Notes under the revised terms of the agreement
through the maturity date of October 31, 2002. We have not provided for income
taxes on the gain because we believe we will be able to utilize certain of our
net operating loss carryforwards to offset any income tax liability related to
the restructuring transaction.

         Effective June 30, 2001, we recorded an extraordinary gain on the
extinguishment of debt of approximately $3,503,000 as a result of the Fiscal
2001 Restructuring of the Notes. The gain resulted primarily from the conversion
of $6,219,511 of the outstanding principal balance into 6,219,511 shares of
common stock, which were valued at approximately $1,804,000 based on the closing
price of our common stock on June 29, 2001, the recording of approximately
$595,000 of interest which will accrue on the remaining balance of the Notes
under the revised terms of the agreement through the maturity date of October
31, 2005, the recording of the New Note in the amount of $912,195 and the
recording of approximately $277,000 of interest which will accrue on the New
Note. We have not provided for income taxes on the gain because we believe we
will be able to utilize certain of our net operating loss carryforwards to
offset any income tax liability related to this transaction.


                                       26
<PAGE>   28

Net Income/Loss

         Net loss for Fiscal 2001 was approximately $138,000 compared to net
income of approximately $14,118,000 for Fiscal 2000.

THE FINANCIAL RESULTS DISCUSSED BELOW RELATE TO OUR OPERATIONS FOR THE FISCAL
YEAR ENDED JUNE 30, 2000 AS COMPARED TO THE FISCAL YEAR ENDED JUNE 30, 1999.

Revenue

         Medical services revenues for Fiscal 2000 decreased 36.1% to
approximately $116,583,000 from approximately $182,527,000 in Fiscal 1999.
During Fiscal 2000, we significantly reduced the number of physician practices
in our IPA subsidiary and we were no longer at risk for the commercial members
of our IPA physicians which contributed approximately $11,000,000 of revenue
during Fiscal 1999. IPA Medicare member months decreased approximately 61% from
approximately 128,000 member months during Fiscal 1999 to 50,000 member months
during Fiscal 2000. IPA Medicare member months contributed approximately
$27,000,000 and $58,000,000 during Fiscal 2000 and 1999, respectively.

         During Fiscal 1999, we disposed of certain underperforming assets and
subsidiaries (the "Rationalized Entities"). During Fiscal 1999, medical services
revenue from the Rationalized Entities was approximately $22,164,000.

         As a result of the rationalization of the non-managed care entities,
the revenue generated by our managed care entities under our contracts with
HMO's amounted to 96% and 85% of medical services revenues for Fiscal 2000 and
1999, respectively. Revenue generated by the Humana contract was 57% and 34% of
medical services revenue for Fiscal 2000 and 1999, respectively. Revenue
generated by the Foundation contract was 39% and 51% of medical services revenue
for Fiscal 2000 and 1999, respectively.

         Revenue received under fee for service arrangements, which require us
to assume the financial risks relating to payor mix and reimbursement rates,
accounted for approximately 14.8% of medical services revenue for Fiscal 1999,
including approximately 3.1% derived from our home health agencies. For Fiscal
2000, approximately 4.4% of medical services revenues was derived from the home
health agencies. The contribution from other sources of fee for service revenue
for Fiscal 2000 was insignificant, primarily as a result of the closing or sale
of certain subsidiaries in Fiscal 1999.

         Medicare and Medicaid, as a percentage of our medical service revenue,
decreased from 6.4% to 4.3% of medical services revenue for Fiscal 1999 and
2000, respectively. This decrease was primarily attributable to the respective
sale and closing of our Outpatient Rehabilitation and Physician Practice
Subsidiaries.

Expenses

         Medical services expenses in Fiscal 2000 were approximately $97,624,000
or 83.7% of medical services revenue, compared to approximately $163,238,000 or
89.4% of medical services revenue for Fiscal 1999. The percentage decrease is
primarily due to tighter operating controls and the disposal of the Rationalized
Entities. During Fiscal 1999, medical services expenses for the Rationalized
Entities were approximately $14,389,000. Medical services expenses of our IPA
decreased from approximately $80,249,000 to approximately $26,137,000 as a
result of the decrease in IPA members for which we are at risk. In addition, the
2000 Contractual Adjustment reduced medical services expense in Fiscal 2000 by
approximately $3,054,000 and resulted in a corresponding decrease in medical
services expense (See Note 7 of the Company's Consolidated Financial
Statements).

         Medical claims represent the cost of medical services provided by
providers other than us but which are to be paid by us for individuals covered
by our capitated risk contracts with HMOs. Medical claims expense was
approximately $82,480,000 and $117,826,000 for Fiscal 2000 and 1999,
respectively, or 74% and 76% of medical service revenues derived from our
managed care entities.


                                       27
<PAGE>   29

         Other direct costs include the salaries and benefits of health
professionals providing the services, capitation payments to our contracted IPA
physicians and other costs necessary to operate our facilities. Other direct
costs were approximately $18,197,000 and $45,412,000 during Fiscal 2000 and
1999, respectively, or 15.6% and 24.9% of medical services revenues. Of the
other direct costs incurred during Fiscal 1999, approximately $14,389,000, or 8%
of medical services revenue, was from the Rationalized Entities.

         Payroll and employee benefits for administrative personnel was
approximately $5,687,000 during Fiscal 2000, or 4.9% of revenues, compared to
approximately $13,798,000 or 7.6% of revenues during Fiscal 1999. The decrease
in these costs as a percentage of revenues is primarily due to the reduction in
the number of employees as a result of the Rationalization Program. Payroll and
employee benefits for the Rationalized Entities was approximately $4,497,000
during Fiscal 1999.

         General and administrative expenses for Fiscal 2000 were approximately
$5,777,000 or 5.0% of revenues compared to approximately $10,198,000 or 5.6% of
revenues for Fiscal 1999. The decrease in general and administrative expense as
a percent of revenues resulted from a reduction of overhead costs as part of our
Business Rationalization Program. In Fiscal 1999, general and administrative
expenses from the Rationalized Entities was approximately $4,428,000.

         Amortization expense of intangible assets was approximately $2,429,000
for Fiscal 2000, as compared to approximately $4,162,000 for Fiscal 1999.
Approximately $762,000 of amortization expense in Fiscal 1999 was related to the
Rationalized Entities. Additionally, in Fiscal 1999, we determined that
approximately $11,717,000 of other intangible assets were impaired and,
accordingly, wrote off the impaired assets. Amortization expense related to
these impaired assets which was included in Fiscal 1999 was approximately
$993,000. We determined that there was no impairment to our intangible assets
during Fiscal 2000.

         Bad debt expense for Fiscal 1999 was related to certain of the
Rationalized Entities which generated revenues primarily through fee-for-service
billings to third party payors and individual patients. The absence of bad debt
expense for Fiscal 2000 is directly attributable to the increase in the
percentage of revenue received under our HMO contracts, for which bad debt
expense is nominal.

Income (Loss) From Operations

         Income from operations for Fiscal 2000 was approximately $3,681,000 or
3.2% of total revenue, compared to an operating loss of approximately
$45,660,000 or 25.0% of total revenues for Fiscal 1999. The operating loss of
the Rationalized Entities for Fiscal 1999 was approximately $22,850,000.

Interest Expense

         Interest expense during Fiscal 2000 was approximately $3,238,000 or
2.8% of revenues compared to approximately $5,145,000 or 2.8% of revenues during
Fiscal 2000. Interest expense during Fiscal 2000 was comprised of approximately
$784,000 related to amortization of deferred financing costs, approximately
$212,000 of imputed interest expense on non-interest bearing notes, interest
expense of approximately $184,000 related to various notes payable and
approximately $2,055,000 of interest on the Notes. Interest expense during
Fiscal 1999 was comprised of approximately $898,000 related to amortization of
deferred financing costs, approximately $255,000 of imputed interest expense on
non-interest bearing notes, interest expense of approximately $275,000 related
to various notes payable and approximately $3,639,000 of interest on the Notes.
The Notes were restructured on February 15, 2000. Although the interest on the
Notes was forgiven as part of the Fiscal 2000 Restructuring, in accordance with
SFAS No. 15, instead of reversing the interest expense, the forgiveness of
interest is reflected in the extraordinary gain (see Extraordinary Gain below).
Also in accordance with FASB No. 15, all interest accruing at 7% on the
remaining $10,000,000 from November 1, 1999 until the Notes' maturity has been
capitalized into the balance of the outstanding Notes. Therefore, we have not
recorded, and will not record in the future, interest expense on the Notes
subsequent to the Restructuring. (See Note 7 of the Company's Consolidated
Financial Statements.)


                                       28
<PAGE>   30

Extraordinary Gain on Extinguishment of Debt

         In August, 1998, we recorded an extraordinary gain on extinguishment of
debt of approximately $130,000 as a result of repurchasing $1,000,000 of our
Notes for a cash payment of approximately $700,000 and the write-off of related
deferred financing costs and accrued interest payable.

         In July, 1999, we recorded an extraordinary gain on extinguishment of
debt of approximately $3,800,000 as a result of repurchasing $4,000,000 of our
Notes for a cash payment of $210,000 and the write-off of related deferred
financing costs and accrued interest payable. We have not provided for income
taxes on the gain because we believe we will be able to utilize certain of our
net operating loss carryforwards to offset any income tax liability related to
the transaction.

         On February 15, 2000, we recorded an extraordinary gain on
extinguishment of debt of approximately $9,472,000 as a result of the Fiscal
2000 Restructuring of our Notes, net of restructuring costs. The gain resulted
primarily from the conversion of $31,000,000 of the outstanding principal
balance into 15,500,000 shares of common stock, which were valued at
approximately $21,312,500 based on the closing price of our stock on February
15, 2000, the forgiveness of approximately $4,237,000 of accrued interest
payable, the write-off of approximately $1,929,000 of unamortized deferred
financing costs and the recording of $2,100,000 of interest which will accrue on
the remaining balance of the Notes under the revised terms of the agreement
through the maturity date of October 31, 2002. We have not provided for income
taxes on the gain because we believe we will be able to utilize certain of our
net operating loss carryforwards to offset any income tax liability related to
the restructuring transaction.

Net Income (Loss)

         Net income for Fiscal 2000 was approximately $14,118,000 compared to a
net loss of approximately $50,511,000 for Fiscal 1999.

LIQUIDITY AND CAPITAL RESOURCES

         During Fiscal 2001 we have continued to focus on strengthening our core
business unit. However during the first and second quarters of Fiscal 2001, we
experienced rapid increases in medical and pharmacy costs without
counterbalancing increases in premium revenue which negatively impacted
earnings. While there were premium revenue increases during the third quarter of
Fiscal 2001, the premium increases have not completely offset the significant
increases in medical and pharmacy costs incurred prior to the increases. The
management team continues to focus on streamlining our operations and enhancing
cost efficiency.

         On July 2, 1999 we purchased $4,000,000 face value of our Notes for
approximately $210,000, recognizing a pre-tax gain on extinguishment of debt of
approximately $3,800,000. We funded the purchase of our Notes from working
capital.

         On February 15, 2000, we completed the Fiscal 2000 Restructuring of the
Notes and recorded a gain of approximately $9,472,000 as a result of the
conversion of $31,000,000 of Notes into common stock, the forgiveness of
approximately $4,237,000 of accrued interest, the write off of approximately
$1,929,000 of unamortized deferred financing costs and the recording of
$2,100,000 of interest which will accrue on the remaining balance of the Notes
under the revised terms of the agreement through the maturity date of October
31, 2002. The remaining outstanding principal balance of the Notes of
$10,000,000 on the date of the Fiscal 2000 Restructuring was reinstated as a
performing non-defaulted loan.

         Effective June 30, 2001, we completed the Fiscal 2001 Restructuring of
the Notes and recorded a gain of approximately $3,503,000 as a result of the
conversion of $6,219,511 of the outstanding principal balance of the Notes into
6,219,511 shares of common stock, which were valued at approximately $1,804,000
based on the closing price of our common stock on June 29, 2001, the recording
of approximately $595,000 of interest which will accrue on the remaining balance
of the Notes under the revised terms of the agreement through the maturity date
of October 31, 2005, the recording of the New Note in the amount of $912,195 and
the recording of approximately


                                       29
<PAGE>   31

$277,000 of interest which will accrue on the New Note. The remaining
outstanding principal balance of the Notes of approximately $3,912,000 on the
date of the Fiscal 2000 Restructuring, including the interest accrued through
April 30, 2001 which has been added to the principal balance, has been
reinstated as a performing non-defaulted loan. Also, see Item 1 "Recent
Developments - Debt Restructuring" and Note 6 of the Company's Consolidated
Financial Statements.

         As a result of the Fiscal 2000 Restructuring, we entered into a credit
facility (the "Credit Facility"). The Credit Facility provides a revolving loan
of $3,000,000 which matures March 31, 2002. Interest is payable monthly at 2.9%
plus the 30-day Dealer Commercial Paper Rate which is 3.75% at June 30, 2001.
The Credit Facility may be renewed annually at the option of the lender. The
Credit Facility has been guaranteed by a board member and an entity controlled
by a board member. The balance outstanding under the Credit Facility at June 30,
2001 was $500,000. (See Note 7 of the Company's Consolidated Financial
Statements.)

         In August 1998, we entered into a credit facility with First Union Bank
that provided for a $5,000,000 Acquisition Facility and a $5,000,000 Revolving
Loan. We had borrowed the entire $5,000,000 Acquisition Facility to fund
acquisitions. We never utilized the Revolving Loan. In April 1999 we used
approximately $4,000,000 of the net proceeds from the sale of certain of our
entities to reduce the outstanding balance on the facility. We amended the
credit facility to provide, among other things, for the repayment of the
remaining outstanding principal balance of approximately $1,000,000 by December
31, 1999. We obtained a waiver which extended the due date of the remaining
balance to February 1, 2000 and repaid the outstanding balance on January 31,
2000.

         Effective December 31, 1999, we amended our contract with Foundation
(the "2000 Amendment"). The 2000 Amendment reduces our prior medical claims and
long-term debt liabilities to Foundation as of May 31, 1999 to $1,500,000. The
2000 Amendment also required us to remit to Foundation any reinsurance proceeds
received for claims generated from Foundation members for the period June 1,
1998 through August 31, 1999 up to a maximum of $1,327,400. As a result of the
2000 Amendment, we recorded a contractual revision of previously recorded
medical claims liability of approximately $3,054,000. The 2000 Amendment
resulted in the reduction of medical claims payable by approximately $2,703,000
and the reduction of long-term debt by approximately $351,000.

         Effective March 31, 2001, we negotiated another amendment to our
professional provider agreement with Foundation. The 2001 Amendment eliminated
the medical claims liability incurred by the IPA through March 31, 2001 and
reduced other liabilities to Foundation by $1,000,000. The 2001 Amendment also
terminated our association with certain physician practices effective May 31,
2001, which represented approximately 70% of the IPA's membership at that time.

         Effective October 1, 2000, the Company's HHAs, which primarily provide
services to patients eligible under the Medicare program, began to be reimbursed
by Medicare under PPS and we continue to take steps to operate effectively and
efficiently under PPS. There can be no assurance that the established fees will
not change in a manner that could adversely affect our revenues. See "Medicare
and Medicaid Reimbursement Considerations" and "The Balanced Budget Act of
1997."

         Our net loss was approximately $138,000 for Fiscal 2001. Net cash used
in operations was approximately $1,902,000 due primarily to the net loss, the
gains on extinguishment of debt and disposals of equipment of approximately
$3,900,000, the 2001 Contractual Adjustment of approximately $4,638,000, offset
by non-cash amortization and depreciation expenses of approximately $4,164,000,
a decrease in Due from HMOs of approximately $2,030,000 and an increase in Due
to Medicare of approximately $797,000.

         Our cash provided by investing activities was approximately $220,000
and resulted from proceeds from disposals of property and equipment of
approximately $452,000 less the purchase of equipment of approximately $231,000.
Our cash used in financing activities was approximately $328,000 for Fiscal 2001
due primarily to borrowings during the year of $2,150,000 and payments of
various notes payable of approximately $2,463,000.

         Our working capital deficit was approximately $8,188,000 at June 30,
2001.


                                       30
<PAGE>   32

         We have no current knowledge of any intermediary audit adjustment
trends with respect to previously filed cost reports. However, as is standard in
the industry, we remain at risk for disallowance and other adjustment to
previously filed cost reports until final settlement. Our average settlement
period with respect to our cost reports has historically ranged from two to four
years.

         The financial statements have been prepared assuming we will continue
as a going concern. We continue to take steps to improve our cash flow and
profitability. We believe that we will be able to fund our capital commitments,
operating cash requirements and satisfy our obligations as they become due from
a combination of cash on hand, expected operating cash flow improvements through
HMO premium increases and advantageous HMO benefit changes and the Credit
Facility. However, there can be no assurances that these sources of funds will
be sufficient to fund our operations and satisfy our obligations as they become
due.

         If we are unable to satisfy our cash requirements, we may be required
to take certain steps, such as borrowing additional funds, restructuring our
indebtedness, selling assets, reducing costs, and reducing or delaying capital
expenditures. If we need additional capital to fund our operations, there can be
no assurances that such capital can be obtained or, if obtained, that it will be
on terms acceptable to us. The incurring or assumption of additional
indebtedness could result in the issuance of additional equity and/or debt which
can have a dilutive effect on current shareholders and a significant effect on
our operations.

