Health Grades Inc – ‘PRES14A’ for 4/16/99

As of:  Friday, 4/16/99   ·   For:  4/16/99   ·   Accession #:  950134-99-3043   ·   File #:  0-22019

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Preliminary Proxy Solicitation Material — Special Meeting   —   Schedule 14A
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Document/Exhibit                   Description                      Pages   Size 

 1: PRES14A     Preliminary Proxy Statement - Special Meeting        148    592K 

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PRES14A
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SCHEDULE 14A
(RULE 14A-101)

INFORMATION REQUIRED IN PROXY STATEMENT 

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES 
EXCHANGE ACT OF 1934 (AMENDMENT NO.           ) 

Filed by the Registrant [X]                                           
Filed by a Party other than the Registrant [ ]                        
Check the appropriate box:                                            
[X] Preliminary Proxy Statement       [ ] Confidential, for Use of the
                                              Commission Only (as permitted by
                               Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement                                        
[ ] Definitive Additional Materials                                   
   [ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12

Specialty Care Network, Inc.
--------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)

--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):                              
[ ] No fee required.                                                  
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.                                                         

(1) Title of each class of securities to which transaction applies:   

--------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:      

--------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed  
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):                                 

       $19,655,711, which is the sum of (a) $17,172,617 cash; (b) $1,893,479
      (3,786,957 shares of Specialty Care Network Common Stock, based on a
    closing price per share of $.50 as reported by Nasdaq on April 14,
  1999); and (c) $589,615 (cancellation of convertible debentures)
--------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:                  

--------------------------------------------------------------------------------
(5) Total fee paid:                                                   

$3,931                                                        
--------------------------------------------------------------------------------

[ ] Fee paid previously with preliminary materials.                   

    [ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid   
previously. Identify the previous filing by registration statement number, or   
the Form or Schedule and the date of its filing.                                

(1) Amount Previously Paid:                                           

--------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:                     

--------------------------------------------------------------------------------
(3) Filing Party:                                                     

--------------------------------------------------------------------------------
(4) Date Filed:                                                       

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

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Specialty Care Network, Inc.
44 Union Boulevard - Suite 600
Lakewood, CO 80228

Dear Stockholder:                                                               

      You are cordially invited to attend a special meeting of Stockholders of
Specialty Care Network, Inc., to be held at                       on            
, 1999 at __ a.m., __________ Daylight Time.                          

   At the special meeting, you will be asked to consider and vote upon a
proposal to approve and adopt a restructuring transaction involving eleven      
restructuring agreements between Specialty Care Network and ten affiliated      
practices. Under the agreements, we will resell to the practices various        
non-medical assets. Aside from accounts receivable that we purchased from the   
practices, we acquired most of the assets we are reselling to the practices in  
connection with our initial affiliation with the practices. In addition, the    
practices will assume certain liabilities relating to our management of         
non-medical aspects of the practices. Under the restructuring transaction, we   
are agreeing to new management service arrangements with the practices that will
have substantially shorter terms than our current management services           
agreements. While the current agreements initially had 40 year terms, the new   
agreements will expire generally on the fifth anniversary of a practice's       
initial affiliation with us. We are also reducing the service fees payable by   
the practices, and the level of services that we provide to the practices. In   
return for our agreement to enter into the restructuring transaction, we will   
receive approximately $17 million in cash, subject to adjustment based on the   
net book value of most of the assets we sell to the practices. We also will     
reacquire 3,786,957 shares of our common stock, and a $589,615 convertible      
debenture payable by us to physicians in one of our affiliated practices will be
cancelled. We expect to use all of the cash proceeds of the transaction to repay
existing indebtedness.                                                          

    We are recommending the restructuring transaction because we feel that
our long-term viability depends on our ability to focus our efforts on          
businesses outside of the physician practice management industry. Several of our
affiliated practices have encountered financial difficulties in fulfilling their
obligations under existing service agreements. We currently are engaged in      
litigation with three practices; none of these practices are currently paying   
service fees. While the ten practices that will be repurchasing their practice  
assets have continued to fulfill their obligations under their current service  
agreements, we believe many of them would neither be willing nor able to        
continue to adhere to the terms of the service agreements as currently          
structured. Moreover, in light of the difficulties confronted in our industry   
generally and by us in particular, we feel it would be most prudent to          
substantially reduce our bank indebtedness and concentrate our efforts on other 
businesses that we believe provide a greater prospect of potential return than  
our physician practice management business as currently structured. Approval of 
the restructuring transaction will enable us to pursue development of our health
care rating internet site and our ambulatory surgery center business.           

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BASED UPON A RECOMMENDATION OF A SPECIAL COMMITTEE OF THE BOARD OF
DIRECTORS CONSISTING OF THE NON-PHYSICIAN DIRECTORS, YOUR BOARD OF DIRECTORS HAS
DETERMINED THAT THE RESTRUCTURING TRANSACTION IS IN THE BEST INTERESTS OF       
SPECIALTY CARE NETWORK AND OUR STOCKHOLDERS THAT ARE NOT PARTICIPATING IN THE   
RESTRUCTURING TRANSACTION, HAS APPROVED THE RESTRUCTURING TRANSACTION (SUBJECT  
TO STOCKHOLDER APPROVAL) AND RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL OF  
THE RESTRUCTURING TRANSACTION. THE ACCOMPANYING PROXY STATEMENT INCLUDES DETAILS
REGARDING THE FACTORS CONSIDERED BY THE BOARD OF DIRECTORS. AMONG THE FACTORS   
WAS AN OPINION DELIVERED TO THE SPECIAL COMMITTEE BY SUNTRUST EQUITABLE         
SECURITIES CORPORATION, FINANCIAL ADVISOR TO THE COMMITTEE, THAT THE            
CONSIDERATION TO BE RECEIVED BY SPECIALTY CARE NETWORK IS FAIR, FROM A FINANCIAL
POINT OF VIEW, TO SPECIALTY CARE NETWORK AND ITS STOCKHOLDERS THAT ARE NOT      
PARTICIPATING IN THE RESTRUCTURING TRANSACTION. I URGE YOU TO READ THE PROXY    
STATEMENT CAREFULLY.                                                            

     We are excited about the prospects for our company if the restructuring
transaction is completed. We can substantially reduce our debt, amicably resolve
ongoing issues with many of our affiliated practices, reduce the number of      
shares outstanding and devote our efforts towards attractive business           
opportunities. We hope to have your support in this important vote.             

Sincerely,                                                                      

Kerry R. Hicks                                                                  
President and Chief Executive Officer                                           

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SPECIALTY CARE NETWORK, INC.

 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

Dear Stockholder:                                                               

We are calling a special meeting of stockholders of Specialty Care
Network, Inc., to be held at                               on ____, 1999 at __  
a.m., __________ Daylight Time. We are calling the meeting so that you may vote 
on a proposal to approve a restructuring transaction under which the following  
events will occur:                                                              

o    Ten of our affiliated practices will purchase from us practice assets      
relating to their practices, including assets we acquired from the    
practices at the time we affiliated with them.                        

o    We will enter into new management service agreements with the practices    
and their physician owners that will:                                 

      o    reduce the services that we provide to the affiliated
practices;                                

         o    reduce the terms of our management services arrangements
                  generally from forty year terms to five year terms beginning
          from the initial affiliation date of each affiliated
                  practice, with such management service arrangements expiring
            at various times between one year after closing of the
           restructuring transaction and September 10, 2002; and

o    lower service fees paid by the practices to us.

o    We will receive from the practices and their physician owners approximately
  $17 million, in cash, subject to adjustment, and 3,786,957 shares of our
   common stock. In addition, a $589,615 convertible debenture payable by us
to physicians in one of our affiliated practices will be cancelled.   

BASED UPON A RECOMMENDATION OF A SPECIAL COMMITTEE OF THE BOARD OF
DIRECTORS, CONSISTING OF THE NON-PHYSICIAN DIRECTORS, YOUR BOARD OF DIRECTORS:  

o    HAS DETERMINED THAT THE RESTRUCTURING TRANSACTION IS IN THE BEST           
INTERESTS OF SPECIALTY CARE NETWORK AND OUR STOCKHOLDERS THAT ARE NOT 
PARTICIPATING IN THE RESTRUCTURING TRANSACTION;                       

o    HAS APPROVED THE RESTRUCTURING TRANSACTION (SUBJECT TO STOCKHOLDER         
APPROVAL); AND                                                        

o    RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL OF THE RESTRUCTURING        
TRANSACTION.                                                          

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IN ARRIVING AT ITS RECOMMENDATION, THE BOARD OF DIRECTORS GAVE CAREFUL          
CONSIDERATION TO A NUMBER OF FACTORS, AS DESCRIBED IN THE ENCLOSED PROXY        
STATEMENT, INCLUDING THE OPINION OF SUNTRUST EQUITABLE SECURITIES CORPORATION,  
FINANCIAL ADVISOR TO THE SPECIAL COMMITTEE THAT THE RESTRUCTURING TRANSACTION IS
FAIR, FROM A FINANCIAL POINT OF VIEW, TO SPECIALTY CARE NETWORK AND OUR         
STOCKHOLDERS THAT ARE NOT PARTICIPATING IN THE RESTRUCTURING TRANSACTION. THE   
WRITTEN OPINION OF SUNTRUST EQUITABLE SECURITIES CORPORATION IS ATTACHED AS     
APPENDIX "A" TO THE ENCLOSED PROXY STATEMENT. YOU ARE URGED TO READ THE OPINION 
IN ITS ENTIRETY FOR A DESCRIPTION OF THE ASSUMPTIONS MADE, THE MATTERS          
CONSIDERED AND THE PROCEDURES FOLLOWED BY SUNTRUST EQUITABLE SECURITIES         
CORPORATION.                                                                    

       DETAILS OF THE RESTRUCTURING TRANSACTION APPEAR IN THE ACCOMPANYING PROXY
STATEMENT. PLEASE GIVE THIS MATERIAL YOUR CAREFUL ATTENTION.                    

     Approval of the restructuring transaction requires the affirmative vote
of the holders of the majority of our issued and outstanding shares of common   
stock, $0.001 par value. Each share of common stock is entitled to one vote on  
all matters to come before the special meeting.                                 

       Your vote is important. BECAUSE APPROVAL OF THE RESTRUCTURING TRANSACTION
REQUIRES THAT THE HOLDER OF A MAJORITY OF THE OUTSTANDING SHARES OF OUR COMMON  
STOCK VOTE "YES," THE EFFECT OF NOT VOTING THE SHARES IS THE SAME AS A "NO"     
VOTE. Whether you plan to attend the meeting or not, we urge you to complete,   
sign and return your proxy card as soon as possible in the envelope provided.   
This will ensure representation of your shares in the event you are not able to 
attend the meeting. You may revoke your proxy and vote in person at the meeting 
if you so desire.                                                               

Sincerely,                                                                      

Patrick M. Jaeckle                                                              
Executive Vice President-Corporate Development and Secretary                    

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 TABLE OF CONTENTS

                                                                [Download Table]

                                                                           Page
                                                                           ----
                                                                               
Questions and Answers About The Restructuring Transaction                    7 
Disclosures Regarding Forward-looking Statements                            10 
Proxy Statement For Special Meeting of Stockholders                         13 
The Restructuring Transaction                                               15 
Opinion of SunTrust Equitable Securities                                    37 
Interests of Certain Persons in Matters to be Acted Upon                    47 
Agreement in Principle with the Former PPI Stockholders                     47 
Ownership of Common Stock By Certain Persons                                50 
Selected Historical and Unaudited Pro Forma Consolidated                       
  Financial Information                                                     52 
Management's Discussion and Analysis of Financial Condition and                
  Results of Operations                                                     59 
Information About Specialty Care Network, Inc.                              66 
Index to Financial Statements                                               95 
Market for Registrant's Common Equity and Related Stockholder Matters      144 
Other Matters                                                              145 
Advance Notice Procedures                                                  145 
Stockholders Proposals                                                     145 
Opinion of SunTrust Equitable Securities                            Appendix A 

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 QUESTIONS AND ANSWERS ABOUT THE
 RESTRUCTURING TRANSACTION

Q.     Who is soliciting my proxy?                                              

A.     The Board of Directors of Specialty Care Network.                        

Q.     Where and when is the special meeting?                                   

A.     __ a.m., _____ Daylight Time,                     ,                      
, 1999 at                                                 

Q.     What am I voting on?                                                     

A.     Our management is seeking the authorization of the stockholders to enter 
      into a restructuring transaction, based on eleven separate restructuring
 agreements with ten of our affiliated practices and their physician
      owners. If the restructuring transaction is consummated, we will receive
       approximately $17 million in cash, subject to adjustment based on the net
     book value of most of the assets we sell to the practices. We will also
reacquire 3,786,957 shares of our common stock, and a $589,615    
convertible debenture payable by us to physicians in one of our   
affiliated practices will be cancelled.                           

Q.     What will Specialty Care Network do after the restructuring transaction  
is completed?                                                     

A.     We will continue to provide some services to these practices, although on
      a more limited basis. In addition, we will continue to provide physician
practice management services to those practices that have not     
  restructured their arrangements with us. We also will concentrate on
   development of our health care rating web site and ambulatory surgery
center businesses. We believe that these businesses present more  
      promising opportunities than our physician practice management business.

Q.     Why should Specialty Care Network enter into the restructuring           
transaction?                                                      

A.     A Special Committee of the Board of Directors, consisting of the         
      non-physician board members, considered the advantages and disadvantages
 of the restructuring at this time and recommended that the Board of
      Directors approve the restructuring transaction. As described in greater
     detail in this proxy statement, our Board of Directors believes that it
   is in the best interests of Specialty Care Network to restructure our
arrangements with the affiliated practices. This will enable us to
    utilize the cash proceeds of the transaction to pay down a substantial
     portion of our indebtedness and increase the proportion of ownership of
      those of our stockholders who are not participating in the restructuring
    transaction. In addition, the restructuring transaction will eliminate
      our pending disputes with some of the affiliated practices. We note that
       we will no longer be able to rely on these practices to provide long term
       revenues. However, several of the practices were suffering from financial
       strains due, in part, to their commitments under their service agreements
       with us. Some claimed we were in default under the service agreements and
even threatened litigation. Therefore, we have substantial doubt  
       concerning the long term viability of our service agreements with many of
       our affiliated practices. Our prospects over an extended term will depend
on our ability to generate income from other businesses.          

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Q.     What did the Board of Directors consider in determining to recommend the 
restructuring transaction?                                        

A.     Based on a variety of factors, including:                                

   o      our inability to complete additional affiliations on favorable
terms;                                              

o      our default under our bank credit facility;                

   o      financial difficulties confronted by our affiliated practices;

    o      financial performance of many of our affiliated practices below
expectations;                                       

     o      lack of philosophical commitment by our affiliated physicians to
our mission;                                        

  o      claims of default and threats of litigation by several of our
practices;                                          

o      impairment of the value of our service agreements;         

      o      our ability, following the restructuring transaction, to focus on
           what we believe are more promising opportunities, including our
          health care rating internet site and ambulatory surgery center
businesses;                                         

     o      our ability to use the proceeds of the restructuring transaction
to reduce our indebtedness substantially; and       

       o      the opinion of SunTrust Equitable Securities Corporation described
below,                                              

  the Board believes that the restructuring transaction is in the best
   interests of Specialty Care Network and our stockholders that are not
      participating in the restructuring transaction. In addition, the Special
Committee retained SunTrust Equitable Securities Corporation, an  
    independent investment banking firm, to analyze the financial terms of
      the transaction. SunTrust Equitable Securities Corporation has concluded
       that the restructuring transaction is fair from a financial point of view
       to Specialty Care Network and its stockholders that are not participating
in the restructuring transaction.                                 

Q.     Will any of the money received from the restructuring transaction be     
distributed to our stockholders?                                  

A.     No. We intend to use substantially all of the cash proceeds generated    
from the restructuring transaction to pay down our outstanding    
indebtedness.                                                     

Q.     Will stockholders have appraisal rights?                                 

A.     No.                                                                      

Q.     What should I do now?                                                    

A.     You should mail your signed and dated proxy card in the enclosed envelope
 as soon as possible, so that your shares will be represented at the
special meeting.                                                  

Q.     Can I change my vote after I have mailed my signed proxy card?           

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A.     Yes. You can change your vote in one of three ways at any time before    
     your proxy is used. First, you can revoke your proxy by written notice.
     Second, you can send a later dated proxy changing your vote. Third, you
can attend the meeting and vote in person.                        

Q.     How will my shares be voted if they are held in a broker's name?         

A.     Your broker may vote shares nominally held in its name (or in what is    
commonly called "street name") only if you provide the broker with
written instructions on how to vote.                              

Q.     What happens if I do not give my broker instructions?                    

A.     Absent your instructions, these shares will not be voted. Because        
      approval of the restructuring transaction requires that the holders of a
    majority of the outstanding shares of our common stock vote "yes," the
       effect of not voting the shares is the same as a "no" vote. Therefore, we
       urge you to instruct your broker in writing to vote shares held in street
name for the proposed transaction.                                

Q.     Who should I call with questions?                                        

A.     If you have questions about the transaction, you should call Pat Jaeckle,
    our Executive Vice President - Corporate Development, at 303/716-0041.

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 DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This Proxy Statement contains forward-looking statements within the meaning of  
the Private Securities Litigation Reform Act of 1995 under the captions,        
"Questions and Answers about the Restructuring Transaction," "the Restructuring 
Transaction," "Management's Discussion and Analysis of Financial Condition and  
Results of Operations," and "Information About Specialty Care Network" and      
elsewhere in this proxy statement. These forward-looking statements include,    
among others, statements about the following:                                   

o    our ability, following the restructuring transaction, to focus on our      
    health care rating internet site and ambulatory surgery center businesses;

o    our ability to maintain the cooperation of our lending banks and to seek a 
restructuring of our remaining debt obligations if the restructuring  
transaction is approved;                                              

o    anticipated decline in revenues generated from service fees with our       
affiliated practices after the guaranteed payment periods;            

o    the effect on our business and operations of additional litigation;        

o    our ability, after the restructuring transaction, to repay a substantial   
    portion of our indebtedness and the anticipated effects of that repayment;

o    the anticipated resolution of issues with the former stockholders of       
Provider Partnerships, Inc.;                                          

o    planned expansion of our internet business and financing needs;            

o    effect of the restructuring transaction on service fee revenues and clinic 
expenses;                                                             

o    the sufficiency of cash flow on operations to fund our operations at their 
current level for the next 12 months;                                 

o    the need for additional funds to finance capital expenditures relating to  
expansion of our business;                                            

o    anticipated capital expenditures during 1999;                              

o    use of working capital to fund our obligation to purchase accounts         
receivables of affiliated practices on an ongoing basis;              

o    Year 2000 compliance of internal applications and affiliated practices;    

o    status of Year 2000 compliance of third-party payors;                      

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o    the effect of costs of Year 2000 non-compliance issues identified to date; 

o    additional costs to correct any significant Year 2000 issues that may      
arise;                                                                

o    capital commitments required to develop operations of Ambulatory Services, 
Inc.;                                                                 

o    anticipated services to be provided by Ambulatory Services, Inc.;          

o    effects of changes in government regulation, application of current        
regulation to our operations, or adverse determinations by regulatory 
agencies;                                                             

o    our ability to compete with respect to physician practice management       
services;                                                             

o    the effect on us if affiliated practices are not able to compete           
effectively in the markets they serve;                                

o    anticipated competition to seek health care rating services on the         
internet;                                                             

o    attractiveness of HealthCareReportCards.com for advertising by certain     
hospitals;                                                            

o    effect of the restructuring transaction on our employee base; and          

o    scope of our insurance coverage.                                           

         When used in this proxy statement, the words "anticipate," "believe,"
"estimate," and similar expressions are generally intended to identify
  forward-looking statements. There are important factors that could cause
     actual results to differ materially from those expressed or implied by such
forward-looking statements including:                                 

     o    our inability to raise capital for our healthcare rating internet site
and Ambulatory Surgery Center Businesses;                   

o    the refusal of our lending banks to consent to the restructuring 
       transaction or the restructuring of our remaining debt obligations;

o    the status of our litigation with our affiliated practices;      

o    results of operations of our affiliated practices;               

o    the failure to enter into a definitive agreement with the former 
stockholders of PPI;                                        

o    unanticipated cash requirements to support current operations or 
expansion of our business;                                  

   o    Year 2000 issues that were not identified by our internal assessment
or by third-party payors;                                   

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o    unanticipated costs of Year 2000 compliance;                     

 o    inability to hire appropriate personnel for, or market services of
Ambulatory Services, Inc.;                                  

   o    enactment of new government regulations, court decisions, regulatory
interpretations or other initiatives;                       

o    competition in each of our businesses;                           

o    the creation of new web sites by our competitors that are with   
    statistical or other attributes that are attractive to hospitals
seeking to advertise on the internet;                       

o    inability to appropriately match personnel to business needs; and

o    claims that exceed our insurance coverage; and                   

  In addition, please see other factors under "Information About
Specialty Care Network, Inc. - Risk Factors."                         

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SPECIALTY CARE NETWORK, INC.
44 Union Boulevard - Suite 600
Lakewood, CO 80228

 PROXY STATEMENT FOR SPECIAL
 MEETING OF STOCKHOLDERS

 THE SPECIAL MEETING

TIME, DATE AND PLACE OF SPECIAL MEETING                                         

This proxy statement is being furnished in connection with the solicitation of  
proxies by our Board of Directors for use at the special meeting of stockholders
to be held at __ a.m., _____ Daylight Time, on [insert day of week], [insert    
month and day], 1999 at the [insert location] and at any meeting held upon      
adjournment or postponement of the special meeting.                             

We are first mailing copies of this proxy statement, the attached notice of     
special meeting of stockholders, and the enclosed form of proxy on or about     
[insert date], 1999.                                                            

PURPOSE OF THE SPECIAL MEETING; RECOMMENDATION OF THE BOARD OF DIRECTORS        

       At the special meeting, holders of our common stock will consider and
vote upon a proposal to approve and adopt the restructuring transaction to be   
effected through eleven separate restructure agreements with ten of our         
affiliated practices and their physician owners. Under the restructure          
agreements, we will sell to the practices non-medical assets relating to the    
practices. Aside from accounts receivable purchased from affiliated practices   
under the current service agreements, we acquired most of the assets we are     
reselling to the practices in connection with our initial affiliations with the 
practices. In addition, the practices will assume certain liabilities relating  
to our management of non-medical aspects of the practices. As part of the       
restructuring transaction, we will also restructure and enter into new          
management services agreements with the practices and their physician owners    
that will reduce the term of our current management services arrangements from  
40 years to terms generally expiring five years from the date of our initial    
affiliations with the practices. We will reduce our services to the practices,  
and fees payable by the practices will be substantially reduced. In return for  
our agreement to enter into the restructuring transaction, we will receive      
approximately $17 million in cash, subject to adjustment based on the net book  
value of most of the assets we sell to the practices. We also will reacquire    
3,786,957 shares of our common stock, and a $589,615 convertible debenture      
payable by us to physicians in one of our affiliated practices will be          
cancelled. We expect to use all of the cash proceeds of the transaction to repay
existing indebtedness.                                                          
See "The Restructuring Agreements."                                             

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The restructuring transaction will be approved if we receive the affirmative    
vote of a majority of the outstanding shares of common stock. Although we will  
continue to conduct operations after consummation of the restructuring          
transaction, we have nevertheless concluded that it is appropriate to submit the
restructuring transaction to our stockholders for their consideration because   
the restructuring transaction involves the sale of a significant portion of our 
assets.                                                                         

BASED UPON, AMONG OTHER THINGS, THE RECOMMENDATION OF THE SPECIAL COMMITTEE OF  
THE BOARD OF DIRECTORS CONSISTING OF ALL NON-PHYSICIAN MEMBERS, THE BOARD OF    
DIRECTORS HAS APPROVED THE RESTRUCTURING TRANSACTION (SUBJECT TO STOCKHOLDER    
APPROVAL) AND RECOMMENDS A VOTE FOR APPROVAL OF THE RESTRUCTURING TRANSACTION.  

RECORD DATE AND OUTSTANDING SHARES                                              

Our Board of Directors has fixed the close of business on _________, 1999 as the
record date for the determination of stockholders entitled to notice of, and to 
vote at the special meeting or any adjournment of the special meeting.          
Accordingly, you may vote at the special meeting only if you are a holder of    
record of common stock at the close of business on the record date. As of the   
record date, there were ________ holders of record of our common stock and      
____________ shares of common stock were issued and outstanding.                

VOTE REQUIRED                                                                   

Approval of the restructuring transaction requires the affirmative vote, in     
person or by proxy, of the majority of the shares outstanding.                  

QUORUM AND VOTING OF PROXIES; REVOCATION                                        

The presence in person or by proxy of the holders of a majority of our          
outstanding shares is necessary to constitute a quorum at the special meeting.  