         On June 29, 2001, the American Stock Exchange (the "Exchange") notified
us of its decision to continue to list our common stock pending a review of our
annual report. As of the date of this filing, we are still below the continued
listing requirements of the Exchange with respect to the requirement to not
sustain losses from continuing operations and/or net losses in two of our three
most recent fiscal years. We are unable to guarantee that the Exchange will
continue to list our common stock.

ITEM 7A.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

         At June 30, 2001, our cash equivalents were invested in high grade,
very short-term securities, which are not typically subject to material market
risk. We have loans outstanding at fixed rates. For loans with fixed interest
rates, a hypothetical 10% change in interest rates would have no impact on our
future earnings and cash flows related to these instruments and would have an
immaterial impact on the fair value of these instruments. Our Credit Facility is
interest rate sensitive. A 100 basis point adverse movement (increase) in
interest rates would have an immaterial impact in our net loss for Fiscal 2001
as there were only balances outstanding under the Credit Facility for 116 days.
There would have been no impact on net income for Fiscal 2000 as there were no
outstanding balances under the Credit Facility during Fiscal 2000. We have no
material risk associated with foreign currency exchange rates or commodity
prices.

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The response to this item is submitted in a separate section of this
report.

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

         None.


                                       31
<PAGE>   33

                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

                                   MANAGEMENT

         The executive officers and directors of Continucare are as follows:

<TABLE>
<CAPTION>

NAME                          AGE     POSITION
--------------------------    ---     -----------------------------------------------------------------------

<S>                           <C>     <C>
Spencer J. Angel..........     35     President, Chief Executive Officer, Chief Operating Officer and Director
Cathy J. Lerman...........     45     Executive Vice President and General Counsel
Janet L. Holt.............     54     Chief Financial Officer
Charles M. Fernandez......     39     Chairman of the Board
Phillip Frost, M.D........     65     Vice Chairman of the Board
Robert J. Cresci..........     57     Director
Patrick M. Healy..........     43     Director
</TABLE>

         SPENCER J. ANGEL has served as our President and Chief Executive
Officer since November 1999. From July 12, 1999 until his appointment as our
President and Chief Executive Officer, he served as our Executive Vice President
and Chief Operating Officer. Mr. Angel has served as a member of our board of
directors since September 30, 1999. Mr. Angel has served, since 1996, as
director and president of Harter Financial, Inc., a diversified financial
consulting firm. See "Certain Relationships and Related Transactions." In 1999,
Mr. Angel served as president and chief executive officer of Medical Laser
Technologies, Inc., a company that produces digital x-ray picture archiving and
communications systems for cardiac catheterization labs. He was the secretary,
treasurer and director of Autoparts Warehouse, Inc., an auto parts retail and
service company, from September 1997 to January 1999. From December 1994 through
August 1996 Mr. Angel was president of 5 East 41 Check Cashing Corp., a company
engaged in the payroll service and armored car business. From November 1991 to
1994 Mr. Angel was an associate attorney with Platzer, Fineberg & Swergold, a
law firm specializing in corporate financial reorganizations.

         CATHY J. LERMAN, ESQ. was appointed as Executive Vice President and
General Counsel in September of 2001. Ms. Lerman has over 20 years of legal
experience including 10 years as in-house counsel for both public and private
companies. Ms. Lerman served as Vice President, Secretary and General Counsel of
Pediatrix Medical Group, Inc., a physician practice management company, from
1994-1996 and completed both an initial and secondary public offering for that
company. From May of 1997 until August of 1998, Ms. Lerman was Vice President,
Secretary and General Counsel of TPS, Inc., a health care company managing
physician practices, laboratories, and pharmacies. From August of 1998 until May
of 2000, Ms. Lerman was the principal of Cathy Jackson Lerman, P.A. Ms. Lerman
served from May of 2000 until August of 2001 as Vice President, Secretary and
General Counsel of Localbusiness.com, Inc., an Internet-based news service.

         JANET L. HOLT was appointed as our Chief Financial Officer in January
2000. From July 1999 when she joined the Company until her appointment as our
Chief Financial Officer, Ms. Holt served as the Vice President of Finance -
Managed Care Division. Ms. Holt served as an audit Senior Manager at Ernst &
Young, LLP from November 1997 until joining Continucare. From June 1995 to
November 1997, Ms. Holt served as the Internal Auditor for InPhyNet Medical
Management, Inc., and she served as an audit manager with Deloitte & Touche, LLP
from 1992 to June 1995.

         CHARLES M. FERNANDEZ, our Chairman of the Board, is the president and
chief executive officer and a director of Big City Radio, Inc. a company that
owns and operates a network of radio stations, since November


                                       32
<PAGE>   34

1999. Mr. Fernandez co-founded Continucare in February 1996 and served as our
Chairman of the Board, President and Chief Executive Officer from our inception
until November 1, 1999, at which time he resigned as the President and Chief
Executive Officer. From July 1999 until November 1999, Mr. Fernandez served as
the chairman of Hispanic Internet Holdings, Inc., a Spanish online service
provider that was acquired by Big City Radio in 1999. He has also served as the
Vice-Chairman of Healthcare2Net Solutions, an internet solutions company, since
March 30, 2000. Mr. Fernandez has also been a director of IVAX Corporation, a
Florida corporation ("IVAX") since June 1998.

         PHILLIP FROST, M.D. has served as our Vice Chairman since September
1996. Dr. Frost has served, since 1987, as chairman of the board and chief
executive officer of IVAX, a pharmaceutical manufacturer. He served as IVAX's
president from July 1991 until January 1995. He was the Chairman of the
Department of Dermatology at Mt. Sinai Medical Center of Greater Miami, Miami
Beach, Florida from 1970 to 1992. Dr. Frost was Chairman of the Board of
Directors of Key Pharmaceutical, Inc. from 1972 to 1986. He is chairman of the
board of directors of Whitman Education Group, which is engaged in proprietary
education and a director of Northrup Grumman which is in the aerospace industry.
He is Vice Chairman of the Board of Trustees of the University of Miami and a
member of the Board of Governors of the American Stock Exchange.

         ROBERT J. CRESCI has served as one of our directors since February
2000. He has been a Managing Director of Pecks Management Partners Ltd., an
investment management firm, since 1990. Mr. Cresci currently serves on the
boards of Sepracor, Inc.; Aviva Petroleum Ltd.; Film Roman, Inc.; Castle Dental
Centers, Inc.; j2 Global Communications, Inc.; Candlewood Hotel Co.; SeraCare
Life Sciences Inc.; E-Stamp Corporation and several private companies.

         PATRICK M. HEALY has served as one of our directors since February
2000. He has served as president and chief administrative officer and as a
member of the board of directors for Mayo Health Plan, Inc. since its inception
in June 1996. Previously, Mr. Healy was president and chief executive officer
and member of the board of directors for Cleveland Clinic Florida Health Plan
from its inception in 1992 through 1996. Mr. Healy also served as a regional
director of operations-southeast region and executive director Florida/Caribbean
for The Travelers Insurance Company from 1990 through 1992.

         Officers serve at the pleasure of the board of directors, subject to
the terms of any employment agreements. See "-Employment Agreements."

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

         Section 16(a) of the Securities Exchange Act of 1934 requires our
directors and executive officers and persons who own more than ten percent of
our outstanding common stock, to file with the Securities and Exchange
Commission (the "SEC") initial reports of ownership and reports of changes in
ownership of common stock. Such persons are required by SEC regulation to
furnish us with copies of all such reports they file.

         To our knowledge, based solely on a review of the copies of such
reports furnished to us and written representations that no other reports were
required, all Section 16(a) filing requirements applicable to our officers,
directors and greater than ten percent beneficial owners have been satisfied.

ITEM 11.          EXECUTIVE COMPENSATION AND OTHER INFORMATION

SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION

The following table sets forth certain summary information concerning
compensation paid or accrued by us to or on behalf of (i) our chief executive
officer, and (ii) the other executive officer who was serving as an executive
officer at the end of the last fiscal year, whose total annual salary and bonus,
determined as of the end of the fiscal year ended June 30, 2001, exceeded
$100,000 (hereinafter referred to as the "Named Executive Officers").


                                       33
<PAGE>   35

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                           LONG-TERM
                                                 ANNUAL COMPENSATION                      COMPENSATION
                                            ----------------------------------------   ------------------
                                                                              OTHER
                                                                              ANNUAL
                NAME AND                    FISCAL                           COMPENS   NO. OF SECURITIES     ALL OTHER
           PRINCIPAL POSITION                YEAR    SALARY ($)   BONUS ($)   ATION    UNDERLYING OPTIONS   COMPENSATION
------------------------------------------  ------   ----------   ---------  -------   ------------------   ------------
<S>                                         <C>      <C>          <C>        <C>       <C>                  <C>
Spencer J. Angel,.........................   2001      268,307           0      (1)        600,000(2)             0
  President and Chief Executive Officer...   2000      207,867           0      (1)              0                0
Janet L. Holt,............................   2001      103,846           0      (1)         75,000(3)             0
  Chief Financial Officer.................   2000       83,077      20,000      (1)              0                0
</TABLE>

-----------
(1)      The total perquisites and other personal benefits provided is less than
         10% of the total annual salary and bonus to such officer.

(2)      100,000 fully vested stock options valued at approximately $68,750
         (based on the closing market price on the date of grant) were awarded
         on July 20, 2000. An additional 500,000 stock options were also awarded
         on July 20, 2000 valued at approximately $343,750 (based on the closing
         market price on the date of grant) and vest ratably over three years.

(3)      75,000 stock options were awarded on July 20, 2000 valued at
         approximately $51,600 (based on the closing market price on the date of
         grant) and vest ratably over three years

OPTION GRANTS DURING FISCAL 2001

The following table sets forth certain information concerning grants of stock
options made during Fiscal 2001 to each of the Named Executive Officers. We did
not grant any stock appreciation rights in Fiscal 2001.

                     INDIVIDUAL OPTION GRANTS IN FISCAL 2001

<TABLE>
<CAPTION>
                          SHARES OF                                                POTENTIAL REALIZABLE VALUE AT
                        COMMON STOCK    % OF TOTAL     OPTION     EXPIRATION    ASSUMED ANNUAL RATES OF STOCK PRICE
                         UNDERLYING     GRANTED TO    PRICE ($)      DATE         APPRECIATION FOR OPTION TERM (1)
           NAME            OPTIONS      EMPLOYEES
                                                                                        5%               10%
  -----------------------------------------------------------------------------------------------------------------
  <S>                   <C>             <C>           <C>         <C>                <C>               <C>
  Spencer J. Angel,.
  President and Chief
  Executive Officer.....   600,000       23.0%(2)       $ .69       7/20/10          260,362           659,809
  Janet L. Holt,
  Chief Financial
  Officer...............    75,000        2.9%(2)       $ .69       7/20/10           32,545            82,476
</TABLE>

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

(1)      The dollar amounts set forth in these columns are the result of
         calculations at the five percent and ten percent rates set by the
         Securities and Exchange Commission, and therefore are not intended to
         forecast possible future appreciation, if any, of the market price of
         the common stock.

(2)      Based upon 2,611,000 total options granted to employees during Fiscal
         2001

OPTION EXERCISES IN 2001 AND YEAR END OPTION VALUES

         The following table sets forth information with respect to (i) the
number of unexercised options held by the Named Executive Officers as of June
30, 2001, and (ii) the value as of June 30, 2001 of unexercised in-the-money
options. No options were exercised by any of the Named Executive Officers in
Fiscal 2001.


                                       34
<PAGE>   36

<TABLE>
<CAPTION>
                        NUMBER OF SECURITIES              VALUE OF UNEXERCISED
                   UNDERLYING UNEXERCISED OPTIONS         IN-THE-MONEY OPTIONS
                          AT JUNE 30, 2001                AT JUNE 30, 2001 (1)
                   ------------------------------    ------------------------------
                   EXERCISABLE      UNEXERCISABLE    EXERCISABLE      UNEXERCISABLE
                   -----------      -------------    -----------      -------------

<S>                <C>              <C>              <C>              <C>
Spencer J. Angel     100,000           500,000            0                 0
Janet L. Holt              0            75,000            0                 0
</TABLE>

---------
(1)      Market value of shares covered by in-the-money options on June 30,
         2001, less option exercise price. Options are in-the-money if the
         market value of the shares covered thereby is greater than the option
         exercise price.

DIRECTOR COMPENSATION

         Other than the chairman of the board of directors, our directors do not
currently receive any cash compensation for service on the board of directors
but may be reimbursed for certain expenses in connection with attendance at
board of director meetings or other meetings on our behalf. All of our directors
are eligible to receive options under our Stock Option Plan. See also "Certain
Relationships and Related Transactions."

         Under an agreement with Mr. Fernandez, he received a payment of $50,000
as chairman of the board of directors.

         On July 20, 2000, each director, other than the chairman of the board
of directors, was granted 100,000 fully vested stock options with an exercise
prices of $.69 per share. The stock options expire on July 20, 2010. On July 20,
2000, the chairman of the board was granted 200,000 fully vested stock options
with an exercise price of $.69 per share which also expire on July 20, 2010. As
of June 30, 2001, none of the options had been exercised.

         On May 29, 2001, we granted Mr. Healy 1,000 fully vested stock options
with an exercise price of $.32 for consulting services provided. The stock
options expire on May 29, 2011.

EMPLOYMENT AGREEMENTS

         Mr. Angel's employment agreement was for a one-year period commencing
July 12, 1999, with additional one-year automatic renewals and provides for an
annual base salary of $250,000. Additionally, he is eligible to receive a bonus
equal to 7% of our earnings before interest, taxes, depreciation and
amortization in excess of $3 million for the fiscal year. The agreement may be
terminated by either party with or without cause upon 60 days notice prior to an
anniversary date of the agreement. Pursuant to the terms of his agreement, Mr.
Angel is prohibited from competing with Continucare for a one year period
following termination of his employment with Continucare. In the event that Mr.
Angel is terminated without cause, Mr. Angel is entitled to his base salary for
the period of one year and any unpaid accrued bonus.

ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information as of September 17,
2001 concerning the beneficial ownership of the common stock by (i) each person
known by Continucare to be the beneficial owner of more than 5% of the
outstanding common stock, (ii) each of the directors and director nominees who
own our shares, (iii) Named Executive Officers, and (iv) all of our executive
officers and directors as a group. All holders listed below have sole voting
power and investment power over the shares beneficially owned by them, except to
the extent such power may be shared with such person's spouse.


                                       35
<PAGE>   37

<TABLE>
<CAPTION>
            NAME AND ADDRESS                    AMOUNT AND NATURE OF         PERCENT OF
           OF BENEFICIAL OWNER                 BENEFICIAL OWNERSHIP(1)     COMMON STOCK(2)
------------------------------------------     -----------------------     ---------------
<S>                                            <C>                         <C>
Spencer J. Angel..........................           1,313,479(3)                 3.3
   80 S.W. 8th Street
   Miami, FL 33131
Charles M. Fernandez......................           2,179,167(4)                 5.5
   80 S.W. 8th Street
   Miami, FL 33131
Dr. Phillip Frost.........................          20,396,550(5)                50.4
   4400 Biscayne Boulevard
   Miami, FL  33137
Janet L. Holt.............................              25,000(6)                   *
   80 S.W. 8th Street
   Miami, FL  33131

Robert Cresci.............................             100,000(6)                   *
   c/o Pecks Management Partners, Ltd.
   One Rockefeller Plaza
   Suite 900
   New York, NY 10020
Patrick Healy.............................             101,000(6)                   *
   c/o Mayo Health Plan
   4168 South Point Parkway
   Suite 102
   Jacksonville, FL 32216
Strategic Investment Partners, Ltd........           2,250,000(7)                 5.7
   Kaya Flamboyan 9
   Willemstad, Curacao
   Netherlands Antilles
Pecks Management Partners Ltd.............           8,511,585(8)                19.9
   One Rockefeller Plaza
   Suite 900
   New York, NY 10020
All directors and executive officers
   as a group (7 persons).................          24,115,196(9)                58.3
</TABLE>

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

*        Less than one percent.

(1)      For purposes of this table, beneficial ownership is computed pursuant
         to Rule 13d-3 under the Exchange Act; the inclusion of shares as
         beneficially owned should not be construed as an admission that such
         shares are beneficially owned for purposes of the Exchange Act. Under
         the rules of the Securities and Exchange Commission, a person is deemed
         to be a "beneficial owner" of a security he or she has or shares the
         power to vote or direct the voting of such security or the power to
         dispose of or direct the disposition of such security. Accordingly,
         more than one person may be deemed to be a beneficial owner of the same
         security.

(2)      Based on 39,459,601 shares outstanding as of September 17, 2001.

(3)      Includes (i) 800 shares held by Arkangel, Inc., an entity controlled by
         Mr. Angel; (ii) 850,000 shares held by Harter Financial, Inc., an
         entity controlled by Mr. Angel; (iii) 150,000 shares held directly by
         Mr. Angel; (iv) 266,666 shares of common stock underlying options that
         are currently exercisable, and (v) 46,013 shares of common stock
         issuable upon conversion of a convertible promissory note.