If you complete and return a proxy and we receive your proxy at or prior to the 
special meeting, your proxy will be voted in accordance with your instructions. 
If you execute and return a proxy but do not provide instructions as to your    
vote, your proxy will be voted FOR the proposed restructuring transaction. If   
you execute and return a proxy marked ABSTAIN, your proxy will count for        
purposes of determining whether there is a quorum present at the special meeting
and for purposes of determining the voting power and number of shares entitled  
to vote at the special meeting, but your proxy will not be voted. Proxies marked
ABSTAIN will have the effect of a vote AGAINST the proposed restructuring       
transaction. Shares represented by "broker non-votes" will be counted for       
purposes of determining whether there is a quorum at the special meeting.       
Brokers and nominees are generally precluded from exercising their voting       
discretion with respect to the approval of the restructuring transaction.       
Therefore, absent specific instructions                                         

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from the beneficial owner of such shares, brokers and nominees are not empowered
to vote such shares with respect to the approval of the proposal. Therefore,    
broker non-votes will have the effect of a vote AGAINST the proposed            
restructuring transaction.                                                      

You may revoke your proxy at any time prior to its use. In order to revoke your 
proxy, you must deliver to our Secretary a signed notice of revocation or you   
must deliver a later dated proxy changing your vote. In addition, you may choose
to attend the special meeting and vote in person. Please note that simply       
attending the special meeting will not in itself constitute the revocation of   
your proxy.                                                                     

INTENTIONS AND AGREEMENTS TO VOTE                                               

The members of our Board of Directors, who beneficially hold an aggregate of    
1,263,543 shares of our common stock, which constitutes 7.7% of the outstanding 
shares, have advised us that they will vote their shares in favor of the        
restructuring transaction. In addition, we anticipate that the physician owners 
of the ten affiliated practices that have entered into the restructuring        
agreements will vote their shares in favor of the restructuring transaction.    

NO DISSENTERS' RIGHTS                                                           

Stockholders who do not approve of the proposed restructuring transaction are   
not entitled to appraisal or any other rights with respect to the proposed      
restructuring transaction under Delaware law or our restated certificate of     
incorporation.                                                                  

COSTS OF SOLICITATION                                                           

We will pay the costs associated with soliciting proxies from our stockholders. 
In addition to solicitation by this proxy statement, we may also solicit holders
of common stock by mail, telephone, facsimile or by personal solicitation. This 
solicitation may be made by directors, officers and regular employees, who will 
not receive any additional compensation for such efforts. We will request       
brokerage houses and other nominees, fiduciaries and custodians who nominally   
hold shares of common stock as of the record date to forward proxy soliciting   
material to the beneficial owners of such shares, and we will reimburse them for
their reasonable out-of-pocket expenses.                                        

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 THE RESTRUCTURING TRANSACTION

BOARD OF DIRECTORS RECOMMENDATION                                               

BASED UPON, AMONG OTHER THINGS, THE RECOMMENDATION OF THE SPECIAL COMMITTEE OF  
THE BOARD OF DIRECTORS AND OTHERS FACTORS, THE BOARD OF DIRECTORS BELIEVES THAT 
THE RESTRUCTURING TRANSACTION IS IN THE BEST INTERESTS OF SPECIALTY CARE NETWORK
AND OUR STOCKHOLDERS THAT ARE NOT PARTICIPATING IN THE RESTRUCTURING            
TRANSACTION. ACCORDINGLY, THE BOARD OF DIRECTORS HAS APPROVED THE RESTRUCTURING 
TRANSACTION AND RECOMMENDS THAT OUR STOCKHOLDERS VOTE FOR APPROVAL OF THE       
RESTRUCTURING TRANSACTION.                                                      

REASONS FOR THE RESTRUCTURING TRANSACTION                                       

Since we began operations in 1996, we have principally been engaged in the      
management of physician practices engaged in musculoskeletal care, which is the 
treatment of conditions relating to bones, joints, muscles and related          
connective tissues. We entered into exclusive, long-term service arrangements   
with 164 physicians practicing through 21 affiliated practices. When we entered 
into these transactions, we also acquired most of the non-medical assets of the 
affiliated practices. In exchange, we paid consideration consisting of cash, our
securities or both. However, as a result of events that have occurred during    
1998, we have concluded that we must refocus our business operations. We believe
that the restructuring transaction presents the best available opportunity to   
enhance stockholder value over the long term. It will eliminate a substantial   
portion of our indebtedness and enable us to focus on businesses that we        
currently believe provide a greater prospect of potential return than our       
physician practice management business. Accordingly, the Board of Directors has 
unanimously voted to recommend that you approve the restructuring transaction.  
In reaching this determination, the Board of Directors considered, among other  
factors, the recommendation of the Special Committee of the Board of Directors  
and the opinion of SunTrust Equitable Securities Corporation regarding the      
financial terms of the proposed restructuring. See "Opinion of SunTrust         
Equitable Securities Corporation." The Board of Directors considered a number of
additional factors in reaching its determination, including the following:      

   1.   Our business strategy contemplated that a significant portion of our
          growth would be achieved through affiliation with additional practices
          on favorable terms. However, after March 1998, we were unable to enter
         into a significant affiliation transaction with any medical practice.

    2.   Completion of the restructuring transaction will require consent from
          our lending banks. Based upon preliminary discussions with our lending
       banks, we are optimistic (although we cannot assure) that they will
        approve the restructuring transaction. We are currently in violation
          of certain covenants in our loan agreements. These violations give our
        lenders the right to accelerate the maturity of our loans and demand
  immediate payment of the entire principal amount of our credit
         facility. If such a situation were to occur, our viability as a going
         concern would be severely impaired. We believe that the restructuring
transaction will enhance our ability to                     

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    maintain the cooperation of our lending banks and to enhance our
      ability to seek a restructuring of our remaining debt obligations.

     3.   Several of our affiliated practices have not yet been able to generate
       the additional revenues anticipated as a result of affiliation with
         us. In certain cases, revenues declined. While our service agreements
      require a guaranteed payment from the practices (in most cases for
  three years following affiliation), certain practices have not
       fulfilled their financial commitment, and it is increasingly likely
     that the revenues we will generate from service fees will decline
after the guaranteed payment periods.                       

   4.   We anticipated that there would be a strong philosophical commitment
        by our affiliated physicians to our mission of enhancing the quality
         and efficiency of the practices. This commitment was important to our
   success because implementing systems, ancillary services, payor
     contracting and other services is a gradual process requiring the
      patience and cooperation of our affiliated physicians. However, we
      believe that the financial difficulties encountered by many of our
   affiliated practices after our stock price declined during 1998
weakened our affiliated physicians' commitment.             

     5.   We are currently engaged in litigation with three affiliated practices
        with regard to our service agreements. In addition, we have received
        letters from two other affiliated practices not participating in the
      restructuring transaction that seek to terminate their affiliation
based on alleged defaults by us. While we are not engaged in
    litigation with any of the ten practices that are parties to the
       proposed restructuring transaction, several of those practices have
       threatened litigation in the event the restructuring transaction is
          not completed. Additional litigation, with its related financial costs
 and diversion of management time and effort, could materially
adversely affect our business and operations.               

    6.   As a result of the factors described above, we feel that the value of
     our service agreements has been materially impaired. We no longer
         believe that we can acquire non-medical assets of practices and enter
     into long-term affiliations with the practices on terms that will
generate an acceptable return on investment.                

    7.   We believe that as a result of the restructuring transaction, we will
        be able to refocus our efforts on what we believe are more promising
      opportunities, namely our health care rating internet site and our
ambulatory surgery center businesses.                       

  8.   The restructuring transaction will enable us to repay a substantial
         portion of our indebtedness, thereby improving our balance sheet, and
reducing our debt service burden.                           

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The restructuring transaction does involve considerable risk. We will agree to  
eliminate a significant portion of our revenue stream and most of the original  
term of the current service agreements. In addition, we will be focusing on     
businesses that are in much earlier stages of development than our physician    
practice management business. These other businesses may fail. However, we feel 
we have little choice but to go forward with the restructuring transaction.     
Despite the contractual terms of our current service agreements, for the reasons
set forth above, we believe that the present situation is untenable. Some of the
shorter term management service agreements will provide revenues for the next   
few years that should help to further reduce indebtedness or fund development of
our other businesses.                                                           

BACKGROUND OF THE RESTRUCTURING TRANSACTION                                     

From the commencement of our operations in 1996, our goal was to become the     
leading physician practice management company focusing on musculoskeletal care. 
We intended to achieve this goal through acquiring the assets of, and providing 
management services to, leading musculoskeletal physician groups in targeted    
markets. Our acquisitions of assets of musculoskeletal groups were made in      
exchange for our securities, cash or both. In connection with these             
acquisitions, we also entered into long-term service agreements with the        
practices under which we provide comprehensive operational support, including   
day-to-day management of non-medical operations and installation of proprietary 
information systems. Our hope was that, through substantial physician           
representation on our board of directors as well as substantial physician equity
ownership, we could create a business model that not only fostered greater      
efficiency, quality and productivity in musculoskeletal practices, but also     
engendered a strong physician commitment to our efforts in achieving certain    
longer term practice improvement goals.                                         

Through March 31, 1998, we were affiliated with 21 practices including 164      
physicians.                                                                     

We believe that we made significant strides in improving the management of our  
affiliated practices. Among other things, we improved the information systems of
most of our practices, instituted ancillary services at many of our practices,  
and undertook cost saving and other measures to improve the efficiencies of our 
practices. As would be expected, certain projects, such as our development of a 
proprietary clinical outcomes database, required a longer term timetable for    
implementation. Nevertheless, efforts on these projects were well underway in   
the first quarter of 1998, and we were confident that we could continue to add  
significant value to our affiliated practices.                                  

Through the spring and summer of 1998, a number of developments adversely       
affected the physician practice management industry generally. Among other      
developments were widespread adverse publicity concerning medical practices'    
experiences with physician practice management companies; the collapse of a     
proposed merger between PhyCor, Inc. and MedPartners, Inc. and                  

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the subsequent announcement by these companies that they were taking significant
charges against earnings; and the bankruptcy of FPA Medical Management, Inc.    
These developments appear to have contributed to a dramatic decline in the      
market price of securities of companies in our sector. We believe that our      
announcement in June 1998, that we were reducing the amortizable lives of our   
long-term service agreements from 40 years to lives ranging from 5 to 30 years  
also adversely affected our stock price. Because of the decline in our stock    
price, it became increasingly difficult to complete affiliations on favorable   
terms. Therefore, we were unable to meet analysts expectations with regard to   
additional affiliations. We believe this contributed to a further decline in the
price of our stock.                                                             

Moreover, many of our affiliated practices were not generating the revenues that
they projected to us would be achieved. Generally, this did not present an      
immediate problem for us because all of our affiliated practices are subject to 
certain guaranteed minimum service fees. These guaranteed fees are payable to us
for periods ranging from three to five years following a practice's affiliation 
with us. We were confident that the efforts we initiated to improve practice    
efficiencies, introduce ancillary services and assist in payor contracting would
enable the practices to improve their net patient revenues. We also believed    
that, based on the physician-oriented nature of our business structure, our     
affiliated practices would be willing to exercise the patience and cooperation  
necessary to enable us to fully implement our various services and practice     
improvements. What we did not anticipate was the extent to which the decline in 
our stock price would result in financial constraints for our affiliated        
physicians that would adversely affect their commitment to Specialty Care       
Network. Since most of our affiliated physicians received Specialty Care Network
common stock in full or partial payment for their share of practice assets that 
we purchased, the physicians had substantial shareholdings in our company.      

Many of our affiliated practices, including practices that had been largely     
complimentary of our efforts prior to the decline in our stock price, began to  
express dissatisfaction with our services. As our stock price continued to      
decline, relations with certain of our affiliated practices deteriorated. We    
believed then, and continue to believe today, that the decline in our stock     
price was the principal cause of physician dissatisfaction, rather than any     
shortcomings in our performance. Nevertheless, we recognized that because a     
number of physicians made substantial investments in our stock in connection    
with their affiliation, and were required to make substantial payments to us    
under the management service agreements, the physicians were suffering from     
financial hardships that served as a strong disincentive to cooperate with us.  

As we confronted increasing difficulty in effecting affiliations, management    
began to seek alternative, and less capital intensive, ways in which to generate
additional revenues. Management determined to pursue "MSA arrangements" with    
musculoskeletal practices. An MSA arrangement involves the provision of services
by us to physician practices under a short-term service agreement involving     
services that were more limited than those provided by us under the long term   
service agreements. Moreover, MSA arrangements did not involve our              

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purchase of practice assets but merely a contractual obligation to provide      
specified services for a fixed fee per physician. We entered into an MSA        
arrangement with Crossroads Orthopaedic Associates in Victoria, Texas, in April 
1998, and Vanderbilt University Hospital in July 1998. However, we were not able
to enter into any further MSA arrangements following July 1998. In addition,    
Vanderbilt University Hospital has asserted that we are in default under the    
terms of our MSA arrangement with them, and has indicated that it will not renew
the arrangement after it terminates in June 1999. Additionally, Crossroads      
Orthopaedic Associates chose not to renew the MSA arrangement in April 1999,    
when the arrangement expired.                                                   

In addition, in August 1998, we acquired Provider Partnerships, Inc. ("PPI"), a 
recently-formed company that provides consulting services to hospitals. At the  
time of acquisition, PPI had just entered into its first consulting arrangement.
In addition, principals of PPI had also begun development of an internet web    
site designed to rate hospitals on quality of care indicators. Our web site was 
launched in October 1998. We acquired these businesses for 420,000 shares of our
common stock and no cash outlay. Kevin Hicks, the principal executive officer of
PPI, is the brother of Kerry R. Hicks, our President and Chief Executive        
Officer. As a result of an agreement in principle that we have reached with the 
former PPI stockholders, we anticipate that this transaction will be            
substantially modified. (See Agreement In Principle With The Former PPI         
Stockholders.)                                                                  

In June, 1998 we were approached by another entity that expressed an interest in
acquiring us. We entered into a confidentiality agreement, permitting the entity
to review some of our internal information. These talks were terminated in      
September 1998. Management of that entity advised us that, based on uncertain   
prospects in our business sector, they would not pursue business opportunities  
in the physician practice management industry.                                  