(4)      Includes (i) 1,816,667 shares of Common Stock are owned of record by
         the Fernandez Family Limited Partnership, (ii) 27,500 shares held
         directly by Mr. Fernandez and (iii) 335,000 shares of Common Stock
         underlying options granted that are currently exercisable.

(5)      Includes (i) 18,984,588 shares owed beneficially through Frost Nevada
         Limited Partnership; (ii) 414,800 shares owned directly by Dr. Frost;
         (iii) 797,162 shares of common stock issuable upon conversion of a
         convertible promissory note and (iv) 200,000 shares of common stock
         underlying options granted that are currently exercisable. See "Certain
         Transactions".

(6)      Represents shares of common stock underlying options that are currently
         exercisable.

(7)      Based on the most recent Schedule 13D/A, the Strategic Investment
         Partners, Ltd. is deemed to have sole voting power and each of Quasar
         Strategic Partners LDC, Quantum Industrial Partners LLC, QIH Management
         Investors, L.P. and QIH Management, Inc., Soros Fund Management, LLC
         and Mr. George Soros are deemed to have shared power.

(8)      Includes 3,407,927 shares of Common Stock that may be issued upon the
         conversion of Convertible Subordinated Notes.

(9)      Includes 1,027,666 shares of common stock underlying options that are
         currently exercisable and 843,175 shares of common stock that are
         issuable upon conversion of promissory notes.

                                       36
<PAGE>   38

ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

CERTAIN TRANSACTIONS

         In a private transaction with certain noteholders, effective June 30,
2001, Frost Nevada Limited Partnership ("Frost Nevada"), an entity controlled by
Dr. Phillip Frost, Vice Chairman of our board of directors, purchased
Convertible Subordinated Notes due 2002 (the "Notes") in the principal amount of
$6,219,511 (the "Purchased Debt") and 9,640,244 shares of our common stock (the
"Purchased Shares"). Frost Nevada immediately exchanged the Purchased Debt for
(i) 6,219,511 shares of our common stock and (ii) a convertible promissory note
(the "New Note") in the principal amount of $912,195, with an October 31, 2005
maturity date and interest at 7% due semi-annually. At such time Dr. Frost was
deemed to beneficially own 55.5% of our outstanding common stock, assuming
conversion of the New Note.

         Effective July 31, 2001, Frost Nevada sold approximately 13% of the
Purchased Shares, 13% of the shares of common stock issued upon the conversion
of the Purchased Debt and transferred 13% of the New Note in a private
transaction to a group of six investors. Spencer J. Angel, our President and
CEO, and an entity controlled by Mr. Angel comprise 40% of this investor group.

         Mr. Fernandez has received fees as chairman of our board of directors
and was granted stock options during the year. See "Director Compensation".


                                       37
<PAGE>   39


                                     PART IV

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

         (a)(1)   Financial Statements

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

         (a)(2)   Financial Statement Schedules

                  All schedules have been omitted because they are inapplicable
         or the information is provided in the consolidated financial
         statements, including the notes hereto.

         (a)(3)   Exhibits

<TABLE>
            <S>   <C>
            3.1   Restated Articles of Incorporation of Company, as amended(3)
            3.2   Restated Bylaws of Company(3)
            4.1   Form of certificate evidencing shares of Common Stock(3)
            4.2   Indenture, dated as of October 30, 1997, between the
                  Company and American Stock Transfer & Trust Company, as
                  Trustee, relating to 8% Convertible Subordinated Notes due
                  2002(5)
            4.3   Registration Rights Agreement, dated as of October 30, 1997,
                  by and between the Company and Loewenbaum & Company
                  Incorporated(5)
            4.4   Continucare Corporation Amended and Restated 1995 Stock Option
                  Plan(7)
            4.5   Amended and Restated 2000 Stock Option Plan(18) (Exhibit 4.1)
            4.6   Convertible Subordinated Promissory Note(19) (Exhibit 4.1)
            10.1  Employment Agreement between the Company and Charles M.
                  Fernandez dated as of September 11, 1996(2)
            10.2  Agreement and Plan of Merger by and among Continucare
                  Corporation, Zanart Entertainment Incorporated and Zanart
                  Subsidiary, Inc. dated August 9, 1996(1)
            10.3  Stock Purchase Agreement dated April 10, 1997 by and among
                  Continucare Corporation, Continucare Physician Practice
                  Management, Inc., AARDS, Inc. and Sheridan Healthcorp. Inc(4)
            10.4  Stock Purchase Agreement dated April 10, 1997 by and among
                  Continucare Corporation, Continucare Physician Practice
                  Management, Inc., Rosenbaum, Weitz & Ritter, Inc. and Sheridan
                  Healthcorp, Inc(4)
            10.5  Stock Purchase Agreement dated April 10, 1997 by and among
                  Continucare Corporation, Continucare Medical Management, Inc.,
                  Arthritis & Rheumatic Disease Specialties, Inc. and Sheridan
                  Healthcare, Inc(4)
            10.6  Placement Agreement, dated as of October 27, 1997, between the
                  Company and Loewenbaum & Company Incorporated(5)
            10.7  Purchase Agreement, dated as of September 4, 1997, by and
                  among Continucare Corporation, Continucare Physician Practice
                  Management, Inc., a wholly owned subsidiary of Continucare
                  Corporation, DHG Enterprises, Inc. f/k/a Doctor's Health
                  Group, Inc. and Doctor's Health Partnership, Inc., both
                  Florida corporations, and Claudio Alvarez and Yvonne Alvarez
                  (6)
            10.8  Stock Purchase Agreement, dated as of February 13, 1998, by
                  and among Continucare Corporation, Continucare Rehabilitation
                  Services, Inc., Integrated Health Services, Inc., Rehab
                  Management Systems, Inc., IntegraCare, Inc. and J.R. Rehab
                  Associates, Inc(8)
</TABLE>

                                       38
<PAGE>   40
<TABLE>
            <S>   <C>
            10.9  Asset Purchase Agreement, dated as of April 7, 1998, by and
                  among: (i) SPI Managed Care, Inc., SPI Managed Care of
                  Hillsborough County, Inc., SPI Managed Care of Broward, Inc.,
                  Broward Managed Care, Inc., each a Florida corporation; (ii)
                  First Medical Corporation, a Delaware corporation and First
                  Medical Group, Inc., a Delaware corporation; and (iii) CNU
                  Acquisition Corporation, a Florida corporation(9) and (10)
           10.10  Asset Purchase Agreement, dated as of August 18, 1998, by and
                  among: (i) Caremed Health Systems, Inc.; (ii) Caremed Medical
                  Management, Inc.; Caremed Health Administrators, Inc., each a
                  Florida corporation; and (iii) Continucare Managed Care, Inc.,
                  a Florida corporation(11)
           10.11  Physician Practice Management Participation Agreement between
                  Continucare Medical Management, Inc., and Humana Medical Plan,
                  Inc. entered into as of the 1st day of August, 1998(17)
           10.12  Asset Purchase Agreement, dated April 7, 1999, by and among:
                  (i) Kessler Rehabilitation of Florida, Inc., a Florida
                  Corporation; Rehab Management Systems, Inc., a Florida
                  Corporation; Continucare Occmed Services, Inc., a Florida
                  Corporation; and Continucare Corporation, a Florida
                  Corporation(12)
           10.13  Employment Agreement dated July 12, 1999 between Continucare
                  Corporation and Spencer Angel(13)
           10.14  Lease Agreement, dated as of the 28th day of July 1999,
                  between Doral Park Joint Venture, Lennar Mortgage Holdings
                  Corporation, LNR/CREC Brickell Bayview Limited Partnership,
                  and Universal American Realty Corporation, as
                  tenants-in-common, and Continucare Corporation(17)
           10.15  First Amendment to Employment Agreement, dated October 1,
                  1999, between Charles Fernandez and Continucare Corporation
                  (13)
           10.16  Second Amendment to Employment Agreement between Charles M.
                  Fernandez and the Company, entered into as of the 1st day of
                  November 1999(14)
           10.17  First Amendment to Employment Agreement between Spencer J.
                  Angel and the Company, entered into as of the 1st day of
                  November, 1999(14)
           10.18  Employment Agreement dated September 4, 2001 between
                  Continucare Corporation and Cathy J. Lerman(20)
            21.1  Subsidiaries of the Company(20) (Exhibit 21.1)
            23.1  Consent of Ernst & Young LLP(20) (Exhibit 23.1)
            99.1  Consent Letter and Agreement to the First Supplemental
                  Indenture between the Securityholders of the Convertible Notes
                  due 2002 and Continucare Corporation, dated December 9, 1999
                  (15)
</TABLE>

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

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


                                       39
<PAGE>   41

<TABLE>
                  <S>      <C>
                  (11)     Form 8-K dated and filed with the Commission on September 2, 1998.
                  (12)     Form 8-K dated April 21, 1999 and filed with the Commission on April 23, 1999.
                  (13)     Form 10-K/A for the fiscal year ended June 30, 1999.
                  (14)     Form 10-K/A, Amendment No. 2 for the fiscal year ended June 30, 1999.
                  (15)     Form 10-Q for the quarterly period ended December 31, 1999
                  (16)     Form 10-Q for the quarterly period ended March 31, 2000.
                  (17)     Form 10-K for the fiscal year ended June 30, 2000.
                  (18)     Form S-8 File No. 333-61246, filed May 18, 2001.
                  (19)     Form 8-K dated August 3, 2001, filed August 15, 2001.
                  (20)     Filed herewith.
</TABLE>

(b)      Reports on Form 8-K

         Form 8-K was filed on May 31, 2001 regarding our failure to make the
         April 30, 2001 semi-annual payment of interest on our Convertible
         Subordinated Notes due 2002 within the 30 day grace period because we
         were continuing our discussions to restructure the Notes.

         Form 8-K was filed on August 15, 2001 regarding the completion of the
         Fiscal 2001 Restructuring which was effective June 30, 2000.
         Immediately upon the completion of the Fiscal 2001 Restructuring, Dr.
         Phillip Frost, a director, was deemed to beneficially own 55.5% of our
         outstanding common stock, assuming conversion of the New Note.
         Subsequently, Frost Nevada sold approximately 13% of the Purchased
         Shares, 13% of the shares of common stock issuable upon conversion of
         the Purchased Debt and transferred 13% of the New Note in a private
         transaction to a group of six investors. As a result of this subsequent
         transaction, Dr. Frost beneficially owns 50% of our outstanding common
         stock, assuming conversion of the New Note, or 49% of our outstanding
         common stock prior to giving effect to the conversion of the New Note.


                                       40
<PAGE>   42

                                   SIGNATURES

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

                         CONTINUCARE CORPORATION


                         By: /s/ Spencer J. Angel
                            ----------------------------------------------------
                            SPENCER J. ANGEL
                            Chief Executive Officer, Chief Operating Officer and
                            President

Dated: September 26, 2001

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

<TABLE>
<CAPTION>
         SIGNATURE                                  TITLE                                 DATE
<S>                               <C>                                              <C>


/s/ Spencer J. Angel              President, Chief Executive Officer, Chief        September 26, 2001
---------------------------             Operating Officer and Director
Spencer J. Angel                        (Principal Executive Officer)


/s/ Janet L. Holt                          Chief Financial Officer                 September 26, 2001
---------------------------           (Principal Accounting Officer and
Janet L. Holt                            Principal Financial Officer)


/s/ Charles M. Fernandez                    Chairman of the Board                  September 26, 2001
---------------------------
Charles M. Fernandez


/s/ Phillip Frost                         Vice Chairman of the Board               September 26, 2001
---------------------------
Phillip Frost, M.D.


/s/ Robert Cresci                                  Director                        September 26, 2001
---------------------------
Robert Cresci


/s/ Patrick Healy                                  Director                        September 26, 2001
---------------------------
Patrick Healy
</TABLE>


                                       41
<PAGE>   43

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                        PAGE
                                                                                        ----

<S>                                                                                     <C>
Report of Independent Certified Public Accountants..................................     F-2
Consolidated Balance Sheets as of June 30, 2001 and 2000............................     F-3
Consolidated Statements of Operations for the years ended June 30, 2001, 2000
     and 1999.......................................................................     F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended
   June 30, 2001, 2000 and 1999.....................................................     F-5
Consolidated Statements of Cash Flows for the years ended June 30, 2001, 2000
     and 1999.......................................................................     F-6
Notes to Consolidated Financial Statements..........................................     F-8
</TABLE>


                                      F-1
<PAGE>   44

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
Continucare Corporation and Subsidiaries:

         We have audited the accompanying consolidated balance sheets of
Continucare Corporation and subsidiaries as of June 30, 2001 and 2000, and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for each of the three years in the period ended June 30, 2001.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

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

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Continucare Corporation and subsidiaries at June 30, 2001 and 2000 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 2001, in conformity with accounting
principles generally accepted in the United States.

         The accompanying consolidated financial statements have been prepared
assuming that Continucare Corporation and subsidiaries will continue as a going
concern. As more fully described in Note 1, the Company has incurred recurring
operating losses and has a working capital deficiency. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regards to these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.


                                                           /s/ ERNST & YOUNG LLP

Miami, Florida
September 21, 2001


                                      F-2
<PAGE>   45

                             CONTINUCARE CORPORATION

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                           JUNE 30,
                                                                                                    2001              2000
                                                                                                ------------      ------------

<S>                                                                                             <C>               <C>
                                          ASSETS
Current assets
   Cash and cash equivalents .............................................................      $    525,482      $  2,535,540
   Accounts receivable, net of allowance for doubtful accounts of $5,802,000 and
     $5,752,000, respectively ............................................................            81,132            94,966
   Other receivables .....................................................................           763,637           697,977
   Prepaid expenses and other current assets .............................................           306,261           368,431
                                                                                                ------------      ------------
     Total current assets ................................................................         1,676,512         3,696,914
Equipment, furniture and leasehold improvements, net .....................................           703,494           880,873
Cost in excess of net tangible assets acquired, net of accumulated amortization of
   $8,346,000 and $5,929,000 respectively ................................................        17,516,751        19,932,891
Deferred financing costs, net of accumulated amortization of $1,706,000 and
   $426,000, respectively ................................................................         1,698,750         2,964,375
Other assets, net ........................................................................            74,731            70,127
                                                                                                ------------      ------------
     Total assets ........................................................................      $ 21,670,238      $ 27,545,180
                                                                                                ============      ============
                           LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
   Accounts payable ......................................................................      $    739,506      $    687,703
   Accrued expenses ......................................................................         2,270,695         2,517,985
   Accrued salaries and benefits .........................................................           579,805           742,069
   Due (from) to HMOs, net ...............................................................          (622,666)          985,835
   Credit Facility .......................................................................           500,000                --
   Advances from HMO .....................................................................           450,000
   Due to Medicare, net ..................................................................           500,045            73,527
   Current portion of convertible subordinated notes payable .............................           273,896           700,000
   Current portion of long-term debt .....................................................         4,952,076         2,276,635
   Current portion of related party note payable .........................................            53,211                --
   Accrued interest payable ..............................................................            17,703             6,044
   Current portion of capital lease obligations ..........................................           149,915           115,685
                                                                                                ------------      ------------
     Total current liabilities ...........................................................         9,864,186         8,105,483
Capital lease obligations, less current portion ..........................................            99,774           103,682
Convertible subordinated notes payable ...................................................         4,630,364        11,050,000
Long-term debt, less current portion .....................................................         1,011,704         5,023,244
Related party note payable, less current portion .........................................         1,135,683                --
                                                                                                ------------      ------------
     Total liabilities ...................................................................        16,741,711        24,282,409
Commitments and contingencies
Shareholders' equity
   Common stock, $0.0001 par value: 100,000,000 shares authorized; 42,455,794 shares
     issued and 39,459,601 shares outstanding at June 30, 2001; and 36,236,283 shares
     issued and 33,240,090 shares outstanding at June 30, 2000 ...........................             3,946             3,325
   Additional paid-in capital ............................................................        59,511,632        57,708,595
   Accumulated deficit ...................................................................       (49,162,350)      (49,024,448)
   Treasury stock (2,996,192 shares at June 30, 2000 and 1999) ...........................        (5,424,701)       (5,424,701)
                                                                                                ------------      ------------
     Total shareholders' equity ..........................................................         4,928,527         3,262,771
                                                                                                ------------      ------------
     Total liabilities and shareholders' equity ..........................................      $ 21,670,238      $ 27,545,180
                                                                                                ============      ============
</TABLE>

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


                                      F-3
<PAGE>   46

                             CONTINUCARE CORPORATION

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                      FOR THE YEAR ENDED JUNE 30,
                                                                             2001                2000                1999
                                                                        --------------      --------------      --------------

<S>                                                                     <C>                 <C>                 <C>
   Medical services revenue, net .................................      $  112,607,916      $  116,582,895      $  182,526,752