In September 1998, Peter A. Fatianow, at the time our former Vice President of  
Development, M. John Neal, a former Manager of Development, and Michael Fulton, 
also a former Manager of Development, approached our management with a plan for 
restructuring our arrangements with our affiliated practices. This plan served  
as the basis for the restructuring transaction. Through October 1998, management
informally surveyed non-management members of the Board of Directors to         
determine if we should pursue the plan with our various affiliated practices. In
general, the plan, as initially conceived, anticipated that, in connection with 
the repurchase of practice assets by the affiliated practices and entry into new
service agreements, we would receive as consideration approximately 75% of the  
common stock and 25% of the cash initially paid to the practices in connection  
with their affiliation with us. In addition, we would receive cash consideration
equal to the net book value of assets returned to the practices. Management     
noted that, in order for the restructuring transaction to be viable, a          
significant majority of the affiliated practices would have to participate.     
Although the Board of Directors reserved judgment pending a review of the       
definitive terms of a proposed restructuring transaction, it expressed a        
willingness to have management seek to negotiate such a transaction.            

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Beginning in October 1998, management discussed, on a preliminary basis, the    
proposed restructuring transaction with various affiliated practices. Reaction  
to management's initial proposal was mixed, and most practices indicated the    
need for further information.                                                   

On October 30, 1998, the Board of Directors authorized our officers to enter    
into negotiations with the affiliated practices with respect to a restructuring 
of Specialty Care Network that would:                                           

o      provide for the repurchase by affiliated physicians or affiliated        
    practices of practice assets in exchange for cash and/or common stock;

o      limit management services provided to the affiliated practices by us     
under our service agreements;                                     

o      reduce the term of our service agreements with the affiliated practices; 
and                                                               

o      lower service fees paid to us by the affiliated practices.               

In October 1998, TOC Specialists, P.L., an affiliated practice located in       
Tallahassee, Florida, unilaterally stopped making payments owed to us under its 
service agreement and diverted cash payments on accounts receivable that were   
due to us, in violation of the terms of its service agreement with us. On       
October 30, 1998, the Board of Directors authorized management to commence legal
action against TOC and any other affiliated practice that our President believes
to be in material default of its obligations under its service agreement with   
us. In addition, the Board of Directors established a Special Committee,        
consisting of Kerry R. Hicks, our President and Chief Executive Officer, Patrick
M. Jaeckle, our Executive Vice President-Corporate Development, Peter H.        
Cheesbrough and Mats Wahlstrom. Messrs. Hicks, Jaeckle, Cheesbrough and         
Wahlstrom comprise all of the non-physician members of the Board of Directors.  
The Special Committee was authorized to consider the following:                 

o      whether it would be in the best interest of Specialty Care Network and   
  its stockholders to restructure our arrangements with our affiliated
practices to:                                                     

          o    provide for the repurchase by affiliated physicians or affiliated
              practices of practice assets in exchange for cash and our common
stock;                                            

          o    limit management services provided to the affiliated practices by
us under our service agreements;                  

      o    reduce the term of our service agreements with the affiliated
practices;                                        

   o    lower service fees paid by affiliated practices to us; and

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o    utilize the cash proceeds of the sale of practice assets to pay  
amounts outstanding under our bank line of credit.          

o    whether it would be in the best interest of Specialty Care Network and     
its stockholders to seek an alternative form of restructuring, and    

o    the terms and conditions upon which the Special Committee would consider   
     such restructuring to be in the best interest of Specialty Care Network and
our stockholders.                                                     

In addition, the Board of Directors authorized the Special Committee, if it     
deemed it desirable, to authorize our officers to negotiate with the affiliated 
practices concerning the terms and conditions of the restructuring and to       
recommend to the Board of Directors approval or disapproval of such terms and   
conditions as are negotiated with the affiliated practices. Finally, the Board  
of Directors authorized the Special Committee to retain such advisors, including
an investment banking firm, as the Special Committee may deem desirable to      
assist in it in discharging its responsibilities.                               

The Special Committee met following the Board meeting and approved the retention
of SunTrust Equitable Securities Corporation to render financial and investment 
banking services to us, which services were to include:                         

o    an evaluation of the terms and conditions of the proposed restructuring;   

o    an exploration of alternative structures that may be used to effect a      
financial restructuring;                                              

o    participation in discussions with affiliated practices concerning the      
terms of the restructuring; and                                       

o    the rendering of an opinion relating to the fairness of the                
  restructuring, from a financial point of view, to Specialty Care Network
    and our stockholders that were not party to the restructuring transaction.

Thereafter, in accordance with the authorization of the Special Committee,      
management engaged in extensive efforts to negotiate a restructuring transaction
with the various affiliated practices. Members of management visited all        
practices and representatives of SunTrust Equitable Securities Corporation      
accompanied management on several of those visits (except for TOC, against whom 
we commenced litigation on November 16, 1998; TOC subsequently filed            
counterclaims against us, and the litigation is pending).                       

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Several of the practices expressed opposition to the terms of the restructuring.
Some of them wrote letters to us claiming that we were in default under our     
service agreements. Some threatened litigation. In addition, we have been       
advised that many of the affiliated practices were in communication with each   
other to discuss possible joint action that could be taken to secure more       
favorable terms from us. On the other hand, our management met with certain     
institutional stockholders. We did not disclose the proposed terms of the       
restructuring transaction to these investors. Nevertheless, they advised us of  
their concern that the terms of any proposed restructuring arrangement not be   
too favorable to our affiliated practices. Management reported to the Special   
Committee on these developments at a meeting held on November 6, 1998.          

On November 13, 1998, the Specialists Orthopaedic Medical Corporation, one of   
our affiliated practices, commenced litigation against us, one of our employees,
and several of the practice's accounting, consulting and legal advisors. The    
practice is seeking, among other things, termination of the service agreement.  

As negotiations proceeded through November, management continued to make        
presentations to many of the practices and set a December 31, 1998 deadline for 
acceptance or rejection of the restructuring. Many affiliated practices stated  
that the deadline did not provide sufficient time for consideration and         
negotiation of the proposal. While management continued to insist on a December 
31 deadline, it became increasingly doubtful that most of the practices would   
react favorably to the restructuring proposal by that time.                     

However, Orlin & Cohen Orthopaedic Associates, LLP, Vero Orthopaedics, II, P.A. 
and Medical Rehabilitation Specialists, II, P.A. expressed a disinclination to  
participate in the proposed restructuring and expressed a desire to participate 
in three separate and distinct transactions that would close by the end of 1998.
Management believed that the proposed transactions with Orlin & Cohen, Vero     
Orthopaedics and Medical Rehabilitation Specialists could provide specific      
benefits to the Company beyond those contemplated by the restructuring          
transaction, and should be pursued regardless of the disposition of the         
restructuring transaction.                                                      

On December 9, 1998, the Special Committee met again. Management described in   
detail the advantages of the transactions. In the case of Orlin & Cohen, the    
structure of the transaction differed from that contemplated in connection with 
the proposed restructuring transaction. Moreover, because of certain tax        
advantages that would be available to Orlin & Cohen only if the transaction was 
closed by December 31, 1998, Orlin & Cohen advised our management that it would 
not be willing to agree to financial terms as favorable to Specialty Care       
Network as the proposed terms if the transaction did not close by December 31,  
1998. In the case of Vero Orthopaedics, in addition to agreeing to the financial
terms relating to repurchase of its practice assets that had been proposed by   
us, the practice also offered to make                                           

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a lump sum payment with regard to the entire future service fee covered by its  
revised service agreement. While the terms relating to Medical Rehabilitation   
Specialists closely paralleled those proposed in the restructuring, Medical     
Rehabilitation Specialists was a practice located in Tallahassee, Florida and   
management believed that TOC had attempted to have Medical Rehabilitation       
Specialists join with it in its litigation against the Company. Given these     
circumstances, management noted to the Special Committee that it intended to    
recommend that Orlin & Cohen, Vero Orthopaedics and Medical Rehabilitation      
Specialists not be participants in the proposed restructuring and that the      
transactions with the three practices be considered separately. In addition,    
management advised the Special Committee that it did not intend to recommend    
that the completion of any of the three transactions be contingent upon         
completion of the others, nor that any of the transactions be contingent on     
completion of the restructuring transaction. Because consideration of the       
transactions was beyond the scope of the Special Committee's authority,         
management indicated that it intended to recommend the transactions to the Board
of Directors for its consideration if agreements were, in fact, reached with one
or more of the three practices.                                                 

With regard to the restructuring transaction, the Special Committee discussed   
the timetable for negotiations and, based on management's recommendation, the   
consensus of the Special Committee was that management should maintain a        
December 31, 1998 deadline for the signing of definitive agreements with        
affiliated practices that decided to participate in the restructuring           
transaction.                                                                    

Over the course of the next several weeks, management continued to negotiate    
with respect to the restructuring transaction as well as with respect to the    
proposed separate transactions. As a result of a number of issues that arose    
during the course of discussions with our various affiliated practices,         
management requested, at a meeting of the Special Committee held on December 21,
1998, that the Special Committee address several of the issues in a memorandum  
to the affiliated practices. The Special Committee approved the text of the     
memorandum at the meeting, which was distributed to the affiliated practices on 
the same day. In the memorandum, the Special Committee noted that it had not    
approved the restructuring transaction and did not intend to consider the terms 
of the restructuring transaction on a formal basis until such time as a         
sufficient number of practices have signed definitive agreements. Nevertheless, 
the Special Committee stated it was submitting the memorandum in the hope that  
it would facilitate negotiations between Specialty Care Network and the         
affiliated physicians. Among other things, the memorandum stated that:          

o    at the recommendation of management, the deadline for agreement on the     
restructuring transaction was extended to January 31, 1999;           

o    an "up front" cash payment was required to pay down our indebtedness;      

o    The Special Committee would consider whether to recommend the restructuring
     transaction to the Board of Directors if approximately ten practices in the
  aggregate have determined to repurchase their assets from Specialty Care
Network and operate under a new service agreement;                    

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o    Management intended to make several changes to the initially proposed      
structure with respect to designated health services (i.e., MRI's,    
physical therapy and orthotics). The length of any ancillary services 
agreement would be shortened to five years (rather than fifteen, as   
originally set forth in the restructuring proposal). In addition,     
management would no longer ask for a right of first refusal to develop
ancillary services for a practice that entered into the restructuring 
transaction. The Special Committee would entertain a restructuring    
proposal that embodied these changes;                                 

o    Except for the changes relating to ancillary services, the Special         
   Committee would not entertain any proposal that would be more generous to
the physician stockholders than the current proposal;                 

o    The Special Committee concurred with management's determination to make    
no special arrangements with any affiliated practice;                 

o    The Special Committee did not intend to recommend to the Board of          
Directors any arrangement that would result in our being unable to    
fulfill our obligations under existing service agreements with those  
practices that elect to continue to maintain the current relationship 
under the existing service agreements.                                

In light of the extended deadline for the restructuring, as well as the         
Christmas holiday, management focused on the proposed transactions with Orlin & 
Cohen, Vero Orthopaedics and Medical Rehabilitation Specialists. However,       
Medical Rehabilitation Specialists advised us that it was not willing to go     
forward with a separate transaction. On the other hand, Greater Chesapeake      
Orthopaedic Associates, LLC, which had not previously expressed an interest in  
effecting a separate transaction, advised management that it was willing to     
engage in a separate transaction by December 31, 1998 and provide a lump sum    
payment of its fee under the new management services arrangement. Leslie S.     
Matthews, M.D., one of our directors, is a physician owner of Greater           
Chesapeake. Like Vero Orthopaedics, Greater Chesapeake agreed that the entire   
future service fee obligation would be paid by January 31, 1999, held in escrow 
and paid out over the term of the management services agreement. We agreed to   
provide a discount to both Vero Orthopaedics and Greater Chesapeake in          
consideration of their agreement to make a lump sum payment. During the last    
week in December, we reached agreements with the three practices on the terms of
the transactions. In addition, Medical Rehabilitation Specialists approached    
management and asked once again to participate in a separate transaction.       
Because of the lateness of its approach, management's initial reaction was      
negative.                                                                       

On December 29, 1998, management presented the transactions with Orlin & Cohen, 
Vero Orthopaedics and Greater Chesapeake to the Board of Directors, which       
approved the transactions. However, in the course of discussions with the       
Company's lending banks on December 30 and on the morning of December 31, we    
were told that we would not obtain bank consent to the transactions unless we   
were able to obtain additional cash proceeds. In order to obtain the necessary  
cash proceeds, we requested that Greater Chesapeake agree to make the entire    
lump sum payment directly to us by January 31, 1999, rather than keep funds in  
escrow.                                                                         

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Greater Chesapeake agreed. In addition, we entered into a separate transaction  
with Medical Rehabilitation Specialists. We agreed to honor an earlier request  
of Medical Rehabilitation Specialists that we accept cash in lieu of the common 
stock it otherwise would have had to surrender in the transaction.              

After further discussions with the lending banks, we were advised that the banks
consented to the transactions, and the transactions were closed on December 31, 
1998. As a result of the completion of these four transactions, we reacquired   
2,124,959 shares of our common stock and reduced our outstanding indebtedness at
December 31, 1998 by approximately $5.5 million through the cancellation of a   
convertible note with Orlin & Cohen. Additionally, in 1999, we used additional  
proceeds from these four transactions to reduce the amount outstanding under our
credit facility by approximately $8.5 million.                                  

On January 22, 1999, 3B Orthopaedics, one of our affiliated practices, commenced
litigation with us seeking, among other things, to terminate our management     
services arrangement with them. We have filed conterclaims against 3B           
Orthopaedics.                                                                   

Intensive discussions regarding the restructuring transaction continued with    
most of our remaining affiliated practices throughout January. As of January 31,
1999, we had received commitments from several affiliated practices. However,   
because substantial progress had been made in negotiations with other affiliated
practices, we decided to continue negotiations into March 1999.                 

On March 8, 1999, the Special Committee recommended approval of, and the Board  
of Directors approved, restructure agreements with the nine affiliated practices
that agreed to enter into the restructuring transaction. Management was not     
certain whether Reconstructive Orthopaedic Associates, II, P.C. would enter into
the restructuring transaction, but felt that there was a strong possibility that
an agreement would be reached. Therefore, the Special Committee recommended, and
the Board approved, including Reconstructive Orthopaedic Associates, II, P.C. in
the restructuring transaction if the practice entered into a restructure        
agreement on terms substantially similar to those contemplated at the time of   
the meeting. On March 19, 1999 we reached agreement with Reconstructive         
Orthopaedic Associates.                                                         

TERMS OF THE RESTRUCTURING TRANSACTION                                          

The following discussion summarizes the material terms of the agreements entered
into with the affiliated practices that are participating in the restructuring  
transaction. The actual terms of the agreements with each of the practices may  
vary in certain respects from the description below as a result of negotiations 
with the individual practices and the requirements of state laws and            
regulations.                                                                    

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BASIC TRANSACTION                                                               

Each of the affiliated practices participating in the restructuring transaction,
together with their physician owners, will enter into a separate restructure    
agreement with us. Two physicians in one of the affiliated practices, who joined
that practice in the summer of 1998, entered into an agreement separate from the
agreement we reached with the other physicians in the practice.                 

Purchase Price of Practice Assets                                               

Under each agreement, we will transfer, with respect to the practice, all of our
right, title and interest in:                                                   

o    the accounts receivable relating to the practice;                          

o    the tangible and intangible assets we purchased or acquired in respect of  
the practice, other than those disposed of in the ordinary course of  
business since the date we affiliated with the practice;              

o    all prepaid expenses relating to the practice;                             

o    all inventory relating to the practice; and                                

o    all other assets relating to the practice.                                 

The amount we will receive from each practice and its physician owners for the  
assets we are selling to the practice generally will equal:                     

o    the book value of the accounts receivable relating to the practice on the  
date the restructuring transaction closes; plus                       
                    ----

o    the book value of all fixed assets and other capital assets relating to    
the practice on the date the restructuring transaction closes; plus   
                                                            ----

o    the book value of all prepaid expenses relating to the practice on the     
date the restructuring transaction closes; plus                       
                    ----

o    the book value of all notes and other receivables the physician owners of  
  the practice owe to us on the date the restructuring transaction closes;
plus                                                                  
----                                                                  

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o    the cash balance of the practice's deposit account on the date the         
restructuring transaction closes; less                                
  ----

o    the book value of the liabilities and obligations relating to the          
practice on the date the restructuring transaction closes.            

Each of the foregoing values generally will be as set forth as of the most      
recent available balance sheet as of the end of the month prior to the date of  
closing of the restructuring transaction.                                       

Purchase Price Adjustment                                                       

Within 60 days after the date the restructuring transaction closes, we will     
prepare an unaudited balance sheet that sets forth the net book value of the    
assets to be purchased by the practice and the liabilities to be assumed by the 
practice as of the date of closing of the transaction. The purchase price will  
be adjusted based on this balance sheet. If the amount paid by the practice and 
its physician owners exceeds the adjusted purchase price, we will remit the     
excess to the practice and its physician owners. Conversely, if the amount paid 
by the practice and its physician owners is less than the adjusted purchase     
price, the practice and its physician owners will remit the difference to us.   

Service Agreements                                                              

In addition to the purchase price paid for the practice assets, we have agreed  
to execute a management services agreement to replace the existing service      
agreement with each of the restructured affiliated practices. As consideration  
for our agreeing to enter into the management services agreement, the practices 
have agreed either to pay us an additional amount of cash, to return to us a    
specified number of our shares of common stock or both to pay us a specified    
amount of cash and to return to us a specified amount of shares of our common   
stock.                                                                          

The following table presents information regarding the approximate consideration
we expect to receive from the practices and their physician owners participating
in the restructuring transaction. The amounts we will receive constitute payment
for the assets we are selling and the revision of our service agreement         
arrangements. Because the precise amount of the cash payment will be adjusted   
based on the net book value of most of the assets and liabilities as of the     
closing date of the restructuring transaction, we anticipate that the actual    
amount we receive will change.                                                  

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                                                        [Enlarge/Download Table]

                                                                            Number of Shares     
                                                            Approximate    of our Common Stock   
           Name of Practice              Principal Office   Cash Payment  to be Surrendered to Us
           ----------------              ----------------   ------------  -----------------------
                                                                                                 
Floyd R. Jaggears, Jr., M.D., P.C., II    Thomasville, GA    $  264,300                 0        

Riyaz H. Jinnah, M.D., P.A.               Baltimore, MD         170,476            73,000        

The Orthopaedic and Sports Medicine       Annapolis, MD       2,477,793           440,079        
   Center, II, P.A.                                                                              

Orthopaedic Associates of West Florida,   Clearwater, FL      2,496,785           332,983        
   P.A.                                                                                          

Orthopedic Institute of Ohio, Inc.        Lima, OH            3,289,373           505,040        

Orthopaedic Surgery Centers, P.C. II      Portsmouth, VA      1,644,899           266,615        

Princeton Orthopaedic Associates, II,     Princeton, NJ       2,219,000           897,595        
   P.A.                                                                                          

Reconstructive Orthopaedic Associates,    Philadelphia, PA    2,966,002         1,224,626        
   II, P.C.                                                                                      

Southeastern Neurology Group II, P.C.     Portsmouth, VA      1,416,720            35,866        

Steven P. Surgnier, M.D., P.A., II        Marianna, FL          227,269            11,153        
                                                            -----------         ---------        
Totals                                                      $17,172,617         3,786,957        
                                                            ===========         =========        

The cash payment amounts set forth above are based upon the net book value of   
the relevant assets and liabilities of the various practices at December 31,    
1998. Actual payment will be based on balance sheets as of the month ending     
prior to closing of the restructuring transaction, and will be adjusted based   
upon balance sheets as of the closing date.                                     

In addition, under a separate restructure agreement, John M. Fenlin, M.D., and  
Barbara G. Frieman, two physicians in Reconstructive Orthopaedic Associates,    
have agreed to cancel a convertible debenture payable that we issued to them in 
the amount of $589,615.                                                         

Management Services Agreements                                                  

Upon the consummation of the restructuring transaction, we will enter into new  
management service agreements with the practices and their physician owners     
that will govern our future relationships. The term of all but one of our       
management services arrangements with the practices and their physician owners  
will be reduced from 40 years to a date between November 2001 and March 2003,   
and the service fees each practice pays to us will be reduced. Although one of  
the management service agreements will terminate on the first anniversary of the
closing of the restructuring transaction, the practice has agreed to pay service
fees to us as if the agreement terminates in November 2001. Our obligations     
under the management services agreements will be more limited than under the    
current service agreements, as described below under "New Arrangements Under    
Management Services Agreements."                                                

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THE CLOSING                                                                     

We will close the restructuring transaction in our offices in Lakewood, Colorado
two days after all conditions precedent to each party's obligations to          
consummate the restructuring transaction have been either satisfied or waived.  
Unless the parties consent, we will not close the restructuring transaction     
later than June 15, 1999.                                                       

REPRESENTATIONS AND WARRANTIES                                                  

The restructure agreement contains certain representations and warranties to be 
made by us on the one hand, and the physician owners and the affiliated practice
participating in the restructuring transaction, on the other hand. These        
representations and warranties deal with matters such as:                       

o    the organization, valid existence and good standing of Specialty Care      
Network and the affiliated practice;                                  

o    in the case of the practice and the physicians, the ownership of the       
practice by the physicians;                                           

o    the authorization, execution, delivery and enforceability of the           
restructure agreement;                                                

o    the absence of conflicts or breaches under any statute, court order, law   
    or ruling including, but not limited to, state or federal securities laws,
as a result of the restructure agreement;                             

o    no party to the restructure agreement will be obligated to pay any brokers'
fees for which the other is liable; and                               

o    in the case of the practice and the physicians, good and marketable title  
  of shares of our common stock to be transferred to us by the practice or
the physicians.                                                       

CERTAIN COVENANTS                                                               

The restructure agreement includes a number of covenants, most of which set     
forth agreements regarding actions that each of the parties will take or refrain
from taking until the closing of the restructuring transaction.                 

General                                                                         

Each of the parties to the restructure agreement will use its best efforts to   
take all actions and do all things necessary in order to consummate the         
transactions contemplated by the restructure agreement.                         

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Consents                                                                        

Each of the parties to the restructure agreement will use its best efforts to   
obtain all third-party consents necessary in order to consummate the            
transactions contemplated by the restructure agreement.                         

Regulatory Matters and Approval                                                 

Each of the parties to the restructure agreement will make filings with and use 
its reasonable best efforts to obtain any government approvals required in      
connection with the agreement.                                                  

Conduct of the Business                                                         

None of the parties to the restructure agreement will:                          

o      take any action outside the ordinary course of business; or              

o      authorize or effect any change in its charter or bylaws that would delay 
    or prevent consummation of the transactions contemplated by the agreement.

We will not impose any security interest on the assets to be purchased by the   
practice outside of the ordinary course of business.                            

Notice of Developments                                                          

We, on one hand, and the practice and the physician owners, on the other hand,  
will give prompt written notice to the other parties of any material adverse    
development causing a breach of its representations and warranties.             

Collection of Accounts Receivable                                               

After the date the restructuring transaction closes, we will help the practices 
and the physician owners collect the accounts receivable we owned prior to the  
date the restructuring transaction closed.                                      

Employee Benefit Plans                                                          

As of the date of the restructuring transaction, we will terminate all of our   
employees located at the practice sites and the practice will hire the          
employees. The terminated employees will no longer participate in our employee  
benefit plans. As of the date the restructuring transaction closes, the practice
will establish benefit plans for these employees similar to those we offered.   
Each employee will have the opportunity to participate in these plans.          

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INDEMNIFICATION                                                                 

By the Physician Owners                                                         

The physician owners of the affiliated practice that is a party to the          
restructure agreement will, jointly and severally, indemnify us from any and all
liabilities arising from the following circumstances:                           

o    any breach, untruth or inaccuracy of any representation, warranty or       
  covenant of the practice that is a party to the restructure agreement or
of the physician owners of the practice; or                           

o    the liabilities assumed by the practice on the date the agreement closes.  

Additionally, the physician owners will continue to be subject to their         
indemnity obligations to us under the original acquisition agreement and the    
existing service agreement with respect to third party claims which relate to   
matters arising prior to the closing date of the restructuring transaction.     

By Us                                                                           

We will indemnify the affiliated practice that is a party to the restructure    
agreement from all liabilities arising out of our breach, untruth or inaccuracy 
of any of our representations, warranties or covenants.                         