   Expenses
     Medical services:
       Medical claims ............................................          88,341,212          82,480,144         117,826,175
       Contractual revision of previously recorded medical
           claims and other ......................................          (4,638,205)         (3,053,853)                 --
       Other .....................................................          16,060,798          18,197,211          45,411,645
     Payroll and employee benefits ...............................           5,689,206           5,687,030          13,797,555
     Provision for bad debts .....................................              50,000                  --           6,196,384
     Professional fees ...........................................           1,180,438             895,716           1,886,661
     General and administrative ..................................           5,466,496           5,777,317          10,198,385
     Gain on disposal of property and equipment ..................            (383,375)                 --                  --
     Write down of long-lived assets .............................                  --                  --          11,717,073
     Loss on disposal of subsidiaries ............................                  --                  --          15,361,292
     Depreciation and amortization ...............................           2,883,287           2,918,534           5,791,982
                                                                        --------------      --------------      --------------
       Subtotal ..................................................         114,649,857         112,902,099         228,187,152
                                                                        --------------      --------------      --------------

(Loss) income from operations ....................................          (2,041,941)          3,680,796         (45,660,400)

Other income (expense)
   Interest income ...............................................              32,358              43,147             138,963
   Interest expense-convertible subordinated notes payable .......                  --          (2,054,710)         (3,639,433)
   Interest expense-other ........................................          (1,632,932)         (1,182,794)         (1,505,779)
   Other .........................................................               1,425             383,623              24,906
                                                                        --------------      --------------      --------------

(Loss) income before income taxes and extraordinary items ........          (3,641,090)            870,062         (50,641,743)
Benefit for income taxes .........................................                  --                  --                  --
                                                                        --------------      --------------      --------------
(Loss) income before extraordinary items .........................          (3,641,090)            870,062         (50,641,743)
Extraordinary gain on extinguishment of debt .....................           3,503,188          13,247,907             130,977
                                                                        --------------      --------------      --------------
Net (loss) income ................................................      $     (137,902)     $   14,117,969      $  (50,510,766)
                                                                        ==============      ==============      ==============

Basic and diluted (loss) earnings per common share:
   (Loss) income before extraordinary item........................      $         (.11)     $          .04      $        (3.50)

   Extraordinary gain on extinguishment of debt ..................                 .11                 .61                 .01
                                                                        --------------      --------------      --------------

   Net (loss) income .............................................      $           --      $          .65      $        (3.49)
                                                                        ==============      ==============      ==============
</TABLE>

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


                                      F-4
<PAGE>   47

                             CONTINUCARE CORPORATION

            CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                                                                                  TOTAL
                                                              ADDITIONAL                                       SHAREHOLDERS'
                                                 COMMON        PAID-IN        ACCUMULATED        TREASURY         EQUITY
                                                  STOCK        CAPITAL          DEFICIT           STOCK          (DEFICIT)
                                                 -------     ------------     ------------     ------------    -------------

<S>                                              <C>         <C>              <C>              <C>             <C>
Balance at June 30, 1998 ...................     $ 1,374     $ 31,099,303     $(12,631,651)    $ (5,242,680)    $ 13,226,346

Receipt of stock in settlement of receivable          (7)              --               --         (182,021)        (182,028)

Issuance of stock for settlement of former
   shareholder claim .......................          30              (30)              --               --               --

Issuance of stock related to ZAG acquisition          58        1,811,192               --               --        1,811,250

Net loss ...................................          --               --      (50,510,766)              --      (50,510,766)
                                                 -------     ------------     ------------     ------------     ------------

Balance at June 30, 1999 ...................       1,455       32,910,465      (63,142,417)      (5,424,701)     (35,655,198)

Issuance of stock to Harter Financial, Inc.           20          112,480               --               --          112,500

Issuance of stock to guarantor of credit
   facility.................................         300        3,374,700               --               --        3,375,000

Issuance of stock for debt restructuring ...       1,550       21,310,950               --               --       21,312,500

Net income .................................          --               --       14,117,969               --       14,117,969
                                                 -------     ------------     ------------     ------------     ------------

Balance at June 30, 2000 ...................       3,325       57,708,595      (49,024,448)      (5,424,701)       3,262,771

Issuance of stock for debt restructuring ...         621        1,803,037               --               --        1,803,658

Net loss ...................................          --               --         (137,902)              --         (137,902)
                                                 -------     ------------     ------------     ------------     ------------

Balance at June 30, 2001 ...................     $ 3,946     $ 59,511,632     $(49,162,350)    $ (5,424,701)    $  4,928,527
                                                 =======     ============     ============     ============     ============
</TABLE>

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


                                      F-5
<PAGE>   48

                             CONTINUCARE CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                             FOR THE YEAR ENDED JUNE 30,
                                                                                         2001            2000            1999
                                                                                     ------------    ------------    ------------

<S>                                                                                  <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net (loss) income .............................................................   $   (137,902)   $ 14,117,969    $(50,510,766)
   Adjustments to reconcile net (loss) income to cash (used in)
         provided by operating activities:
      Depreciation and amortization, including amortization of deferred
         loan costs ..............................................................      4,163,913       3,752,653       6,705,221
      Provision for bad debts ....................................................         50,000              --       4,656,384
      Write down of long-lived assets ............................................             --              --      11,717,073
      Provision for notes receivable .............................................             --              --       1,540,000
      Loss on disposal of subsidiaries ...........................................             --              --      15,361,292
      Amortization of discount on notes payable ..................................        109,983         258,349         254,531
      Contractual revision of previously recorded medical claims liability .......     (4,638,205)     (3,053,853)             --
      Gain on disposal of property and equipment .................................       (383,375)        (23,123)             --
      Gain on early extinguishment of debt .......................................     (3,503,188)    (13,247,907)       (130,977)
    Changes in assets and liabilities, excluding the effect of acquisitions and
         disposals:
      (Increase) decrease in accounts receivable .................................        (36,166)        509,558         290,226
      Decrease (increase) in prepaid expenses and other current assets ...........         62,170         (69,532)        191,644
      Increase in other receivables ..............................................        (65,660)       (431,920)       (221,092)
      Decrease in income tax receivable ..........................................             --              --       1,800,000
      Increase in intangible assets ..............................................             --              --          75,674
      (Increase) decrease in other assets ........................................         (4,604)           (962)         24,141
      Decrease in accounts payable and accrued expenses ..........................       (357,751)     (1,109,171)     (1,516,093)
      Increase (decrease) in Due to/from HMOs, net ...............................      2,029,704      (1,135,939)      3,858,831
      Increase in due to Medicare, net ...........................................        797,140         413,174       2,754,764
      Increase in accrued interest payable .......................................         11,659       2,029,043       1,776,466
                                                                                     ------------    ------------    ------------
Net cash (used in) provided by operating activities ..............................     (1,902,282)      2,008,339      (1,372,681)
                                                                                     ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Cash proceeds from disposal of subsidiaries ...................................             --              --       5,642,216
   Cash proceeds from disposal of property and equipment .........................        451,500              --              --
   Cash paid for acquisitions ....................................................             --              --      (4,640,000)
   Property and equipment additions ..............................................       (231,339)       (227,137)       (751,708)
                                                                                     ------------    ------------    ------------
Net cash provided by (used in) investing activities ..............................        220,161        (227,137)        250,508
                                                                                     ------------    ------------    ------------
</TABLE>

Continued on next page.


                                      F-6
<PAGE>   49

                             CONTINUCARE CORPORATION

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

<TABLE>
<CAPTION>
                                                                                            FOR THE YEAR ENDED JUNE 30,
                                                                                        2001            2000            1999
                                                                                    ------------    ------------    ------------

<S>                                                                                 <C>             <C>             <C>
CASH FLOWS FROM FINANCING ACTIVITIES
   Payments on Convertible Subordinated Notes ..................................        (350,000)       (560,000)       (720,000)
   Principal repayments under capital lease obligation .........................         (96,233)        (40,319)       (247,619)
   Payments on acquisition notes ...............................................              --              --      (1,475,000)
   Payment of deferred financing costs .........................................         (15,000)        (15,000)       (161,051)
   Payment of restructuring costs ..............................................              --        (310,792)             --
   Proceeds from Term and Revolving Notes ......................................              --              --       5,000,000
   Repayment of Term and Revolving Notes .......................................        (150,000)     (1,064,255)     (3,935,745)
   Net increase in Credit Facility .............................................         500,000              --              --
   Advances from HMOs ..........................................................       1,450,000              --              --
   Payments on advances from HMOs ..............................................      (1,000,000)             --              --
   Repayments to Medicare per agreement ........................................        (666,704)       (440,373)     (1,736,579)
   Proceeds from note repayment ................................................              --              --         147,520
                                                                                    ------------    ------------    ------------
Net cash used in financing activities ..........................................        (327,937)     (2,430,739)     (3,128,474)
                                                                                    ------------    ------------    ------------
Net decrease in cash and cash equivalents ......................................      (2,010,058)       (649,537)     (4,250,647)
Cash and cash equivalents at beginning of fiscal year ..........................       2,535,540       3,185,077       7,435,724
                                                                                    ------------    ------------    ------------
Cash and cash equivalents at end of fiscal year ................................    $    525,482    $  2,535,540    $  3,185,077
                                                                                    ============    ============    ============

SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

Notes payable issued for acquisitions ..........................................    $         --    $         --    $  5,819,411
                                                                                    ============    ============    ============

Receipt of stock in settlement of receivable ...................................    $         --    $         --    $    182,028
                                                                                    ============    ============    ============

Stock issued in ZAG acquisition ................................................    $         --    $         --    $  1,811,250
                                                                                    ============    ============    ============

Stock issued for deferred financing costs ......................................    $         --    $  3,375,000    $         --
                                                                                    ============    ============    ============

Stock issued for extinguishment of debt ........................................    $  1,803,658    $ 21,312,500    $         --
                                                                                    ============    ============    ============

Note payable issued for refunds due to Medicare for overpayments ...............    $    370,622    $    642,005    $         --
                                                                                    ============    ============    ============

Purchase of furniture and fixtures with proceeds of capital lease obligations ..    $    127,428    $    181,484    $         --
                                                                                    ============    ============    ============

Cash paid for interest .........................................................    $    580,665    $    106,534    $  2,125,895
                                                                                    ============    ============    ============
</TABLE>

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


                                      F-7
<PAGE>   50

                             CONTINUCARE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - GENERAL

Continucare Corporation ("Continucare" or the "Company"), which was incorporated
on February 1, 1996 as a Florida corporation, is a provider of integrated
outpatient healthcare and home health care services in Florida. Continucare's
predecessor, Zanart Entertainment, Incorporated ("Zanart") was incorporated in
1986. On August 9, 1996, a subsidiary of Zanart merged into Continucare
Corporation (the "Merger"). As a result of the Merger, the shareholders of
Continucare became shareholders of Zanart, and Zanart changed its name to
Continucare Corporation. As of June 30, 2001 the Company operated, owned and/or
managed: (i) fifteen staff model clinics in South and Central Florida; an
Independent Practice Association with 28 physicians; and four Home Health
agencies. For Fiscal 2001 approximately 60% of net medical services revenue was
derived from managed care contracts with Humana Medical Plans, Inc. ("Humana")
and 36% of net medical services revenue was derived from managed care contracts
with Foundation Health Corporation ("Foundation"). (Foundation and Humana may
hereinafter be collectively referred to as "the HMOs".) For Fiscal 2000
approximately 57% of net medical services revenue was derived from managed care
contracts with Humana and 39% of net medical services revenue was derived from
managed care contracts with Foundation. For Fiscal 1999 approximately 34% of net
medical services revenue was derived from managed care contracts with Humana and
51% of net medical services revenue was derived from managed care contracts with
Foundation.

Throughout Fiscal 1999 the Company experienced adverse business operations,
recurring operating losses, negative cash flow from operations, and significant
working capital deficiencies. Furthermore, as discussed below and further in
Note 6, the Company was unable to make the interest payments due April 30, 1999
and October 31, 1999 on the Company's Convertible Subordinated Notes Payable due
2002 (the "Notes"). The Company's operating difficulties were in large part due
to the underperformance of various entities which were acquired in fiscal years
1999, 1998 and 1997, the inability to effectively integrate and realize
increased profitability through anticipated economies of scale with these
acquisitions, as well as reductions in reimbursement rates under the Balanced
Budget Act of 1997.

To strengthen the Company financially, during Fiscal 1999 the Company began a
business rationalization program (the "Business Rationalization Program") to
divest itself of certain unprofitable operations and to close other
underperforming subsidiary divisions, and a financial restructuring program (the
"Financial Restructuring Program") to strengthen its financial condition and
performance. In connection with the implementation of its Business
Rationalization Program, the Company sold or closed its Outpatient
Rehabilitation subsidiary, its Diagnostic Imaging subsidiary and Specialty
Physician Practice subsidiary. These divestitures generated net cash proceeds of
approximately $5,642,000 (after the payment of transaction costs and other
employee-related costs). The rationalization liability associated with these
divestitures was approximately $749,000 at June 30, 2001. Other than payments
totally approximately $2,100, there were no changes in the rationalization
liability during Fiscal 2001. The Business Rationalization Program has assisted
management with the commencement and implementation of its Financial
Restructuring Program and has allowed the Company to focus its resources on a
core business model.

As a result of the Financial Restructuring Program, in Fiscal 2000, the Company
instituted a series of measures intended to reduce losses and to operate the
remaining acquired businesses profitably. Furthermore, as discussed in Note 6,
in Fiscal 2000, the Company completed a restructuring of its Notes.

During Fiscal 2001, the Company began to experience a deterioration in its claim
loss ratio, resulting in operating losses, negative cash flow from operations
and a significant working capital deficiency. Changes in the claims loss ratio
are due to fluctuations in utilization, the timing of claims paid by the HMOs on
the Company's behalf, as well as increases in medical costs without
counterbalancing increases in premium revenues from the HMOs. Furthermore, and
as discussed in Note 6, the Company did not make the April 30, 2001 interest
payment on the


                                      F-8
<PAGE>   51

                             CONTINUCARE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 - GENERAL (CONTINUED)

Notes and began negotiations with the noteholders to restructure the outstanding
Notes. On June 30, 2001, the Company completed a second restructuring of the
Notes.

The financial statements of the Company have been prepared assuming that it will
continue as a going concern. The Company believes that it will be able to fund
its capital commitments, operating cash requirements and satisfy its obligations
as they become due from a combination of cash on hand, expected operating cash
flow improvements through HMO premium increases and advantageous HMO benefit
changes and the Company's credit facility (see Note 9). However, there can be no
assurances that theses sources of funds will be sufficient to fund operations
and satisfy its obligations as they become due.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

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

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

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

Accounts receivable include an allowance for contractual adjustments, charity
and other adjustments. Contractual adjustments result from differences between
the rates charged for the service performed and amounts reimbursed under
government sponsored health care programs and insurance contracts. Charity and
other adjustments, which were immaterial for the years ended June 30, 2001,
2000, and 1999, represent services provided to patients for which fees are not
expected to be collected at the time the service is provided. Accounts
receivable are also presented net of intermediary final settlement adjustments.

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

Costs In Excess Of Net Tangible Assets Acquired--Costs in excess of net tangible
assets acquired are stated net of accumulated amortization and are amortized on
a straight-line basis over periods ranging from 3 to 20 years. The Company
periodically evaluates the recovery of the carrying amount of costs in excess of
net tangible assets acquired by determining if a permanent impairment has
occurred. Indicators of a permanent impairment include duplication of resources
resulting from acquisitions, instances in which the estimated undiscounted cash
flows of the entity are less than the remaining unamortized balance of the
underlying intangible assets and other factors. At June 30, 1999, the Company
believed that certain of its costs in excess of net tangible assets acquired -
primarily those related to its Independent Practice Association ("IPA") and one
of its Home Health divisions, $9,200,000 and $2,200,000 respectively - were
impaired based upon recent and anticipated significant cash flow deficiencies.
As the net present value of expected future cash flows for these operating
entities were negative, the following intangible assets were written off during
Fiscal 1999:


                                      F-9
<PAGE>   52

                             CONTINUCARE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
         <S>                                                        <C>
         Goodwill                                                   $  7,724,000
         Identifiable intangibles:
              Contract rights                                          3,159,000
              Other, including assembled workforce and tradenames        564,000
         Other                                                           270,000
                                                                    ------------
                                                                    $ 11,717,000
                                                                    ============
</TABLE>

No such adjustment was required at June 30, 2001 or 2000.

Deferred Financing Costs--Expenses incurred in connection with the credit
facility and the guarantee related to the New Credit Facility have been deferred
and are being amortized using the interest method over the life of the facility
and the guarantee. (See Note 7.)

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

         Cash and cash equivalents, accounts receivable, accounts payable and
         accrued expenses--The carrying values approximate fair value due to the
         relatively short maturity of the respective instruments.

         Convertible subordinated notes payable--The fair value was
         approximately $1,135,000 and $948,000 at June 30, 2001 and 2000,
         respectively, based on the market value of the Company's common stock.

         Related party note payable--The fair value was approximately $265,000
         at June 30, 2001 based on the market value of the Company's common
         stock.

         Long-term debt and capital lease obligations--The carrying value at
         June 30, 2001 and 2000 approximates fair value based on the terms of
         the obligations. The Company has imputed interest on non-interest
         bearing debt using an incremental borrowing rate of 8%.

Accounting for Stock-Based Compensation--The Company follows Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related Interpretations in accounting for its employee stock
options. Under APB 25, when the exercise price of the Company's employee stock
options equals or exceeds the market price of the underlying stock on the date
of grant, no compensation expense is recognized (see Note 11).