RELEASE                                                                         

The practice and its physician owners will release us from all claims they have 
or had against us at or prior to the closing of the restructuring transaction.  
With respect to certain practices, we will release them from all claims we may  
have, at or prior to the closing date of the restructuring transactions, except 
with respect to some continuing indemnification obligations of such practices.  

CONDITIONS TO THE CLOSING OF THE RESTRUCTURING TRANSACTION                      

The closing of the restructuring transaction depends upon the satisfaction a    
number of conditions, including the following:                                  

o      approval of our lending banks;                                           

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o    the approval of our stockholders;                                          

o    the restructuring transaction is not prohibited by any laws or             
injunctions;                                                          

o    the representations and warranties of each of the parties are true and     
correct on the date the restructuring transaction closes;             

o    the restructure agreement does not violate any state or federal            
securities laws; and                                                  

o    each party performed or complied with its covenants on or before the date  
the restructuring transaction closes.                                 

TERMINATION OF THE RESTRUCTURE AGREEMENT                                        

Either party to the restructure agreement may terminate the restructure         
agreement if:                                                                   

o    the other breaches or failures to comply with any of its representations,  
warranties or obligations under the agreement; or                     

o    the closing has not occurred by June 15, 1999, because the conditions to   
that party's obligation to close have not been satisfied by that date.

AMENDMENT AND WAIVER                                                            

The restructure agreement may be amended by the parties at any time before or   
after approval of the restructuring transaction by our stockholders. However,   
certain amendments may, by law, require further approval by our stockholders.   

NEW ARRANGEMENTS UNDER MANAGEMENT SERVICES AGREEMENT                            

We Will Provide Fewer Services Under Our New Management Service Agreements      

Under our new management service agreements, we will reduce the level of        
services that we provide to the practices participating in the restructuring    
transaction. We will offer the following services for each practice             
participating in the restructuring transaction:                                 

o    assessing the financial performance, organizational structure, wages and   
strategic plan of the practice;                                       

o    advising with respect to current and future marketing and contracting      
plans with third party payors and managed care plans;                 

o    negotiating malpractice insurance coverage;                                

o    providing access to patient information databases;                         

o    analyzing annual performance on a comparative basis with other practices   
that have contracted with us; and                                     

o    analyzing coding and billing practices.                                    

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Unlike our prior arrangements with the affiliated practices, we will NOT provide
any equipment, facilities, supplies or employee staffing at practice sites under
these management services agreements. In addition, the following management     
services are those that we performed under the prior arrangement but will NOT be
providing under the management service agreements:                              

o      personnel evaluations;                                                   

o      billing and collection services;                                         

o      computer hardware/software support;                                      

o      payroll services;                                                        

o      accounts payable processing/managing;                                    

o      on-site procurement; and                                                 

o      any other type of day-to-day practice management services.               

Our Fee Structure Will Change Under the Management Service Agreements           

We have negotiated a fixed fee with each of the practices and their physician   
owners participating in the restructuring transaction. In addition, our fees    
relating to certain ancillary services will be based upon a percentage of the   
practice's monthly revenue from professional medical services personally        
furnished to patients by the practice's licensed medical professionals.         

The following table shows the expiration date and the fee to be paid by each    
practice participating in the restructuring transaction. Those practices that   
are paying us a lump sum fee were provided a discount as compared to the total  
fee they would have paid if their fees were paid monthly.                       

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                                                        [Enlarge/Download Table]

                                            Expiration Date of                                       
                                            Management Service                                       
         Name of Practice                      Agreement                        Fee                  
         ----------------                   -------------------                 ---                  
                                                                                                     
Floyd R. Jaggears, Jr., M.D., P.C. II      March 3, 2002                $141,716 (pre-paid lump sum) 

Riyaz H. Jinnah, M.D., II, P.A.            February 28, 2002            $3,736 (per month)           

The Orthopaedic and Sports Medicine        March 31, 2002               $50,210 (per month), plus    
   Center, II, P.A.                                                     7.5% of revenue from         
                                                                        orthotics management services

Orthopaedic Associates of West             September 1, 2002            $38,023 (per month), plus    
   Florida, P.A.                                                        7.8% of professional         
                                                                        services revenue associated  
                                                                        with respect to William E.   
                                                                        Kilgore, M.D.                

Orthopedic Institute of Ohio, Inc.         September 10, 2002           $1,850,365 (pre-paid lump    
                                                                        sum)                         

Orthopaedic Surgery Centers, P.C. II       June 10, 2002                $1,126,977 (pre-paid lump    
                                                                        sum)                         

Princeton Orthopaedic Associates, II, P.A. One year after closing date  $972,155 (pre-paid lump sum) 

Reconstructive Orthopaedic                 November 1, 2001             $1,888,635 (pre-paid lump    
   Associates, II, P.C.                                                 sum)                         

Southeastern Neurology Group II,  P.C.     June 30, 2002                $5,976 (per month)           

Steven P. Surgnier, M.D., P.A., II         August 29, 2002              $3,367 (per month)           

Although the term of Princeton Orthopaedic Associates, II, P.A.'s management    
service agreement ends on the first anniversary of the closing date, the        
practice has agreed to pay service fees to us as if the agreement terminates in 
November 2001. We have also agreed that beginning April 1, 1999 and ending on   
the earlier of the date of closing of the restructuring transaction or June 15, 
1999, the service fee under the current service agreements will be reduced from 
the current fee; and we will provide a more limited level of services during    
this period.                                                                    

ACCOUNTING TREATMENT OF THE TRANSACTION AND OTHER MATTERS                       

During the fourth quarter of 1998, we recorded a non-cash impairment loss on    
service agreements of approximately $94.6 million. This impairment loss         
principally relates to the long-term service agreement asset on our balance     
sheet and was made under Statement of Financial Accounting Standards No. 121,   
"Accounting for the Impairment of Long-Termed Assets and for Long-Lived Assets  
to be disposed of."                                                             

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FEDERAL INCOME TAX CONSEQUENCES OF THE RESTRUCTURING TRANSACTION                

This summary is based upon the Internal Revenue Code of 1986, as amended, as    
presently in effect, the rules and regulations promulgated thereunder, current  
administrative interpretations and court decisions. No assurance can be given   
that future legislation, regulations, administrative interpretations or court   
decisions will not significantly change these authorities (possibly with        
retroactive effect).                                                            

Federal Income Tax Consequences to Us. The sale of various non-medical tangible 
and intangible assets pursuant to the restructure agreements will be a taxable  
sale by us upon which gain or loss will be recognized by us. The amount of gain 
or loss recognized by us with respect to the sale of the assets will be measured
by the difference between the amount realized by us on the sale of assets and   
our tax basis in the assets. The amount realized by us on the sale of the assets
will include the amount of cash received, the fair market value of any other    
property received and the amount of liabilities assumed by the purchasing       
affiliated practice. Our tax basis in the assets to be sold is determined in    
accordance with various provisions of the Internal Revenue Code and is largely  
dependent upon the manner in which the assets were acquired by us. Many of the  
assets were acquired through non-taxable transactions and have an initial tax   
basis determined by reference to the transferor's tax basis with subsequent     
adjustments for certain items, such as depreciation. These assets generally have
a tax basis that is less than their corresponding financial accounting basis.   
For assets that were not acquired in non-taxable transactions, their tax basis  
is generally equal to their cost, as adjusted for certain items, such as        
depreciation. These assets generally have a tax basis that more closely         
corresponds to their financial accounting basis.                                

The determination of whether gain or loss is recognized by us will be made with 
respect to each of the assets sold. Accordingly, we may recognize gain on the   
sale of certain assets and loss on the sale of certain others, depending on the 
amount of consideration allocated to an asset as compared to the tax basis of   
that asset.                                                                     

Federal Income Tax Consequences to Stockholders. Except for our physician       
Stockholders who are participating in the restructuring transaction, the        
restructuring transaction will have no income tax consequences to our           
Stockholders.                                                                   

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OPINION OF SUNTRUST EQUITABLE SECURITIES                                        

On December 9, 1998, we engaged SunTrust Equitable Securities as financial      
advisor to the Special Committee. In connection with the engagement, SunTrust   
Equitable Securities evaluated the fairness of the proposed restructuring       
transaction, from a financial point of view, to Specialty Care Network and to   
those stockholders not participating in the restructuring transaction.          

The SunTrust Equitable Securities opinion was prepared for the Special Committee
and addresses only the fairness of the proposed restructuring transaction, from 
a financial point of view, to Specialty Care Network and to our stockholders    
that are not participating in the restructuring transaction. The SunTrust       
Equitable Securities opinion was delivered orally to the Special Committee on   
March 8, 1999 and was accompanied by their written opinion. SunTrust Equitable  
Securities opined that the restructuring transaction would be fair, from a      
financial point of view, to Specialty Care Network and the stockholders that    
are not participating in the restructuring transaction. Anticipating that       
Reconstructive Orthopaedic Associates, II, P.C. would enter into the            
restructuring transaction, SunTrust Equitable Securities affirmed to the        
Special Committee its opinion of the fairness of the restructuring transaction  
assuming the participation of Reconstructive Orthopaedic Associates, II, P.C.   
under the terms contemplated as of that date. SunTrust Equitable Securities     
updated its analysis to include Reconstructive Orthopaedic Associates, II, P.C. 
when the practice reached agreement with us to participate in the restructuring 
transaction on March 19, 1999, and also updated its opinion.                    

The form of the full text of the SunTrust Equitable Securities opinion, dated   
March 19, 1999, which sets forth assumptions made, matters considered and       
limitations on the review undertaken by SunTrust Equitable Securities, is       
attached as Appendix A and should be read carefully and in its entirety.        

The SunTrust Equitable Securities opinion does not constitute:                  

o      a recommendation to any stockholder of Specialty Care Network as to how  
   he, she, or it should vote on the proposed restructuring transaction;

o      an opinion as to fair market value of any affiliated practice; or        

o      an opinion as to the price at which our common stock will actually trade 
at any time.                                                      

The Special Committee did not request that SunTrust Equitable Securities make,  
nor did SunTrust Equitable Securities make, any recommendation as to the        
consideration to be received by us from any of the practices participating in   
the restructuring transaction. The consideration we would receive in the        
restructuring transaction was determined through negotiations between us and the
participating practices without involvement by SunTrust Equitable Securities.   
No restrictions or limitations were imposed on SunTrust Equitable Securities    
with respect to the investigations made or procedures followed by SunTrust      
Equitable Securities in rendering its opinion.                                  

In connection with its opinion, SunTrust Equitable Securities made such reviews,
analyses and inquiries as it believed were necessary and appropriate under the  
circumstances. Among other things, SunTrust Equitable Securities:               

o      reviewed the restructure agreements;                                     

o      reviewed certain publicly available business and financial information   
relating to us;                                                   

o      reviewed certain other information, including financial projections,     
    related assumptions and other internal financial analyses, provided by
our management;                                                   

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o      met with our management to discuss our business prospects based on our   
present organizational structure and assuming the restructuring   
transaction occurs;                                               

o      visited eight practices participating in the restructuring transaction   
and discussed the terms and conditions of the transaction;        

o      reviewed the trends and general market conditions in the physician       
practice management industry;                                     

o      reviewed the reported price and trading activity for our common stock    
since our initial public offering;                                

o      reviewed our historical operating performance;                           

o      reviewed the circumstances of certain comparable companies in the        
physician practice management industry that have undertaken       
reorganizations;                                                  

o      analyzed certain financial and stock market valuation information for us 
  and certain other comparable companies whose securities are publicly
traded; and                                                       

o      performed such other studies and analyses as SunTrust Equitable          
Securities considered appropriate.                                

SunTrust Equitable Securities assumed and relied upon, without independent      
verification, the accuracy and completeness of the information reviewed for     
purposes of its opinion. With respect to the pro forma financial statements and 
financial forecasts and projections provided by us, SunTrust Equitable          
Securities assumed that they had been reasonably prepared on the bases          
reflecting the best currently available estimates and judgments of our senior   
management as to the financial impact of the restructuring transaction on us and
our likely future financial performance. In addition, SunTrust Equitable        
Securities did not make an independent valuation or appraisal of our assets or  
any of the practices participating in the restructuring transaction. The        
SunTrust Equitable Securities opinion was based on business, market, economic,  
and other conditions as they existed and could be evaluated on March 8, 1999.   