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

Business Segments--The Company adopted SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information" during Fiscal 1999. The Company has
concluded that it operates in one segment of business, that of managing the
provision of outpatient health care and health care related services in the
State of Florida.

Revenue--The Company's health care providers provide service to patients on
either a fee for service arrangement or under a fixed monthly fee arrangement
with HMOs or through contracts directly with the payor. Revenue is recorded in
the period services are rendered as determined by the respective contract.



                                      F-10
<PAGE>   53

                             CONTINUCARE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

No such adjustment was required at June 30, 2001 or 2000.

Deferred Financing Costs--Expenses incurred in connection with the credit
facility and the guarantee related to the New Credit Facility have been deferred
and are being amortized using the interest method over the life of the facility
and the guarantee. (See Note 7.)

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

         Cash and cash equivalents, accounts receivable, accounts payable and
         accrued expenses--The carrying values approximate fair value due to the
         relatively short maturity of the respective instruments.

         Convertible subordinated notes payable--The fair value was
         approximately $1,135,000 and $948,000 at June 30, 2001 and 2000,
         respectively, based on the market value of the Company's common stock.

         Related party note payable--The fair value was approximately $265,000
         at June 30, 2001 based on the market value of the Company's common
         stock.

         Long-term debt and capital lease obligations--The carrying value at
         June 30, 2001 and 2000 approximates fair value based on the terms of
         the obligations. The Company has imputed interest on non-interest
         bearing debt using an incremental borrowing rate of 8%.

Accounting for Stock-Based Compensation--The Company follows Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related Interpretations in accounting for its employee stock
options. Under APB 25, when the exercise price of the Company's employee stock
options equals or exceeds the market price of the underlying stock on the date
of grant, no compensation expense is recognized (see Note 11).

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

Business Segments--The Company adopted SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information" during Fiscal 1999. The Company has
concluded that it operates in one segment of business, that of managing the
provision of outpatient health care and health care related services in the
State of Florida.

Revenue--The Company's health care providers provide service to patients on
either a fee for service arrangement or under a fixed monthly fee arrangement
with HMOs or through contracts directly with the payor. Revenue is recorded in
the period services are rendered as determined by the respective contract.


                                      F-11
<PAGE>   54

                             CONTINUCARE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Fee for service arrangements, which accounted for 11% of medical services net
revenue in Fiscal 1999, required the Company to assume the financial risks
relating to payor mix and reimbursement rates. The Company received
reimbursement for these services under either the Medicare or Medicaid programs
or payments from the individual, insurers, self-funded benefit plans or
third-party payors. The Company was paid based upon established charges, the
cost of providing services, predetermined rates per diagnosis, or discounts from
established charges. Revenue was recorded as an estimated amount, net of
contractual allowances. These accounts, which were unsecured, have longer
collection periods than capitated fee contracts and required the Company to bear
the credit risk of uninsured individuals. The contribution from fee for service
revenue for Fiscal 2001 and 2000 was insignificant, primarily as a result of the
closing and sale of certain subsidiaries in Fiscal 1999.

Under the Company's contracts with Humana and Foundation, the Company receives a
fixed, monthly fee from the HMOs for each covered life in exchange for assuming
responsibility for the provision of medical services. Total medical services net
revenue related to Foundation approximated 36%, 39% and 51% for Fiscal 2001,
2000 and 1999, respectively. Total medical services net revenue relating to
Humana approximated 60%, 57% and 34% for Fiscal 2001, 2000 and 1999,
respectively. To the extent that patients require more frequent or expensive
care than was anticipated by the Company, revenue to the Company under a
contract may be insufficient to cover the costs of care provided.

When it is probable that expected future health care costs and maintenance costs
under a contract or group of existing contracts will exceed anticipated
capitated revenue on those contracts, the Company recognizes losses on its
prepaid healthcare services with HMOs. No contracts are considered loss
contracts at June 30, 2001 because the Company has the right to terminate
unprofitable physicians and close unprofitable centers under its managed care
contracts.

Approximately 4% of the Company's medical services net revenue in Fiscal 1999
was earned through contracts, which are directly between the payor (i.e.,
hospital), and the Company. These contracts provide for payments to the Company
based upon a fixed percentage of the hospital's charges related to the services
provided by the Company to patients of the hospital. The contribution from
contracts in Fiscal 2001 and 2000 was insignificant, primarily as a result of
the Business Rationalization Program and the divestiture of the Outpatient
Rehabilitation Subsidiary in Fiscal 1999.

Through September 30, 2000, certain of the Company's services to Medicare
beneficiaries were paid based on a reasonable cost methodology. The Company was
reimbursed for cost reimbursable items at a tentative rate with final settlement
determined after submission of annual cost reports and audits thereof by the
payor. Changes in the estimated settlements recorded by the Company may be
adjusted in future periods as final settlements are determined.

Since October 1, 2000, the Company's home health services have been paid under a
prospective payment system administered by the Medicare program ("PPS"). Under
this program, the Company is paid a predetermined fee for services provided to
patients for every 60-day period for which care is rendered.

Revenue from the Medicare and Medicaid programs, accounted for approximately 4%,
4% and 6% of the Company's net medical service revenue for the years ended June
30, 2001, 2000, and 1999, respectively. Laws and regulations governing the
Medicare and Medicaid programs are complex and subject to interpretation. The
Company believes that it is in compliance with all applicable laws and
regulations and is not aware of any pending or threatened investigations
involving allegations of potential wrongdoing. While no such regulatory
inquiries have


                                      F-11
<PAGE>   55

                             CONTINUCARE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

been made, compliance with such laws and regulations can be subject to future
government review and interpretation as well as significant regulatory action
including fines, penalties, and exclusion from the Medicare and Medicaid
programs.

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

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

Reinsurance (stop-loss insurance)--Reinsurance premiums are reported as health
care cost which are included in medical service expense in the accompanying
statements of operations, and reinsurance recoveries are reported as a reduction
of related health care costs.

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

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

Derivative Instruments and Hedging Activities--In Fiscal 2001, the Company
adopted Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities" which establishes
standards for the accounting and reporting of derivative instruments embedded in
other contracts (collectively referred to as derivatives) and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure these
instruments at fair value. In Fiscal 2001, the Company did not have any
derivative instruments and had not entered into any hedging activities as
defined in SFAS No. 133.

Recent Accounting Pronouncements--In July, 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 141,
"Business Combinations" ("SFAS No. 141") and Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS
No. 141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria
that intangible assets acquired in a purchase method business combination must
meet to be recognized and reported apart from goodwill, noting that any purchase
price allocable to an assembled workforce may not be accounted for separately.
The requirements of SFAS No. 141 are effective for any business combination
accounted for by the purchase method that is completed after June 30, 2001.


                                      F-12
<PAGE>   56

                             CONTINUCARE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Under SFAS No. 142, goodwill and intangible assets with indefinite useful lives
are no longer amortized, but are reviewed annually, or more frequently if
impairment indicators arise, for impairment. SFAS No. 142 will require that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The amortization
provisions of SFAS No. 142 apply to goodwill and intangible assets acquired
after June 30, 2001. With respect to goodwill and intangible assets acquired
prior to July 1, 2001, the amortization provisions of SFAS No. 142 will be
effective upon adoption of SFAS No. 142. Companies are required to adopt SFAS
No. 142 in fiscal years beginning after December 15, 2001 but may elect to early
adopt.

The Company will apply the new rules for accounting for goodwill and other
intangible assets beginning July 1, 2001. Application of the non-amortization
provisions of SFAS No. 142 is expected to result in an increase in pretax income
of approximately $944,000 per year. During Fiscal 2002, the Company will perform
the first of the required impairment tests of goodwill as of September 30, 2001
and has not yet determined what the effect of this test will be on the results
of operations or the financial position of the Company.

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

NOTE 3 - BUSINESS COMBINATIONS AND DISPOSALS

Physician Practices

On April 10, 1997, the Company, through Continucare Physician Practice
Management, Inc., ("CPPM") a wholly-owned subsidiary, acquired all of the
outstanding stock of certain arthritis rehabilitation centers and affiliated
physician practices. The acquisitions included the purchase of AARDS, INC., a
Florida corporation formerly known as Norman B. Gaylis, M.D., Inc., of
Rosenbaum, Weitz & Ritter, Inc., a Florida corporation, and of Arthritis &
Rheumatic Disease Specialties, Inc., a Florida corporation, from Sheridan
Healthcare, Inc. (collectively "AARDS") The aggregate purchase price was
approximately $3,300,000. Tangible assets recorded consisted primarily of
receivables and equipment. As a result of the acquisitions, purchase price in
excess of the fair value of the net tangible assets acquired was approximately
$2,149,000 and included approximately $1,173,000 in separately identifiable
intangible assets. Goodwill was being amortized over 20 years and separately
identifiable assets were being amortized over periods ranging from 7 to 10
years. The consolidated financial statements include the accounts of these
acquisitions from the date of the acquisitions.

In connection with the purchase of AARDS, the Company entered into a management
agreement with ZAG Group, Inc. ("ZAG"), an entity controlled by Jay Ziskind, Ken
Arvin and Dr. Norman Gaylis. The management agreement, among other things,
provided for ZAG to perform certain services in exchange for specified
compensation. In addition, the Company entered into a put/call agreement with
ZAG, which allowed each of the parties to require the other party, after a
two-year period, to either sell or purchase all the issued and outstanding
capital stock of ZAG for a specified price to be paid in a combination of cash
and common stock of the Company. In September 1998, the Company paid
approximately $2,000,000 to ZAG in connection with an Agreement and Plan of
Merger executed between the Company and ZAG which effectively canceled the
put/call agreement. Cash of $115,000 was paid and the remaining $1,885,000 was
paid by issuing 575,000 unregistered shares of the Company's common stock with a
fair market value of approximately $1,600,000 on the date of issuance. However,
because the common stock issued did not have an aggregate fair market value of
approximately $1,885,000 on October 15, 1999, the agreement and plan of merger
provided that the Company would pay additional cash consideration or issue
additional shares of its


                                      F-13
<PAGE>   57

                             CONTINUCARE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3 - BUSINESS COMBINATIONS AND DISPOSALS (CONTINUED)

common stock so that the aggregate value of the stock issued is approximately
$1,885,000. Additional consideration of approximately $1,600,000 in cash or
approximately 2,388,000 shares of the Company's common stock (based on the
September 17, 2001 market price) would have to be issued. At this time no
additional payment has been made to ZAG.

On November 15, 1999, the Company commenced litigation against ZAG and its
affiliated parties alleging breach of fiduciary duties, improper billing, and
seeking return of all consideration previously paid by the Company to ZAG, and
damages, as well as seeking rescission of the Agreement and Plan of Merger and
the Registration Rights Agreement. A counterclaim was filed against the Company
on December 20, 1999 in the Circuit Court of the 11th Judicial District in and
for Miami-Dade County, Florida. The counterclaim alleged breach of contract,
tortious interference and conversion. The Company may be required to pay in
excess of $1,600,000 of additional consideration, in the form of either cash or
stock, representing the difference between $1,885,000 and the fair market value
of the 575,000 unregistered shares of the Company's common stock previously
issued to ZAG in connection with the agreement and plan of merger.

On March 12, 1999, the Company closed CPPM by selling assets totaling
approximately $3,675,000 and closing offices that represented assets totaling
approximately $1,069,000. As a result of closing CPPM, the Company recorded a
loss on disposal of approximately $4,200,000 which consisted of the following:

<TABLE>
<S>                                                                        <C>
Equipment, furniture and leasehold improvements                            $  405,000
Goodwill                                                                    3,131,000
Identifiable intangibles, including contracts and assembled work force        670,000
Other, including deposits and prepaid expenses                                 61,000
Liabilities assumed                                                           (67,000)
                                                                           ----------
                                                                           $4,200,000
                                                                           ==========
</TABLE>

Net patient revenue and net operating loss for CPPM (prior to recording the loss
on disposal) was approximately $6,096,000 and $2,133,000, respectively, for the
year ended June 30, 1999. Approximately 60 employees were terminated as a result
of the closure of this division. Neither severance nor any other significant
exit costs were incurred as a result of this closure.

Home Health Services

On September 19, 1997, the Company acquired the stock of Maxicare, Inc.
("Maxicare"), a Florida based home health agency for $4,200,000 including
approximately $900,000 of liabilities assumed. In addition, $300,000 of
additional purchase price was contingent upon maintaining various performance
criteria. No amounts have been paid to the former owner of Maxicare, Inc.
pursuant to the contingent purchase price from the acquisition. The acquisition
is being accounted for under the purchase method of accounting. Tangible assets
recorded consisted primarily of cash, receivables and equipment. The purchase
price in excess of the fair value of the net tangible assets acquired was
approximately $3,048,000 and included approximately $1,189,000 in separately
identifiable intangible assets. Goodwill was being amortized over 20 years and
separately identifiable intangible assets were being amortized over periods
ranging from 3 to 20 years. The consolidated financial statements include the
accounts of Maxicare since the date of acquisition. As discussed in Note 2,
during Fiscal 1999 management determined that the intangible assets associated
with Maxicare were impaired.


                                      F-14
<PAGE>   58

                             CONTINUCARE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3 - BUSINESS COMBINATIONS AND DISPOSALS (CONTINUED)

Radiology Services

On December 1, 1997, the Company acquired the assets of Beacon Healthcare Group
(principally medical supplies and equipment) for $2,200,000 in cash and 83,000
shares of the Company's common stock with a value of $490,000. The purchase
price in excess of the fair value of the net tangible assets acquired was
approximately $2,000,000 and included approximately $1,142,000 in separately
identifiable intangible assets. Goodwill was being amortized over 20 years and
separately identifiable assets were being amortized over periods ranging from 6
to 15 years.

On December 27, 1998, the Company sold the stock of the Diagnostic Imaging
Services Subsidiary (the "Subsidiary") for a cash purchase price of $120,000 to
Diagnostic Results, Inc. Prior to the sale, the Subsidiary conveyed through
dividends all of the accounts receivable of the Subsidiary to the Company. All
obligations for trade payables existing on the date of sale remained the
obligations of the Company. As a result of this transaction, the Company
recorded a loss on disposal of approximately $4,152,000, which consisted of the
following:

<TABLE>
                  <S>                                         <C>
                  Operating lease accrual                     $1,000,000
                  Equipment, furniture and leasehold
                      improvements                             1,512,000
                  Goodwill                                       750,000
                  Contractual rights                           1,043,000
                  Liabilities assumed                            (33,000)
                  Consideration received                        (120,000)
                                                              ----------
                                                              $4,152,000
                                                              ==========
</TABLE>

Net patient revenue and net operating loss (prior to recording the loss on
disposal) were approximately $1,900,000 and $2,000,000, respectively, for the
year ended June 30, 1999. Approximately 60 employees were terminated as a result
of the sale. Neither severance nor any other significant exit costs were
incurred as a result of the sale. The operating lease accrual includes several
leases requiring monthly payments through 2007. Through June 30, 2001
approximately $43,600 of this liability had been paid.

Rehabilitation Management Services

On February 13, 1998, the Company acquired the stock of Rehab Management
Systems, Inc., IntegraCare, Inc. and J.R. Rehab Associates, Inc., collectively
referred to as "RMS", for a total purchase price of approximately $10,500,000,
including acquisition costs of approximately $500,000. RMS operated numerous
rehabilitation clinics in the States of Florida, Georgia, Alabama, North
Carolina and South Carolina as a Medicare and Medicaid provider of outpatient
rehabilitation services. The acquisition was accounted for under the purchase
method of accounting. Tangible assets recorded consisted principally of
receivables and equipment. The purchase price in excess of the fair value of the
net tangible assets acquired of approximately $6,160,000 was recorded as
goodwill and was being amortized using the straight-line method over a weighted
average life of 15 years.

On April 8, 1999, the Company sold substantially all the assets of RMS to
Kessler Rehabilitation of Florida, Inc. ("Kessler") for $5,500,000 in cash and
the assumption of certain liabilities. The Company recorded a loss on sale of
approximately $6,800,000, which consisted of the following:


                                      F-15
<PAGE>   59

                             CONTINUCARE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3 - BUSINESS COMBINATIONS AND DISPOSALS (CONTINUED)

<TABLE>
                  <S>                                                  <C>
                  Net working capital                                  $4,838,000
                  Equipment, furniture and leasehold improvements       1,739,000
                  Goodwill                                              5,723,000
                  Consideration received                               (5,500,000)
                                                                       ----------
                                                                       $6,800,000
                                                                       ==========
</TABLE>

The consolidated financial statements included the accounts of RMS from the date
of purchase to the date of sale. Net patient revenue and net operating loss
(prior to recording the loss on disposal) were approximately $13,272,000 and
$2,053,000, respectively, for the year ended June 30, 1999. Approximately 600
employees were terminated as a result of the sale and severance costs of
approximately $50,000 was accrued and paid prior to June 30, 1999. No other
significant exit costs were incurred as a result of the sale. A member of the
Company's Board of Directors at the time of the sale was also a director of
Kessler.

Managed Care Services

On October 31, 1997, the Company purchased the assets of DHG Enterprises, Inc.
and Doctors Health Partnership, Inc. (collectively, "Doctors Health Group"), a
company that provides healthcare services at outpatient centers through managed
care contracts. The total purchase price for the acquisition was approximately
$16,000,000, including acquisition costs of approximately $1,052,000. Of this
amount, $1,700,000 was paid in common stock of the Company (242,098 shares),
approximately $13,700,000 was paid in cash and warrants to purchase 200,000
shares of the Company's common stock with an estimated fair market value of
$600,000 were issued. The warrants have an exercise price of $7.25 per share for
a period of 5 years. The acquisition is being accounted for under the purchase
method of accounting. Tangible assets acquired consisted principally of medical
equipment and deposits. The purchase price in excess of the fair value of the
net tangible assets acquired was approximately $15,478,000 and included
approximately $5,636,000 in separately identifiable intangible assets. Goodwill
is being amortized over 20 years and separately identifiable intangible assets
are being amortized over periods ranging from 4 to 20 years. The consolidated
financial statements include the accounts of Doctors Health Group from the
purchase date.

On January 1, 1998, the Company acquired certain of the assets of Medical
Services Organization, Inc. ("MSO") for a total purchase price of $4,260,000.
MSO provides healthcare services at outpatient centers through capitated managed
care contracts. The Company paid $2,560,000 in cash and entered into a note
payable totaling $1,700,000. The acquisition is being accounted for under the
purchase method of accounting. The entire purchase price was in excess of the
net tangible assets acquired and was recorded as contract costs. These costs
were being amortized using the straight-line method over 10 years. The
amortization period is based on the remaining life of the contract acquired. The
note was payable in six equal monthly installments beginning May 1, 1998. At
June 30, 1999 the note had been paid in full. In addition, the Company is
obligated to pay the owners of MSO an additional purchase price up to a maximum
amount of $25,000,000 based on the annualized net revenues of the acquired
contract for the twelve month period ended December 31, 1998, as adjusted under
the terms of the acquisition agreement with the former owner of MSO, times a
multiple of 4.25. The additional purchase price, if any, may be paid entirely in
Common Stock of the Company; however the Company may, at its discretion, pay 50%
of the additional purchase price in cash. Based on the performance of the
contract for that period, the Company has not paid or accrued for any additional
purchase price. Furthermore, as discussed in Note 2, in Fiscal 1999 management
determined that the intangible assets of MSO were impaired. The consolidated
financial statements include the accounts of MSO since the date of purchase.

On April 14, 1998, the Company purchased the assets of SPI Managed Care, Inc.,
SPI Managed Care of Hillsborough County, Inc., SPI Managed Care of Broward,
Inc., and Broward Managed Care, Inc., (collectively


                                      F-16
<PAGE>   60

                             CONTINUCARE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3 - BUSINESS COMBINATIONS AND DISPOSALS (CONTINUED)

"SPI"), which consisted principally of office and medical equipment. SPI
provides healthcare services at outpatient centers through capitated managed
care contracts. The total purchase price for the acquisition was approximately
$6,750,000. The acquisition is being accounted for under the purchase method of
accounting. The purchase price in excess of the fair value of the net tangible
assets acquired of approximately $6,416,000 was recorded as goodwill and is
being amortized using the straight-line method over a weighted average life of
15 years. The consolidated financial statements include the accounts of SPI from
the purchase date.

In August 1998, the Company purchased the contracts of CareMed Inc. ("CareMed"),
a managed care healthcare company which owns or has agreements with
approximately 30 physician practices. The total purchase price was approximately
$6,700,000, of which $4,200,000 was paid at closing and the remaining balance is
payable in equal monthly installments over the ensuing 24 months. The entire
purchase price was in excess of the net tangible assets acquired and was
recorded as contract costs. These costs were being amortized over 10 years. As
discussed in Note 2, management has determined that the intangible assets
associated with this operation were impaired. The consolidated financial
statements included the accounts of CareMed since the acquisition date.

The following unaudited pro forma data summarize the results of operations for
the periods indicated as if the above transactions had been completed at the
beginning of the year preceding the respective transaction dates. The pro forma
data gives effect to actual operating results prior to the transactions and
adjustments to depreciation, interest expense, goodwill amortization and income
taxes. These pro forma amounts do not purport to be indicative of the results
that would have actually been obtained if the transactions had occurred at an
earlier date or that may be obtained in the future. Included in expenses for the
year ended June 30, 1999, are impairment charges of $11,717,073 due to the
write-down of certain intangible assets related to continuing subsidiaries,
while the losses on disposals of $15,361,289 has been excluded in the pro forma
amounts below.

<TABLE>
<CAPTION>
                                                              YEAR ENDED JUNE 30,
                                              ---------------------------------------------------
                                                   2001               2000               1999
                                              -------------      -------------      -------------
                                                                  (Unaudited)

<S>                                           <C>                <C>                <C>
Total revenues .........................      $ 112,607,916      $ 116,582,895      $ 161,039,157
                                              =============      =============      =============

Net income (loss) ......................      $    (137,902)     $  14,117,969      $ (27,571,235)
                                              =============      =============      =============

Basic and diluted income (loss) per
  common share .........................      $          --      $         .65      $       (1.91)
</TABLE>

NOTE 4 - NOTES RECEIVABLE

In the first quarter of Fiscal 1998, the Company assigned the accounts
receivable related to its behavioral health programs and assigned its behavioral
health management contracts to third parties in exchange for notes receivable in
the aggregate amount of $7,800,000. The Company recorded no gain or loss on the
assignment since the amount received approximated the net book value of the
assets assigned. The notes receivable were to be paid over a five year term with
interest to accrue at 9% per annum. The notes receivable are secured by all the
assets of the behavioral health business.


                                      F-17
<PAGE>   61

                             CONTINUCARE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4 - NOTES RECEIVABLE (CONTINUED)

While the Company had determined that these notes receivable were impaired and
had recorded an allowance in prior years, during Fiscal 1999, the Company
increased its reserve on these notes for the remaining balance of $1,600,000.
This was determined to be necessary because, despite collecting payments of
$104,000 on one note in early Fiscal 1999 and the issuance of demand notices to
seek reimbursement, the Company has been unsuccessful in its collection efforts.
The Company did not receive any payments during Fiscal 2001 or 2000. The balance
of the notes at June 30, 2000 and 2001, net of the allowance, is $0. The Company
will apply all future payments, if any, to principal with interest being
recognized on a cash basis after all principal has been paid.

During Fiscal 1999 the Company accepted $29,700 in cash and 66,192 shares of the
Company's common stock in full satisfaction of a $340,000 receivable from a
former employee of the Company and a promissory note due from the same former
employee of $46,750. The shares were valued at $2.75 per share and are included
in treasury stock at June 30, 2001 and 2000.

NOTE 5 - EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS

Equipment, furniture and leasehold improvements are summarized as follows:

<TABLE>
<CAPTION>

                                                                   JUNE 30,                ESTIMATED
                                                        ------------------------------    USEFUL LIVES
                                                            2001              2000         (IN YEARS)
                                                        ------------      ------------    ------------

<S>                                                     <C>               <C>             <C>
Furniture, fixtures and equipment ................      $  2,329,241      $  2,178,457         3-5
Furniture and equipment under capital lease ......           316,470           189,173          5
Vehicles .........................................             2,184             2,184          5
Leasehold improvements ...........................            94,627           178,897          5
                                                        ------------      ------------
                                                           2,742,522         2,548,711
Less accumulated depreciation ....................        (2,039,028)       (1,667,838)
                                                        ------------      ------------
                                                        $    703,494      $    880,873
                                                        ============      ============
</TABLE>

Depreciation expense for the years ended June 30, 2001, 2000 and 1999 was
$467,148, $491,276 and $1,481,439, respectively. Accumulated amortization for
assets recorded under capital lease agreements was approximately $116,000 at
June 30, 2001. Amortization of assets recorded under capital lease agreements
was approximately $91,000 at June 30, 2001, and is included in depreciation
expense.

In connection with its acquisitions, the Company entered into various
noncancellable leases for certain furniture and equipment that are classified as
capital leases. The leases are payable over 5 years and the Company has used
incremental borrowing rates ranging from 9% to 35% per annum. In addition, the
Company had entered into capital leases which, in conjunction with its various
business disposals (see Note 3) in Fiscal 1999, were canceled or transferred to
the purchasers of those businesses.

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


                                      F-18
<PAGE>   62

                             CONTINUCARE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5 - EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS (CONTINUED)

<TABLE>
<S>                                                     <C>
For the year ending June 30,
   2002..............................................   $ 165,542
   2003..............................................      87,352
   2004..............................................      14,316
   2005..............................................       1,060
                                                        ---------
                                                          268,270
   Less amount representing imputed interest.........      18,581
                                                        ---------
   Present value of obligations under capital lease..     249,689
   Less current portion..............................     149,915
                                                        ---------
   Long-term capital lease obligations...............   $  99,774
                                                        =========
</TABLE>

NOTE 6 - CONVERTIBLE SUBORDINATED NOTES PAYABLE AND RELATED PARTY NOTE PAYABLE

On October 30, 1997, the Company issued $46,000,000 of 8% Convertible
Subordinated Notes Payable (the "Notes") due on October 31, 2002. As described
below, through a series of repurchases and restructurings in Fiscal 2001 and
2000, the outstanding principal balance of the Notes at June 30, 2001 was
approximately $3,913,000.

At the time the Notes were issued, interest on the Notes accrued at 8% and was
payable semiannually beginning April 30, 1998. The Notes could be converted into
shares of common stock of the Company at a conversion price of $7.25 per share
at any time after 60 days following the date of initial issuance which is
adjusted upon the occurrence of certain events. In addition, the Notes were
redeemable, in whole or in part, at the option of the Company at any time on or
after October 31, 2000, at redemption prices (expressed as a percentage of the
principal amount) ranging from 100% to 104%.

On August 12, 1998, the Company repurchased $1,000,000 of the Notes and recorded
an extraordinary gain on retirement of debt of $130,197. The Company used cash
from operations to redeem the Notes.

On April 30, 1999 (the "April 1999 Default Date"), the Company defaulted on its
semi-annual payment of interest on the outstanding Notes. On the April 1999
Default Date, the outstanding principal balance of the Notes was $45,000,000 and
the related accrued interest was approximately $1,800,000.

On July 2, 1999, the Company repurchased $4,000,000 of the Notes for $210,000
and recorded a gain on extinguishment of debt of approximately $3,776,000. The
Company funded the purchase of the Notes from working capital. The Company has
not provided for income taxes on the gain because it believes that it will be
able to utilize certain of its net operating loss carryforwards to offset any
income tax liability related to the transaction.

On October 31, 1999 (the "October 1999 Default Date"), the Company defaulted on
its semi-annual payment of interest on the outstanding Notes. On the October
1999 Default Date, the outstanding principal balance of the Notes was
$41,000,000 and the related accrued interest was approximately $3,300,000.

The Company completed a restructuring of the Notes and executed a Consent Letter
and Agreement to the First Supplemental Indenture (the "Fiscal 2000
Restructuring"). The Fiscal 2000 Restructuring was approved by the shareholders
on February 14, 2000. The following occurred as a result of the Fiscal 2000
Restructuring: (a) $31,000,000 of the outstanding principal of the Notes was
converted, on a pro rata basis, into the Company's common stock at a conversion
rate of $2.00 per share (approximately 15,500,000 shares of capital stock); (b)
all interest which had accrued on the Notes through October 31, 1999 was
forgiven (approximately $3,300,000); (c)


                                      F-19
<PAGE>   63

                             CONTINUCARE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6 - CONVERTIBLE SUBORDINATED NOTES PAYABLE AND RELATED PARTY NOTE PAYABLE
(CONTINUED)

interest which accrued from November 1, 1999 through the date of the Fiscal 2000
Restructuring (February 15, 2000) on the $31,000,000 which was converted into
15,500,000 shares of the Company's common stock was forgiven; (d) the interest
payment default on the remaining $10,000,000 principal balance of the Notes was
waived and the debentures were reinstated on the Company's books and records as
a performing non-defaulted loan (the "Reinstated Subordinated Debentures"); (e)
the Reinstated Subordinated Debentures bear interest at the rate of 7% per annum
commencing November 1, 1999; and (f) the conversion rate for the Reinstated
Subordinated Debentures for the period commencing November 1, 2000 to maturity
will be $2.00. The Fiscal 2000 Restructuring also required the Company to
procure a $3,000,000 bank credit facility and to obtain a financially
responsible person(s) to guarantee the bank credit facility for the Company (see
Note 7 below).

As a result of the Fiscal 2000 Restructuring, the Company recognized a gain of
approximately $9,472,000, net of restructuring costs. The gain consists of the
conversion of $31,000,000 of the outstanding principal balance into 15,500,000
shares of common stock, which were valued at approximately $21,312,500 based on
the closing price of the Company's stock on February 15, 2000, the forgiveness
of approximately $4,237,000 of accrued interest, the write off of approximately
$1,929,000 of unamortized deferred financing costs and the recording of
$2,100,000 of interest which will accrue on the remaining balance of the Notes
under the revised terms of the agreement through the maturity date of October
31, 2002. In accordance with Statement of Financial Accounting Standards No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructurings," ("SFAS
No. 15") the balance of the outstanding Notes on the balance sheet of
$11,750,000 at June 30, 2000, includes interest accrued through June 30, 2000 of
$116,667 and the remaining interest of $1,633,333 which will be payable in
semi-annual payments through October 31, 2002.

On April 30, 2001 (the "April 2001 Default Date"), the Company defaulted on its
semi-annual payment of interest on the outstanding Notes. On the April 2001
Default Date, the outstanding principal balance of the Notes was $10,000,000 and
the related accrued interest was approximately $300,000.

Effective June 30, 2001, the Company completed a second restructuring of the
Notes (the "Fiscal 2001 Restructuring"). In a private transaction with certain
noteholders, Frost Nevada Limited Partnership ("Frost Nevada"), an entity
controlled by Dr. Phillip Frost, Vice Chairman of the Company's board of
directors, purchased Notes in the principal amount of $6,219,511 (the "Purchased
Debt") and 9,640,244 shares of our common stock (the "Purchased Shares"). Frost
Nevada immediately exchanged the Purchased debt for (i) 6,219,511 shares of our
common stock and (ii) a new note (the "Related Party Note") in the principal
amount of $912,195. The Related Party Note, which bears interest at 7%, payable
semi-annually, is convertible into shares of common stock at a conversion price
of $1.00 and matures October 31, 2005.

Also as part of the Fiscal 2001 Restructuring, holders of the remaining
$3,800,000 of outstanding Notes have agreed to restructure various terms of the
Notes, which include, among other things, the following: (i) adding interest of
$132,317 which accrued through April 30, 2001 to the outstanding principal
balance; (ii) extending the maturity date through October 2005; (iii) reducing
the conversion rate from $2.00 to $1.00; (iv) providing for quarterly interest
payments; (v) adding a call provision if the outstanding common stock trades at
or above $2.50 per share for twenty trading days and if the common stock trades
an average of at least 100,000 shares per week for a four week period; and (vi)
curing all prior defaults under the Notes.

As a result of the Fiscal 2001 Restructuring, the Company recognized a gain of
approximately $3,503,000. The gain consists of the conversion of $6,219,511 of
the outstanding principal balance into 6,219,511 shares of common stock, which
were valued at approximately $1,804,000 based on the closing price of the
Company's stock on June


                                      F-20
<PAGE>   64

                             CONTINUCARE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6 - CONVERTIBLE SUBORDINATED NOTES PAYABLE AND RELATED PARTY NOTE PAYABLE
(CONTINUED)

29, 2001, the recording of approximately $595,000 of interest which will accrue
on the remaining balance of the Notes under the revised terms of the agreement
through the new maturity date of October 31, 2005, the recording of the Related
Party Note in the amount of $912,195 and the recording of approximately $277,000
of interest which will accrue on the Related Party Note.

In accordance with SFAS No. 15, the balance of the outstanding Notes on the
balance sheet of $4,904,260 at June 30, 2001, includes interest accrued through
June 30, 2001 of $45,649 and the remaining interest of $945,805 which will be
payable in quarterly payments through October 31, 2005. The balance of the
Related Party Note on the balance sheet of $1,188,894 at June 30, 2001, also
recorded in accordance with SFAS No. 15, includes interest of $276,699 which
will be payable in semi-annual payments through the maturity date of October 31,
2005.

Scheduled payments on the Notes and the Related Party Note are as follows:

<TABLE>
<CAPTION>
                PRINCIPAL       INTEREST         TOTAL
               -----------     ----------     ----------

<S>            <C>             <C>            <C>
Fiscal 2002                    $  327,107     $  327,107
Fiscal 2003                       337,750        337,750
Fiscal 2004    $ 1,148,000        297,570      1,445,570
Fiscal 2005      1,148,000        222,531      1,370,531
Fiscal 2006      2,529,001         83,195      2,612,196
               -----------     ----------     ----------

               $ 4,825,001     $1,268,153     $6,093,154
               ===========     ==========     ==========
</TABLE>

NOTE 7 - CREDIT FACILITY AND LONG-TERM DEBT

The following long-term debt was outstanding as of June 30, 2001 and 2000.