In preparing its opinion for the Special Committee, SunTrust Equitable          
Securities performed a variety of financial and comparative analyses, including 
those described below. The summary of these analyses does not purport to be a   
complete description of the analyses underlying the SunTrust Equitable          
Securities opinion. The preparation of a fairness opinion is a complex          
analytical process involving various determinations as to the most appropriate  
and relevant methods of financial analyses and the application of those methods 
to the particular circumstances. Therefore, the process undertaken to deliver an
opinion is not readily susceptible to summary description. In arriving at its   
opinion, SunTrust Equitable Securities did not attribute any particular weight  
to any analysis or qualitative factor considered by it, but rather made         
qualitative judgments as to the significance and relevance of each analysis and 
qualitative factor. Accordingly, SunTrust Equitable Securities believes that its
analysis must be considered as a whole and that selecting portions, without     
considering all analyses and qualitative factors, could                         

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create a misleading or incomplete view of the processes underlying its resulting
opinion. In its various analyses, SunTrust Equitable Securities made numerous   
assumptions with respect to us, industry performance, general business and      
economic conditions and other matters, many of which are beyond our control. The
estimates in such analyses are not necessarily indicative of actual values or   
predictive of future results, which may be significantly more or less favorable 
than those suggested. Actual values will depend on several factors, including   
events affecting the physician practice management industry, general economic,  
market and interest rate conditions, and other factors that generally influence 
the price of securities.                                                        

The material portions of the analyses performed by SunTrust Equitable Securities
are summarized below.                                                           

Pro Forma Dilution Analysis                                                     

SunTrust Equitable Securities analyzed the pro forma effect of the restructuring
transaction on our earnings per share for the annualized three month period     
ended December 31, 1998. SunTrust Equitable Securities compared the pro forma   
earnings per share in the restructuring transaction case to the actual base case
earnings per share, adjusted for certain recent and anticipated developments in 
our business. The base case and, in turn, the restructuring transaction case    
were predicated on a number of pro forma base case adjustments, including, among
others:                                                                         

o      the write-off of a substantial amount of our impaired assets, primarily  
management service agreements intangible assets;                  

o      reorganization of our relationship with four practices in December 1998; 

o      elimination of the operating results in respect of three practices       
currently engaged in litigation with us; and                      

o      certain additional charges and adjustments.                              

We informed SunTrust Equitable Securities that our management anticipated       
making, and in certain cases made, each of these base case adjustments without  
regard to whether the restructuring transaction is completed. The restructuring 
transaction case was based on a number of additional assumptions, including,    
among others:                                                                   

o      completion of the restructuring transaction;                             

o      receipt of consideration from the participating practices, including     
cash, shares of our common stock and cancellation of a convertible
debenture payable by us to physicians in one of the participating 
practices;                                                        

o      repayment of a portion of our outstanding indebtedness under our credit  
facility;                                                         

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o      replacement of existing service fees with lower fees; and                

o      estimated general and administrative expense savings.                    

The analysis indicated that the restructuring would have the following pro forma
financial impact:                                                               

                                                                [Download Table]

                                         THREE MONTHS ENDED            
                                      DECEMBER 31, 1998 ANNUALIZED     
                                      -------------------------------- 
                                                           PRO FORMA   
                                                         RESTRUCTURING 
                                                           AGREEMENT   
                                            BASE CASE        CASE      

                                                                       
Earnings (loss) per share...............     ($0.01)       $0.15       
Assumed G&A expense savings.............         --        $3.8 million

Because of the entirely speculative nature of our projected financial results   
following the restructuring transaction, SunTrust Equitable Securities performed
a pro forma dilution analysis of our historical financial results and did not   
perform a dilution analysis on our projections. Our future results will be      
subject to significant business and operational risks, to the amount and timing 
of general and administrative expense savings, to our access to capital         
resources and to development risks related to potential new lines of business.  
Therefore, future financial results may vary materially from projected results. 
The dilution analysis implied that our fourth quarter run-rate of net earnings  
per share would be enhanced by completion of the restructuring transaction and  
supported the SunTrust Equitable Securities opinion.                            

Capitalization and Leverage Analysis                                            

SunTrust Equitable Securities noted the importance of ready access to debt and  
equity capital under the physician affiliation model historically used by us. We
have disclosed that we currently are out of compliance with some of the         
covenants under our bank credit facility and that the banks currently will not  
advance any additional funds under the credit facility. SunTrust Equitable      
Securities analyzed our December 31, 1998 book capitalization and leverage (1)  
giving pro forma effect to the base case adjustments and (2) adjusted for the   
further pro forma impact of the restructuring transaction. SunTrust Equitable   
Securities measured, among other things, the following credit statistics:       

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o      Our ratio of current assets to current liabilities, commonly known as    
the current ratio;                                                

o      Our indebtedness expressed as a multiple of trailing twelve months       
earnings before interest, taxes, depreciation, amortization and   
non-recurring items, commonly referred to as EBITDA;              

o      Our indebtedness expressed as a percentage of total book capitalization; 

o      Our indebtedness expressed as a percentage of tangible net worth;        

o      Our trailing EBITDA less capital expenditures expressed as a multiple of 
trailing interest expense;                                        

o      Our trailing earnings before interest, taxes and non-recurring items,    
commonly referred to as EBIT, expressed as a multiple of trailing 
interest expense;                                                 

o      Our trailing fixed charge coverage; and                                  

o      Our indebtedness, adjusted to include the capitalized value of operating 
   lease payments, expressed as a multiple of trailing EBITDA plus lease
expense, commonly referred to as EBITDAR.                         

SunTrust Equitable Securities analyzed the impact of the restructuring          
transaction on our credit statistics and compared our post-restructuring        
transaction credit statistics to corresponding measurements for some selected   
companies in the physician practice management industry.                        

                                                                [Download Table]

                                             SPECIALTY CARE NETWORK                 
                                               THREE MONTHS ENDED                   
                                               DECEMBER 31, 1998                    
                                                   ANNUALIZED             SELECTED  
                                            ---------------------------  COMPANIES  
                                            BASE CASE     PRO FORMA (1)  AVERAGE (2)
                                            ---------     -------------  -----------
                                                                                    
Current ratio..............................   6.1:1.0        3.8:1.0     2.3:1.0    
Debt/EBITDA................................      5.6x           4.0x        2.5x    
Debt/capitalization........................     83.9%         103.1%       34.8%    
Debt/tangible net worth....................  (739.4%)        (348.5%)    (148.0%)   
(EBITDA less capital expenses)                                                      
   /interest expense.......................      2.1x           3.8x        5.3x    
EBIT/interest expense......................      0.9x           2.8x        4.8x    
Fixed charge coverage......................      1.4x           1.9x        1.8x    
Adjusted debt/EBITDAR......................      6.7x           5.3x        3.6x    

(1) Assumes consummation of the restructuring transaction.                      
(2) Average excludes highest and lowest measurements.                           

The results of the leverage and capitalization analysis suggest that upon       
completion of the restructuring transaction, we will be significantly less      
leveraged, relative to our cash flows, and will have more                       

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favorable income coverage of our interest expense and other fixed charges. The  
restructuring transaction will generate a significant amount of cash, almost all
of which will be used to repay existing indebtedness under our credit facility. 
Repayment of these debt obligations will decrease our risk profile in the event 
of operational or post-restructuring transaction difficulties. Our              
post-restructuring transaction capital structure will bring us closer to        
compliance on several of the financial covenants under our credit facility and  
may reduce the probability of our lenders accelerating our indebtedness. These  
results supported the SunTrust Equitable Securities opinion.                    

Discounted Cash Flow Analysis                                                   

SunTrust Equitable Securities performed a discounted cash flow analysis of us   
using financial projections developed by our management. We informed SunTrust   
Equitable Securities that we would focus on three primary lines of business in  
the future: the existing physician practice management business, the health care
rating internet site business and a new business involving developing, managing 
and acquiring ownership interests in ambulatory surgery centers. SunTrust       
Equitable Securities performed two separate discounted cash flow analyses: one  
of the post-restructuring transaction physician practice management business    
combined with the health care rating internet site business and a second of the 
ambulatory surgery center business, each with distinct cost of capital and      
terminal valuation assumptions based on the particular operating and risk       
profiles related to the business lines.                                         

SunTrust Equitable Securities calculated the present value of the future cash   
flows that each business line would produce over the five-year period from 1999 
through 2003, assuming completion of the restructuring transaction and using    
financial projections developed by our management. In each case, SunTrust       
Equitable Securities determined a range of enterprise values based on (a) the   
sum of each year's projected free cash flow discounted back to December 31, 1998
plus (b) a terminal value for the business line discounted back to December 31, 
1998. SunTrust Equitable Securities adjusted the enterprise values by deducting 
the outstanding net indebtedness for the respective business lines as of        
December 31, 1998 to arrive at reference ranges of equity value. To arrive at   
the final equity valuation range for us, SunTrust Equitable Securities added the
ranges of net equity values for the existing business and the ambulatory surgery
center business.                                                                

In calculating the projected free cash flow of both the existing business and   
the ambulatory surgery center business, SunTrust Equitable Securities (a)       
tax-effected each business line's projected pre-tax earnings before interest and
intangible amortization expense; (b) added back projected depreciation; (c)     
subtracted the projected increase, or added the decrease, in working capital;   
and (d) subtracted projected capital expenditures.                              

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In analyzing the existing business' terminal value, SunTrust Equitable          
Securities applied a range of multiples from 12.8x to 26.3x to the projected    
terminal year 2003 free cash flow for the HealthCareReportCards.com business    
only. This assumes that the free cash flow from the physician practice          
management portion of the existing business would not continue beyond 2003 and  
that the free cash flow from HealthCareReportCards.com would continue in        
perpetuity beyond 2003 with an annual growth rate ranging between 0.0% and 4.0%.
In analyzing the ambulatory surgery center business, SunTrust Equitable         
Securities arrived at a terminal value by applying a range of multiples from    
6.0x to 8.0x to the ambulatory surgery center business' projected terminal year 
2003 EBITDA and deducting the ambulatory surgery center business' projected 2003
net indebtedness.                                                               

In determining the appropriate weighted average cost of capital, or WACC, to use
as the discount rate for the existing business and the ambulatory surgery center
business, SunTrust Equitable Securities used the business lines' after-tax costs
of debt and their costs of equity. The costs of equity were calculated using the
capital asset pricing model and risk/volatility indicators from publicly-traded 
companies that were comparable to the two business lines. The WACCs for the two 
business lines are summarized as follows:                                       

                                                                [Download Table]

                                               COST OF              
                                          ---------------           
                                          EQUITY     DEBT      WACC 
                                          ------     ----      ---- 
                                                                    
Existing business........................  12.5%      8.0%      7.8%
Ambulatory surgery center business.......  27.7%     10.0%     16.9%

The results of the discounted cash flow analysis are summarized as follows:     

                                                                [Download Table]

(dollar amounts in thousands)                             HIGH         LOW  
Net equity value:                                                           
                                                                            
Existing business......................................  $15,734     $ 6,312
Ambulatory surgery center..............................   39,676      14,309
                                                         -------     -------
Specialty Care Network total...........................  $55,410     $20,621
                                                         =======     =======
Specialty Care Network net equity value per share......  $  4.20     $  1.56
                                                         =======     =======

The discounted cash flow analysis relied significantly on the financial         
projections provided by our management. Because our future results will be      
subject to significant business and operational risks, to the amount and timing 
of general and administrative expense savings, to access to capital resources   
and to development risks related to the new ambulatory surgery center business  
line, future financial results may vary materially from projected results. For  
this reason, SunTrust Equitable Securities placed relatively less emphasis on   
the results of the discounted                                                   

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cash flow analysis. Notwithstanding this qualification, the discounted cash     
flow analysis resulted in a range of net equity values per share for Specialty  
Care Network that compared favorably with our March 5, 1999 closing market price
of $0.875 per share and that supported the SunTrust Equitable Securities        
opinion.                                                                        

Trading Analysis                                                                

As part of its trading analysis, SunTrust Equitable Securities reviewed:        

      o      the market price performance of our common stock on a daily basis
           for the period since January 2, 1998 and on a monthly basis for
the period since February 1997;                     

    o      the market performance of our common stock versus the Dow Jones
         Industrial Average, the Nasdaq Composite Index and the Morgan
              Stanley Health Care Index on a weekly basis since January 2, 1998;

o      the market performance of a price index of publicly-traded 
           physician practice management companies on a weekly basis since
January 2, 1998; and                                

   o      our stock expressed as a multiple of our reported earnings per
           share and our equity market capitalization on a quarterly basis
since March 1997.                                   