<TABLE>
<CAPTION>
                                               2001             2000
                                            ---------------------------

         <S>                                <C>              <C>
         Contract Modification Note....     $3,816,728       $3,856,745
         Acquisition Liability.........        500,000        1,500,000
         Credit Facility...............        500,000               --
         Other Outstanding Notes.......      1,647,052        1,943,134
                                            ---------------------------
                                             6,463,780        7,299,879
         Less Current Portion..........      5,452,076        2,276,635
                                            ---------------------------

         Long-Term.....................     $1,011,704       $5,023,244
                                            ===========================
</TABLE>

Contract Modification Note--Effective August 1, 1998, the Company entered into
two amendments to its professional provider agreements with an HMO. The
amendments, among other things, extended the term of the original agreement from
six to ten years and increased the percentage of Medicare premiums received by
the Company effective January 1, 1999. In exchange for the amendments, the
Company signed a $4,000,000 non-interest bearing promissory note with the HMO of
which $1,000,000 was to be paid over the 12 months commencing January 1999 and
the remaining $3,000,000 over the ensuing 24 months. The note was recorded net
of imputed interest. The $4,000,000 cost, net of imputed interest calculated at
8%, or approximately $500,000, is included in other intangible assets on the
accompanying consolidated balance sheet and is being amortized over 9.6 years,
the remaining term of the contract.


                                      F-21
<PAGE>   65

                             CONTINUCARE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7 - CREDIT FACILITY AND LONG-TERM DEBT (CONTINUED)

On September 27, 2000, the Company entered into an agreement to amend the
repayment terms. This agreement modified the repayment terms as follows: (a)
commencing on October 1, 2000 and through September 1, 2001, the Company would
make monthly payments of $30,000; (b) on October 1, 2001, the Company would make
a single payment of $640,000; and (c) commencing on November 1, 2001 through
October 1, 2002, the Company would make monthly payments of $250,000.
Accordingly, at June 30, 2000 approximately $270,000 was classified as a current
obligation in the accompanying consolidated balance sheet. At June 30, 2001, the
Company is currently not in compliance with the amended repayment terms, and the
outstanding balance of approximately $3,817,000 has been classified as a current
liability in the accompanying consolidated balance sheet. The Company is
currently in the process of renegotiating the terms of this contract
modification note. However, there can be no assurances that an agreement can be
reached.

Acquisition Liability--In August 1998, the Company, through its Continucare
Managed Care Subsidiary, purchased professional provider contracts with
approximately 30 physicians from an unrelated entity. The total purchase price
was approximately $6,700,000 of which $4,200,000 was paid in cash at closing and
the remaining $2,500,000 is payable in equal monthly installments over the
ensuing 24 months. The liability is non-interest bearing. The Company imputed
interest at 8%. The Company has repaid $625,000. The purchase price was included
in other intangible assets on the accompanying consolidated balance sheet and
was being amortized over 10 years, the term of the contracts. However, later in
Fiscal 1999 management determined that these assets were impaired, as discussed
in Note 2, and the unamortized balance was written-off.

Effective December 31, 1999, the Company negotiated an amendment to its contract
with an HMO (the "2000 Amendment"). The 2000 Amendment reduced the Company's
prior medical claims and long-term debt liabilities as of May 31, 1999 to
$1,500,000. The 2000 Amendment also required the Company to remit to the HMO any
reinsurance proceeds received for claims generated from the HMO's members for
the period June 1, 1998 through August 31, 1999 up to a maximum of $1,327,400.
As a result of the 2000 Amendment, the Company recorded a contractual revision
of previously recorded medical claims liability of approximately $3,054,000. The
2000 Amendment resulted in the reduction of medical claims payable by
approximately $2,703,000 and the reduction of long-term debt by approximately
$351,000. Under the 2000 Amendment, the outstanding balance of $1,500,000 was to
be repaid from future surpluses generated by the IPA.

Effective March 31, 2001, the Company negotiated another amendment to its
contract with an HMO (the "2001 Amendment"). The 2001 Amendment reduced the
long-term debt liability to the HMO by $1,000,000 and eliminated the medical
claims liability incurred by the IPA through March 31, 2001. As a result of the
2001 Amendment, the Company recorded a contractual revision of previously
recorded medical claims and other of approximately $4,638,000.

Credit Facility--In August 1998, the Company entered into a credit facility with
First Union Bank (the "1998 Credit Facility"). The 1998 Credit Facility provided
for a $5,000,000 acquisition facility and a $5,000,000 revolving loan. The
Company borrowed the entire $5,000,000 acquisition facility to fund
acquisitions. The Company never utilized the revolving loan. During April 1999,
the Company used approximately $4,000,000 of the net proceeds from the sale of
its Rehabilitation Subsidiary to reduce the outstanding balance of the 1998
Credit Facility. In connection with the payment, the Company entered into an
amendment to the 1998 Credit Facility, which provided, among other things, for
the repayment of the remaining outstanding principal balance by December 31,
1999. The Company obtained a waiver which extended the due date on the remaining
balance to February 1, 2000 and repaid the remaining outstanding balance on
January 31, 2000.


                                      F-22
<PAGE>   66

                             CONTINUCARE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7 - CREDIT FACILITY AND LONG-TERM DEBT (CONTINUED)

In conjunction with the Fiscal 2000 Restructuring, the Company executed a credit
facility agreement (the "Credit Facility"). The Credit Facility provides a
revolving loan of $3,000,000. The Credit Facility is due March 31, 2002 with
annual renewable options, with interest payable monthly at 2.9% plus the 30-day
Dealer Commercial Paper Rate which is 3.75% at June 30, 2001. All assets of the
Company serve as collateral for the Credit Facility. In addition, the Credit
Facility has been guaranteed by a board member and an entity controlled by a
board member. In consideration for providing the guarantees, the Company issued
3,000,000 shares of the Company's common stock. These shares, which were valued
at $3,375,000 based on the closing price of the Company's common stock on
February 11, 2000 when the guarantees were granted, have been recorded as a
deferred financing cost which is being amortized over the term of the guarantee,
which expires October 31, 2002. At June 30, 2001, the outstanding balance of the
Credit Facility was $500,000.

Other Outstanding Notes--In conjunction with the operation of its Home Health
Division, the Company has entered into twelve (12) repayment agreements (the
"Repayment Agreements") with a governmental agency. These Repayments Agreements
resulted from various overpayments received by the Company for expenses that
were expected to be generated in conjunction with home health patient care
activities. Five of the twelve Repayment Agreements are non-interest bearing and
have maturity dates in Fiscal 2003 and Fiscal 2004. Seven of the twelve
Repayment Agreements have interest rates ranging from 13.250% to 13.875% and
have maturity dates ranging from Fiscal 2003 to Fiscal 2005.

Scheduled payments on the Credit Facility and long-term debt are as follows:

<TABLE>
                  <S>               <C>
                  Fiscal 2002       $ 5,452,076
                  Fiscal 2003           640,622
                  Fiscal 2004           350,379
                  Fiscal 2005            20,703
                                    -----------

                                    $ 6,463,780
                                    ===========
</TABLE>

NOTE 8 - EARNINGS PER SHARE

The following table sets forth share and common share equivalents used in the
computation of basic and diluted earnings per share:

<TABLE>
<CAPTION>
                                                                           YEAR ENDED JUNE 30,
                                                                 2001              2000              1999
                                                             ------------      ------------      ------------

<S>                                                          <C>               <C>               <C>
Numerator for basic and dilutive earnings per share
  (Loss) income before extraordinary items ............      $ (3,641,090)     $    870,062      $(50,641,743)
  Extraordinary gain or extinguishment of debt ........         3,503,188        13,247,907           130,977
                                                             ------------      ------------      ------------
  Net (loss) income ...................................      $   (137,902)     $ 14,117,969      $(50,510,766)
                                                             ============      ============      ============

Denominator for basic and diluted earnings (loss)
  Per share-weighted average shares ...................        33,257,130        21,587,086        14,451,493
                                                             ============      ============      ============
</TABLE>


                                      F-23
<PAGE>   67

                             CONTINUCARE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8 - EARNINGS PER SHARE (CONTINUED)

Options and warrants to purchase the Company's common stock and the convertible
subordinated notes payable were not included in the computation of diluted
earnings (loss) per share because the effect would be antidilutive.

For additional disclosure regarding the employee stock options and warrants see
Note 11.

NOTE 9 - RELATED PARTY TRANSACTIONS

During the fiscal year ended June 30, 1998, the Company incurred expenses of
$200,000 for consulting services provided by a corporation in which one of its
shareholders was an executive officer of the Company. On September 18, 1998, the
Company purchased the corporation for $115,000 in cash and 575,000 shares with a
fair market value of approximately $1,600,000 of the Company's restricted common
stock. Additional consideration is contingently due to the former owners based
on the price of the Company's common stock at October 15, 1999 as described
further in Note 3. The Company has commenced litigation and is seeking return of
consideration and rescission of the contract.

During Fiscal 1999, the Company rented various medical facilities and equipment
from corporations owned by physician employees of the Company. General and
administrative expense for year ended June 30, 1999 included approximately
$186,000 under these lease agreements. The subsidiaries which leased these
facilities and equipment were disposed of in Fiscal 1999, and, therefore, there
were no such expenses during Fiscal 2001 or 2000.

In May 1999, the Company entered into an agreement with Harter Financial, Inc.
("Harter") to assist it with a financial reorganization and to represent the
Company in negotiating the restructuring of the Notes and a settlement with the
noteholders. As compensation for its services, Harter received an initial fee of
$50,000 on May 18, 1999. On October 18, 1999, the Board of Directors approved a
final compensation package to Harter consisting of a cash payment of $150,000
and the issuance of 200,000 unregistered shares of the Company's common stock,
which were valued at $112,500 based on the closing price of the Company's common
stock on the date of grant. Mr. Angel, the Company's president and chief
executive officer is also the president and a 15% shareholder of Harter.
However, as of May 18, 1999, Mr. Angel was not an officer or director of the
Company.

In connection with the Fiscal 2000 Restructuring of the Notes which occurred in
February 2000, the Company was required to procure a $3,000,000 bank credit
facility and to obtain a financially responsible person(s) to guarantee the bank
credit facility for the Company. The Company obtained such a bank credit
facility and obtained personal guarantees from a board member and an entity
controlled by a board member. In consideration for providing the guarantees, the
Company issued an aggregate of 3,000,000 shares of the Company's common stock to
the guarantors. These shares were valued at $3,375,000 based on the closing
price of the Company's stock on February 11, 2000 when the original guarantees
were granted.

On May 29, 2001, the Company granted 1,000 fully vested stock options with an
exercise price of $.32 to one of the Company's directors for consulting services
provided. The stock options expire on May 29, 2011.

In connection with the Fiscal 2001 Restructuring of the Notes which occurred in
June 2001, the Company issued 6,219,511 shares of the Company's common stock to
Frost Nevada, an entity controlled by Dr. Phillip Frost, a director of the
Company, and issued a new note in the principal amount of $912,195 bearing
interest at 7%, payable semi-annually, which matures in October 2005.

Effective July 31, 2001, Frost Nevada sold approximately 13% of the Purchased
Shares, 13% of the shares of common stock issued upon the conversion of the
Purchased Debt and transferred 13% of the Related Party Note in a private
transaction to a group of six investors. Mr. Angel, the Company's president and
chief executive officer, and an entity controlled by Mr. Angel comprise 40% of
this investor group.


                                      F-24
<PAGE>   68

                             CONTINUCARE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10 - STOCK OPTION PLAN AND WARRANTS

In January 1999, the Company's shareholders approved an amendment to the
Company's Amended and Restated 1995 Stock Option Plan (the "1995 Stock Option
Plan") to increase the authorized shares for issuance upon the exercise of stock
options from 1,750,000 to 2,400,000 and to cover employees, directors,
independent contractors and consultants of the Company. Under the terms of the
Stock Option Plan, the options expire 10 years after the date of the grant.

In December 2000, the Company's shareholders approved the Amended and Restated
Continucare Corporation 2000 Stock Option Plan (the "2000 Stock Option Plan") to
increase the authorized shares for issuance upon the exercise of stock options
from 3,000,000 to 4,000,000 and to cover employees, directors, independent
contractors and consultants of the Company. Under the terms of the Stock Option
Plan, the options expire 10 years after the date of the grant.

Pro forma information regarding net income and earnings per share is required by
FASB No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 2001,
2000 and 1999, respectively: risk-free interest rates of 5.61%, 5.85% and 5.25%;
dividend yields of 0%; volatility factors of the expected market price of the
Company's common stock of 90.8%, 82.5% and 66.4%, and a weighted-average
expected life of the options of 10, 10 and 10.

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

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:

<TABLE>
<CAPTION>
                                                              YEAR ENDED JUNE 30,
                                                     2001          2000           1999
                                                  ----------    -----------   ------------

<S>                                               <C>           <C>           <C>
Pro forma net (loss) income.....................  $ (137,902)   $13,326,315   $(52,046,336)
Basic and diluted pro forma net income (loss)
  per share....................................   $       --    $       .62   $      (3.60)
</TABLE>

The following table summarizes information related to the Company's stock option
activity for the years ended June 30, 2001, 2000 and 1999:


                                      F-25
<PAGE>   69

                             CONTINUCARE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10 - STOCK OPTION PLAN AND WARRANTS (CONTINUED)

<TABLE>
<CAPTION>
                                                                             YEAR ENDED JUNE 30,
                                                 ----------------------------------------------------------------------------
                                                          2001                       2000                       1999
                                                 ----------------------     ----------------------     ----------------------
                                                               WEIGHTED                   WEIGHTED                   WEIGHTED
                                                               AVERAGE                    AVERAGE                    AVERAGE
                                                   NUMBER      EXERCISE       NUMBER      EXERCISE       NUMBER      EXERCISE
                                                 OF SHARES       PRICE      OF SHARES       PRICE      OF SHARES       PRICE
                                                 ----------    --------     ----------    --------     ----------    --------

<S>                                              <C>           <C>          <C>           <C>          <C>           <C>
Outstanding at beginning of the year ......         494,000      $5.44       1,138,500      $5.58       1,388,500      $5.45
Granted ...................................       2,611,000        .69          25,000       2.00         562,500       5.90
Forfeited .................................        (108,250)      5.48        (669,500)      5.54        (812,500)      5.58
                                                 ----------                 ----------                 ----------
Outstanding at end of the year ............       2,996,750                    494,000                  1,138,500
                                                 ==========                 ==========                 ==========

Exercisable at end of the year ............       1,595,000                    464,000                    847,085
                                                 ==========                 ==========                 ==========
Weighted average fair value of options
  granted during the year .................      $      .61                 $      .30                 $     4.18
                                                 ==========                 ==========                 ==========
</TABLE>

The following table summarizes information about the options outstanding at June
30, 2001:

<TABLE>
<CAPTION>
                              OPTIONS OUTSTANDING                        OPTIONS EXERCISABLE
    RANGE      -----------------------------------------------------------------------------------
     OF                        WEIGHTED AVERAGE
  EXERCISE     OUTSTANDING AT      REMAINING     WEIGHTED AVERAGE     NUMBER      WEIGHTED AVERAGE
   PRICES      JUNE 30, 2001   CONTRACTUAL LIFE   EXERCISE PRICE    EXERCISABLE    EXERCISE PRICE
--------------------------------------------------------------------------------------------------

<S>            <C>             <C>               <C>                <C>           <C>
$5.125-$7.25       369,000           6.21             $5.56            369,000          $5.56
   $2.00            25,000           8.18              2.00             25,000           2.00
 $.32-$.69       2,602,750           9.01               .69          1,200,000            .69
</TABLE>

In connection with the sale of the Notes in Fiscal 1998 (see Note 6), the
Company issued warrants to purchase 200,000 shares of the Company's common stock
with exercise prices ranging from $8.00 to $12.50 per share as a placement fee.
The fair market value of the warrants at date of issuance was $775,000. This
amount was being amortized, using the interest method, over the life of the
Notes. However, in connection with the Fiscal 2000 Restructuring, the remaining
unamortized balance was written off and is included in the extraordinary gain
for the year ended June 30, 2000. During Fiscal 1998, warrants to purchase
250,000 shares of common stock at $3.15 per share were exercised. The Company
has 760,000 warrants outstanding at June 30, 2001 which are exercisable through
December 31, 2007, with exercise prices ranging from $7.25 to $12.50 per share.

Shares of common stock have been reserved for future issuance at June 30, 2001
as follows:

<TABLE>
                  <S>                                        <C>
                  Convertible subordinated notes.......       3,780,489
                  Convertible related party note.......         912,195
                  Warrants.............................         760,000
                  Stock Options........................       2,996,750
                                                             ----------
                  Total................................       8,449,434
                                                             ==========
</TABLE>

NOTE 11 - INCOME TAXES

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


                                      F-26
<PAGE>   70

                             CONTINUCARE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11 - INCOME TAXES (CONTINUED)

There is no provision or benefit for income taxes for the years ended June 30,
2001, 2000 and 1999 as the Company has substantial tax assets, described more
fully below, which have not been recognized as it is more likely than not that
they will not be realized.

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

<TABLE>
<CAPTION>
                                                                                    JUNE 30,
                                                                  2001                2000                1999
                                                              ----------------------------------------------------
         <S>                                                  <C>                 <C>                 <C>
         Deferred tax assets:
            Bad debt and notes receivable reserve ....        $  4,579,119        $  4,817,719        $  4,065,794
            Depreciable/amortizable assets ...........             386,686             577,136             762,486
            Alternative minimum tax credit ...........             111,973             111,973             111,973
            Other ....................................           1,013,159           1,127,065             454,379
            Impairment charge ........................           2,660,663           3,285,430           3,540,577
            Capital loss carryover ...................             200,261             200,261
            Net operating loss carryforward ..........           2,195,114           2,522,780           8,036,027
                                                              ----------------------------------------------------
            Deferred tax assets ......................          11,146,975          12,642,364          16,971,236
         Deferred tax liabilities:
            Other ....................................             (40,211)            (23,126)            (23,126)
            Valuation allowance ......................         (11,106,764)        (12,619,238)        (16,948,110)
                                                              ----------------------------------------------------
            Deferred tax liabilities .................         (11,146,975)        (12,642,364)        (16,971,236)
                                                              ----------------------------------------------------

         Net deferred tax (liability) asset ..........        $         --        $         --        $         --
                                                              ====================================================
</TABLE>

SFAS No. 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management
determined that a valuation allowance of $11,106,764, $12,619,238 and
$16,948,110 is necessary at June 30, 2001, 2000 and 1999, respectively, to
reduce the deferred tax assets to the amount that will more likely than not be
realized. The change in the valuation allowance for the current period was
approximately $1,512,000 for the year ended June 30, 2001. At June 30, 2001, the
Company had available net operating loss carryforwards of $5,833,414, which
expire in 2013 through 2020.

For financial reporting purposes, the Company reported a gain of $13,247,907 for
the year ended June 30, 2000, resulting from the forgiveness of indebtedness
relating to debt restructuring. Pursuant to Section 108 of the Internal Revenue
Code, the Company believes that this gain is excluded from income taxation and
certain tax attributes (i.e. net operating losses) of the Company are being
reduced by the amount of such debt forgiveness. As a result, the Company's net
operating loss carryforwards have been reduced by an amount representing the
Company's discharge of indebtedness income.

A reconciliation of the statutory federal income tax rate with the Company's
effective income tax rate for the years ended June 30, 2001, 2000 and 1999 is as
follows:

<TABLE>
<CAPTION>
                                                                     2001         2000         1999
                                                                    --------------------------------

<S>                                                                 <C>           <C>          <C>
Statutory federal rate .....................................         (34.0)%       34.0%       (34.0)%
State income taxes, net of federal income tax benefit ......          7.37        (0.89)        (2.6)
Goodwill and other non-deductible items ....................        103.04         0.84         10.1
Change in valuation allowance ..............................        (76.41)      (30.66)        24.2
Other ......................................................            --        (3.29)         2.3
                                                                    --------------------------------
Effective (benefit) tax rate ...............................             0%           0%           0%
                                                                    ================================
</TABLE>

NOTE 12 - EMPLOYEE BENEFIT PLAN

As of January 1, 1997, the Company adopted a tax qualified employee savings and
retirement plan covering the Company's eligible employees. The Continucare
Corporation 401(k) Profit Sharing Plan and Trust (the "401(k) Plan") was amended
and restated on July 1, 1998. The 401(k) Plan is intended to qualify under
Section 401 of the Internal Revenue Code (the "Code") and contains a feature
described in Code Section 401(k) under which a participant may elect to have his
or her compensation reduced by up to 16% (subject to IRS limits) and have that
amount contributed to the 401(k) Plan. On February 1, 1999, the Internal Revenue
Service issued a favorable determination letter for the 401(k) Plan.

Under the 401(k) Plan, new employees who are at least eighteen (18) years of age
are eligible to participate in the 401(k) Plan after 90 days of service.
Eligible employees may elect to reduce their compensation by the lesser of 16%
of their annual compensation or the statutorily prescribed annual limit of
$10,500 (for calendar year ending December 31, 2001) and have the reduced amount
contributed to the 401(k) Plan. The Company may, at its discretion, make a
matching contribution and a non-elective contribution to the 401(k) Plan. There
were no matching contributions for the years ending June 30, 2001, 2000 or 1999.
Participants in the 401(k) Plan do not begin to vest in the employer
contribution until the end of two years of service, with full vesting achieved
after five years of service.

                                      F-27
<PAGE>   71

                             CONTINUCARE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11 - INCOME TAXES (CONTINUED)

SFAS No. 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management
determined that a valuation allowance of $11,106,764, $12,619,238 and
$16,948,110 is necessary at June 30, 2001, 2000 and 1999, respectively, to
reduce the deferred tax assets to the amount that will more likely than not be
realized. The change in the valuation allowance for the current period was
approximately $1,512,000 for the year ended June 30, 2001. At June 30, 2001, the
Company had available net operating loss carryforwards of $5,833,414, which
expire in 2013 through 2020.

For financial reporting purposes, the Company reported a gain of $13,247,907 for
the year ended June 30, 2000, resulting from the forgiveness of indebtedness
relating to debt restructuring. Pursuant to Section 108 of the Internal Revenue
Code, the Company believes that this gain is excluded from income taxation and
certain tax attributes (i.e. net operating losses) of the Company are being
reduced by the amount of such debt forgiveness. As a result, the Company's net
operating loss carryforwards have been reduced by an amount representing the
Company's discharge of indebtedness income.

A reconciliation of the statutory federal income tax rate with the Company's
effective income tax rate for the years ended June 30, 2001, 2000 and 1999 is as
follows:

<TABLE>
<CAPTION>
                                                                     2001         2000         1999
                                                                    --------------------------------

<S>                                                                 <C>           <C>          <C>
Statutory federal rate .....................................         (34.0)%       34.0%       (34.0)%
State income taxes, net of federal income tax benefit ......          7.37        (0.89)        (2.6)
Goodwill and other non-deductible items ....................        103.04         0.84         10.1
Change in valuation allowance ..............................        (76.41)      (30.66)        24.2
Other ......................................................            --        (3.29)         2.3
                                                                    --------------------------------
Effective (benefit) tax rate ...............................             0%           0%           0%
                                                                    ================================
</TABLE>

NOTE 12 - EMPLOYEE BENEFIT PLAN

As of January 1, 1997, the Company adopted a tax qualified employee savings and
retirement plan covering the Company's eligible employees. The Continucare
Corporation 401(k) Profit Sharing Plan and Trust (the "401(k) Plan") was amended
and restated on July 1, 1998. The 401(k) Plan is intended to qualify under
Section 401 of the Internal Revenue Code (the "Code") and contains a feature
described in Code Section 401(k) under which a participant may elect to have his
or her compensation reduced by up to 16% (subject to IRS limits) and have that
amount contributed to the 401(k) Plan. On February 1, 1999, the Internal Revenue
Service issued a favorable determination letter for the 401(k) Plan.

Under the 401(k) Plan, new employees who are at least eighteen (18) years of age
are eligible to participate in the 401(k) Plan after 90 days of service.
Eligible employees may elect to reduce their compensation by the lesser of 16%
of their annual compensation or the statutorily prescribed annual limit of
$10,500 (for calendar year ending December 31, 2001) and have the reduced amount
contributed to the 401(k) Plan. The Company may, at its discretion, make a
matching contribution and a non-elective contribution to the 401(k) Plan. There
were no matching contributions for the years ending June 30, 2001, 2000 or 1999.
Participants in the 401(k) Plan do not begin to vest in the employer
contribution until the end of two years of service, with full vesting achieved
after five years of service.


                                      F-28
<PAGE>   72

                             CONTINUCARE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12 - EMPLOYEE BENEFIT PLAN (CONTINUED)

Under the 401(k) Plan, each participant directs the investment of his or her
401(k) Plan account from among the 401(k) Plan's many options. During Fiscal
1999, the 401(k) Plan underwent an integration and conversion process by which:
(i) certain 401(k) plans of subsidiaries purchased through past acquisitions
were merged into the 401(k) Plan; and (ii) the 401(k) Plan's valuation system
was converted from a quarterly to a daily valuation.

NOTE 13 - COMMITMENTS AND CONTINGENCIES

Employment Agreements--The Company maintains employment agreements with certain
officers and key executives expiring at various dates through September 11,
2002. In addition, one employment agreement provides for one additional year
term for each year of service by the executive. The agreements provide for
annual base salaries in the aggregate of approximately $300,000, annual
increases, bonuses and stock option grants. The employment agreements with
certain officers also provide that in the event of a change in control of the
Company, as defined therein, each officer is entitled to an acceleration of the
remainder of the officer's term and the automatic vesting of any unvested stock
options.

Insurance--The Company maintains policies for general and professional liability
insurance jointly with each of the providers. It is the Company's intention to
renew such coverage on an on-going basis.

Leases--The Company leases office space and equipment under various
non-cancelable operating leases. Rent expense under such operating leases was
$2,081,428, $2,304,299 and $4,520,866 for the years ended June 30, 2001, 2000
and 1999, respectively. Future annual minimum payments under such leases as of
June 30, 2001 are as follows:

<TABLE>
                  <S>                                       <C>
                  For the fiscal year ending June 30,
                  2002....................................  $   833,093
                  2003....................................      689,680
                  2004....................................      452,083
                  2005....................................      198,748
                  2006....................................       32,856
                                                            -----------
                     Total................................  $ 2,206,460
                                                            ===========
</TABLE>


Concentrations of Revenues - For the years ended June 30, 2001, 2000 and 1999,
the Company generated approximately 36%, 39% and 51%, respectively, of total
revenues from Foundation Health Corporation. Humana Medical Plans, Inc.
accounted for 60%, 57% and 34%, respectively, of total revenues in Fiscal 2001,
2000 and 1999.

The case of CONTINUCARE CORPORATION, A FLORIDA CORPORATION, CONTINUCARE
PHYSICIAN PRACTICE MANAGEMENT, INC. ("CPPM"), v. JAY A. ZISKIND, AN INDIVIDUAL,
KENNETH I. ARVIN, AN INDIVIDUAL, TRACY ARVIN, AN INDIVIDUAL, ZISKIND & ARVIN,
P.A., A PROFESSIONAL ASSOCIATION, NORMAN B. GAYLIS, M.D., AN INDIVIDUAL AND ZAG
GROUP, INC., A FLORIDA CORPORATION, was filed on November 15, 1999 in the
Circuit Court of the 11th Judicial District in and for Miami-Dade County,
alleging breach of fiduciary duties, improper billing, and seeking the return of
all consideration previously paid by the Company to ZAG, and damages, as well as
seeking rescission of the Agreement and Plan of Merger and the Registration
Rights Agreement. On July 13, 2001, the counterplaintiffs filed their Third
Amended Counterclaim against the Company and included Mr. Charles Fernandez as a
defendant in the action. The Third Amended Counterclaim alleges counts for (i)
breach of contract against the Company and CPPM


                                      F-29
<PAGE>   73

                             CONTINUCARE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

based on the alleged failure to register stock pursuant to the Registration
Rights Agreement, the alleged failure to pay contingent merger consideration and
the alleged failure to fulfill obligations pursuant to Rule 144 of the
Securities Act of 1933; (ii) fraud in the inducement against the Company, CPPM
and Mr. Fernandez in connection with the execution of the Registration Rights
Agreement and the Agreement and Plan of Merger; (iii) violation of Florida Blue
Sky Laws against the Company, CPPM and Mr. Fernandez; and (iv) conversion
against the Company and CPPM. The Third Amended Counterclaim seeks an amount in
excess of $4,000,000 in damages. On August 31, 2001, the Company, CPPM and Mr.
Fernandez filed their Answer and Affirmative Defenses to the Third Amended
Counterclaim. The matter has been taken off the trial calendar and is not
currently scheduled for trial. Discovery is ongoing. The Company believes that
there is little merit to the counterclaim and intends to vigorously defend the
claims.

The Company is a party to the case of WARREN GROSSMAN, M.D., ALAN REICH, M.D.,
AND RICHARD STRAIN, M.D. v. CONTINUCARE PHYSICIAN PRACTICE MANAGEMENT, INC. AND
CONTINUCARE CORPORATION. This case was filed in May 1999 in the Circuit Court
for Broward County, Florida. The complaint alleges breach of employment
contracts based on the early termination of the Plaintiffs' employment and seeks
damages in excess of $250,000. On January 5, 2000, the Company filed a
counterclaim alleging breach of contract in connection with the Plaintiff's
failure to return certain computer equipment, as well as a breach of the
non-compete covenant. On February 18, 2000, the Company filed a Motion for
Summary Judgment as to all Plaintiffs. On April 28, 2000, the Plaintiffs filed a
Motion for Summary Judgment as to the issue of liability. On June 5, 2000, the
Company filed a Motion for Judgment on the Pleadings as to all Plaintiffs. All
of the aforementioned motions were heard on June 15, 2000. On November 14, 2000,
the court granted the Company's motion as to one of the Plaintiffs' claims for
deferred and incentive compensation, but reserved as to his claim for post
termination compensation related to follow-up patient care, if any. The court
denied the Company's motion as to the other two Plaintiffs. Also on November 14,
2000, the court denied the Plaintiffs motion for summary judgment in all
respects. The trial started on February 13, 2001. As of the date of this filing,
the trial is still in progress and is scheduled to continue in October, 2001.
The Company believes the action has little merit and intends to vigorously
defend the claims.

The Company settled the case of GE MEDICAL SYSTEMS, AN UNINCORPORATED DIVISION
OF GENERAL ELECTRIC COMPANY v. CONTINUCARE OUTPATIENT SERVICES, INC. n/k/a
OUTPATIENT RADIOLOGY SERVICES, INC., A FLORIDA CORPORATION AND CONTINUCARE
CORPORATION, A FLORIDA CORPORATION with GE Medical Systems ("GE") on April 5,
2001 with no admission of liability. As part of the settlement, GE assigned to
the Company all of its claims associated with the litigation. The Company
intends to continue to litigate its claims of indemnification through its
pending cross-claims and/or third party claims.

Two subsidiaries of the Company are parties to the case of NANCY FEIT ET AL. v.
KENNETH BLAZE, D.O. KENNETH BLAZE., D.O., P.A.; SHERIDEN HEALTHCORP, INC.; WAYNE
RISKIN, M.D.; KAHN AND RISKIN, M.D., P.A.; CONTINUCARE PHYSICIAN PRACTICE
MANAGEMENT, INC., D/B/A ARTHRITIS AND RHEUMATIC DISEASE SPECIALTIES, INC.; JAMES
JOHNSON, D.C. AND JOHNSON & FALK, D.C., P.A. The case was filed in December,
1999 in the Circuit Court of the 17th Judicial Circuit in and for Broward
County, Florida and served on the companies in April, 2000. The complaint
alleges vicarious liability and seeks damages in excess of $15,000. The Company
filed its answer on May 3, 2000. Discovery is still proceeding at a slow pace.
The Company has made a demand for assumption of defense and indemnification from
Kahn and Riskin, M.D., P.A. and Wayne Riskin, M.D. The demand was initially
rejected, but is currently being re-evaluated. The Company and the carriers for
Kahn & Riskin, M.D. have been discussing apportionment of responsibilities. The
Company believes it has meritorious defenses and intends to vigorously pursue
them.


                                      F-30
<PAGE>   74

                             CONTINUCARE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

In Fiscal 1999, the Company closed or dissolved certain subsidiaries, some of
which had pending claims against them. The Company is also involved in various
other legal proceedings incidental to its business that arise from time to time
out of the ordinary course of business -- including, but not limited to, claims
related to the alleged malpractice of employed and contracted medical
professionals, workers' compensation claims and other employee-related matters,
and minor disputes with equipment lessors and other vendors.

No liability has been recorded on the above matters as it is not possible to
estimate the liability, if any.

NOTE 14 - VALUATION AND QUALIFYING ACCOUNTS

Activity in the Company's Valuation and Qualifying Accounts consists of the
following:

<TABLE>
<CAPTION>
                                                                                              YEAR ENDED JUNE 30,
                                                                                  2001                 2000               1999
                                                                              ----------------------------------------------------
<S>                                                                           <C>                 <C>                 <C>
Allowance for doubtful accounts related to accounts receivable:
Balance at beginning of period .......................................        $  5,752,000        $  5,752,000        $  2,071,000
Provision for doubtful accounts ......................................              50,000                  --           4,655,000
Write-offs of uncollectible accounts receivable ......................                  --                  --            (974,000)
                                                                              ----------------------------------------------------
Balance at end of period .............................................        $  5,802,000        $  5,752,000        $  5,752,000
                                                                              ====================================================

Allowance for doubtful accounts related to notes receivable:
Balance at beginning of period .......................................        $  7,051,000        $  7,051,000        $  5,510,000
Provision for doubtful accounts ......................................                  --                  --           1,541,000
Write-offs of uncollectible notes receivable .........................            (684,000)                 --                  --
                                                                              ----------------------------------------------------
Balance at end of period .............................................        $  6,367,000        $  7,051,000        $  7,051,000
                                                                              ====================================================

Tax valuation allowance for deferred tax assets:
Balance at beginning of period .......................................        $ 12,619,238        $ 16,948,110        $  4,718,600
Additions, charged to cost and expenses ..............................                  --                  --          12,229,510
Deductions ...........................................................          (1,512,474)         (4,328,872)                 --
                                                                              ----------------------------------------------------
Balance at end of period .............................................        $ 11,106,764        $ 12,619,238        $ 16,948,110
                                                                              ====================================================
</TABLE>



                                      F-31