Based on the trading analysis, SunTrust Equitable Securities noted that our     
market price per share had come under extraordinary pressure since January 1998 
during a period of significant price weakness in the physician practice         
management sector generally. SunTrust Equitable Securities observed that our    
market price per share had declined 93.6% from its historical high of $13.75 per
share on December 30, 1997 to $0.875 per share on March 5, 1999. SunTrust       
Equitable Securities observed that our total equity market value had declined   
from its historical quarterly high of approximately $241.7 million in December  
1997 to approximately $23.1 million in December 1998. SunTrust Equitable        
Securities further observed that the index of publicly-traded physician practice
management companies declined by approximately 56.5% between January 2, 1998 and
March 5, 1999.                                                                  

SunTrust Equitable Securities noted that following our approximately 12-month   
market price per share decline and at our current low valuation level, raising  
equity capital in the public equity market would not be advisable because of,   
among other things, (1) the probable dilutive impact on our earnings per share, 
(2) the recent underperformance of our stock in the public equity market and (3)
the current unreceptive market conditions for equity offerings from health care 
providers generally and physician practice management companies specifically.   
SunTrust Equitable Securities also noted that our small equity market value and 
the corresponding liquidity impairment would further limit our access to new    
capital from the public equity markets. The trading analysis illustrated our    
need to evolve to a business model not wholly dependent on access to equity     
capital to drive external growth and supported the SunTrust Equitable Securities
opinion.                                                                        

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Selected Public Companies Analysis                                              

To provide contextual data and comparative market information, SunTrust         
Equitable Securities analyzed selected physician practice management companies  
whose securities are publicly traded and that were deemed by SunTrust Equitable 
Securities to be reasonably similar to us, on a pro forma basis, adjusted to    
give effect to the restructuring transaction. The companies chosen were then    
divided into three tiers of comparability to our operations:                    

                                                                [Download Table]

                              SELECTED COMPANIES                                
--------------------------------------------------------------------------------
 SELECTED ORTHOPAEDIC      SELECTED SINGLE-SPECIALTY    SELECTED MULTI-SPECIALTY
      COMPANIES                    COMPANIES                    COMPANIES       
---------------------      -------------------------    ------------------------
                                                                                
Specialty Care Network     American Oncology            PhyCor                  
BMJ Medical Management     AmeriPath                    ProMedCo                
Integrated Orthopaedics    American Physician Partners                          
                           Omega Health Systems                                 
                           Pediatrix                                            
                           Physician Reliance Network                           
                           Physicians Resource Group                            
                           Physicians Specialty Corp.                           
                           Response Oncology                                    
                           Sheridan Healthcare                                  
                           Vision Twenty-One                                    

SunTrust Equitable Securities examined publicly available financial data from   
the selected companies for the latest twelve months and earnings estimates for  
the calendar years ending December 31, 1999 and 2000. The projected results were
based upon consensus sources. SunTrust Equitable Securities calculated the      
following market valuation multiples:                                           

o      Enterprise value, defined as the market value of common equity plus book 
  value of total debt and preferred stock less cash, as a multiple of:

o      trailing revenues,                           

o      trailing EBITDA and                          

o      trailing EBIT.                               

o      Equity value as a multiple of:                                           

o      trailing pre-tax income, and                 

o      current book value.                          

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o      Price to earnings ratios:                                                

o      trailing price to earnings multiple and                    

     o      price to earnings ratios based upon estimated calendar year 1999
and 2000 EPS.                                       

SunTrust Equitable Securities noted that as of March 5, 1998, the selected      
companies were trading at the following valuation multiples:                    

                                                                [Download Table]

                                                 SELECTED COMPANIES       
                                            ------------------------------
                                             LOW       HIGH    AVERAGE (1)
                                            -----     -----    -----------
                                                                          
Multiples of enterprise value:                                            
   Trailing revenues.....................    0.5x       2.4x      1.1x    
   Trailing EBITDA.......................    3.8x       8.9x      6.2x    
   Trailing EBIT.........................    5.4x      13.9x      9.1x    

Multiples of equity value:                                                
   Trailing pre-tax income...............    1.6x      14.5x      6.8x    
   Book value............................    0.0x      36.9x      0.9x    

Price to earnings ratios:                                                 
   Trailing price to earnings multiple...    2.6x     122.5x     10.9x    
   Estimated 1999 calendar year                                           
      earnings per share.................    2.9x      12.1x      8.3x    
   Estimated 2000 calendar year                                           
      earning per share..................    4.8x       9.7x      7.3x    

---------------                                                                 
(1) Average excludes highest and lowest measures.                               

SunTrust Equitable Securities noted the significantly diminished utility of a   
comparable companies analysis in analyzing the fairness of the restructuring    
transaction because the valuation parameters for the selected companies in the  
public equity market are not comparable to the valuation parameters used in     
negotiating the terms of the restructuring transaction.                         

Additional Considerations                                                       

In performing its analyses, SunTrust Equitable Securities made numerous         
assumptions with respect to industry performance, general business, economic,   
market, and financial conditions and other matters, many of which are beyond our
control. Any estimates contained in such analyses are not necessarily indicative
of actual past or future results or values, which may be significantly more or  
less favorable than such estimates.                                             

Under the terms of SunTrust Equitable Securities's engagement, we have agreed to
pay SunTrust Equitable Securities an aggregate fee of $475,000 for its services 
in connection with the restructuring transaction, none of which is contingent   
upon the consummation of the restructuring transaction. We have also agreed to  
reimburse SunTrust Equitable Securities for its reasonable out-of-pocket        
expenses incurred in performing its services and to indemnify SunTrust Equitable
Securities and related persons against certain liabilities.                     

SunTrust Equitable Securities was selected to render an opinion in connection   
with the restructuring transaction based upon SunTrust Equitable Securities's   
qualifications as investment                                                    

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bankers, health care expertise, and reputation, including the fact that SunTrust
Equitable Securities, as part of its health care investment banking services, is
regularly engaged in the valuation of businesses and securities in connection   
with mergers, acquisitions, underwritings, sales and distributions of listed and
unlisted securities, private placements, and valuations for corporate and other 
purposes.                                                                       

SunTrust Equitable Securities served as a co-managing underwriter in connection 
with the sale of our common stock in February 1997, and SunTrust Equitable      
Securities has provided certain additional investment banking services for us in
the past and has received customary compensation. In the normal course of       
business, SunTrust Equitable Securities publishes research reports regarding us 
and actively trades our equity securities for its own account and for the       
accounts of its customers. Accordingly, SunTrust Equitable Securities may at any
time hold a long or short position in our securities                            

INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON                        

Richard E. Fleming, Jr., M.D., one of our directors, is a physician owner of    
Princeton Orthopaedic Associates, II, P.A., one of the practices participating  
in the restructuring transaction.                                               

We have paid $96,000 to Consolidation Capital Partners, LLC, an entity owned by 
Messrs. Fatianow, Neal and Fulton, who first raised with our management the     
concept of the restructuring transaction. We have also paid their expenses in   
connection with their assistance to us in connection with the restructuring     
transaction. If the restructuring transaction is completed, we will pay an      
additional $204,000 to Consolidation Capital Partners, LLC.                     

AGREEMENT IN PRINCIPLE WITH THE FORMER PPI STOCKHOLDERS                         

       We believe that largely because of the difficulties we encountered in the
latter part of 1998, the former stockholders of PPI raised certain issues       
relating to the transaction in which we acquired PPI. We hired special counsel  
to assist us in analyzing their contentions. After completion of the analysis   
and extensive negotiations, we determined to seek to reach an amicable          
resolution of the issues. We have entered into an agreement in principle with   
the former PPI stockholders to resolve this matter. The agreement provides for  
the following:                                                                  

o      We will form a new company that will own the HealthCareReportCards.com   
 web site and other related internet products. (It is possible that,
       instead of a new company, our wholly-owned Health Care Report Cards, Inc.
      subsidiary will be subject to the following provisions.) With respect to
       the new company, the agreement in principle provides, among other things,
for the following:                                                

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 o      The former PPI stockholders will have a 25 percent ownership
          interest in the new company. Peter A. Fatianow, an employee of
             Specialty Care Network who developed a new product to be included
      in our healthcare rating web site, will own a five percent
              interest in the new company. The remainder will initially be owned
by us.                                              

    o      The PPI stockholders' 25 percent ownership position will not be
           diluted unless certain events occur, including the reduction of
            our stock ownership interest below 50.1 percent after completion
            of an initial round of financing or below 55 percent following a
subsequent round of financing.                      

       o      Until their ownership interest in the new company is reduced below
              five percent, the PPI stockholders will have representation on the
           new company's Board of Directors proportionate to the amount of
         stock that they own. Certain corporate matters will require a
supermajority vote of the board of directors.       

   o      We will facilitate financing to fund the operations of the new
              company. If we are unable to facilitate a financing of at least $4
            million by December 31, 1999, we will transfer sufficient shares
             of the new company stock that we own so that the PPI stockholders
     will become the majority stockholders of the new company.

      o      The new company will provide specified compensation to the former
        PPI stockholders (who will be employees of the new company).

o      We will guarantee payment of new company expenses until December 31, 1999
       or, if sooner, the date the new company receives third party financing of
$1 million.                                                       

o      The former PPI stockholders will have specified preemptive rights,       
tag-along rights and registration rights with respect to their new
company shares.                                                   

o      We will sell most of the assets of PPI to the former PPI stockholders for
      nominal consideration. We will retain revenues from PPI contracts earned
  through March 31, 1999, and will fund up to a maximum of $500,000 of
expenses of the PPI business through December 31, 1999.           

o      The PPI stockholders will return the 420,000 shares of our common stock  
   that they received in connection with our acquisition of PPI. We have
     agreed to reimburse the PPI stockholders for any tax liability they may
incur with regard to the return of the shares.                    

o      The PPI stockholders will return the options to purchase 760,000 shares  
of our common stock that they now hold.                           

o      The parties to the agreement will mutually release each other from claims
relating to our acquisition of PPI.                               

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        The agreement in principle is subject to the preparation and execution
of a definitive agreement. We are optimistic, but cannot assure, that a         
definitive agreement will be signed.                                            

    Assuming that a final agreement is reached, it is our intention to
expand our internet business to provide various healthcare rating services. We  
will need to obtain additional financing in order to maintain our majority      
interest in the new company and expand the scope of operations of our internet  
business. While we are exploring potential opportunities, we cannot assure that 
such financing will, in fact, be raised.                                        

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OWNERSHIP OF COMMON STOCK BY CERTAIN PERSONS

The following table sets forth certain information with respect to the          
beneficial ownership of our Common Stock as of April 1, 1999 by (i) each person 
known to us to own beneficially more than five percent of our Common Stock      
(including such person's address), (ii) the chief executive officer and the four
other most highly paid executive officers during 1998, (iii) each director and  
(iv) all directors and executive officers as a group.                           

                                                        [Enlarge/Download Table]

                                                   NUMBER OF SHARES       PERCENT OF       
NAME OF BENEFICIAL OWNER                          BENEFICIALLY OWNED  OUTSTANDING SHARES(1)
------------------------                          ------------------  ---------------------
                                                                                           
Kerry R. Hicks (2)................................       775,390              4.7%         
                                                      ----------            -----          
Patrick M. Jaeckle (3)............................       749,096              4.5%         
                                                      ----------            -----          
Peter H. Cheesbrough (4)..........................        14,333                 *         
                                                      ----------                           
Richard E. Fleming, Jr., M.D. (5).................       140,121                 *         
                                                      ----------                           
Leslie S. Matthews, M.D. (6)......................        36,214                 *         
                                                      ----------                           
Mats Wahlstrom (7)................................         6,667                 *         
                                                      ----------                           
D. Paul Davis (8).................................       142,924                 *         
                                                      ----------                           
David G. Hicks (9)................................       140,561                 *         
                                                      ----------                           
Michael West (10).................................        67,541                 *         
                                                      ----------                           
All directors and executive officers as a                                                  
   group (11 persons) (11)........................     2,358,408              13.7%        
                                                      ----------             -----         

-----------------                                                               
* Less than one percent.                                                        

(1)    Applicable percentage of ownership is based on 16,381,229 shares of      
Common Stock outstanding on April 1, 1999. Beneficial ownership is
    determined in accordance with the rules of the Securities and Exchange
Commission and means voting or investment power with respect to   
    securities. Shares of Common Stock issuable upon the exercise of stock
  options exercisable currently or within 60 days of April 1, 1999 are
   deemed outstanding and to be beneficially owned by the person holding
       such option for purposes of computing such person's percentage ownership,
but are not deemed outstanding for the purpose of computing the   
      percentage ownership of any other person. Except for shares held jointly
      with a person's spouse or subject to applicable community property laws,
or as indicated in the footnotes to this table, each stockholder  
     identified in the table possesses sole voting and investment power with
       respect to all shares of common stock shown as beneficially owned by such
stockholder.                                                      
(2)    Includes 60,000 shares of Common Stock held in the Linda Wratten Trust,  
      20,000 shares of Common Stock in each of the Frank Nemick III Trust, the
     William Nemick Trust and the Jeanette Baysinger Trust, 10,000 shares of
   Common Stock in each of the Frank Nemick, Jr. Trust, the Julie Nemick
   Trust and The David G. Hicks Irrevocable Children's Trust and 204,972
shares underlying currently exerciseable stock options. Does      

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not include 60,000 shares of Common Stock held by The Hicks Family
Irrevocable Trust, for which shares Mr. Hicks disclaims beneficial
ownership.                                                        
(3)    Includes 204,972 shares underlying currently exercisable stock options.  
    Does not include 100,000 shares of Common Stock held by The Patrick M.
       Jaeckle Family Irrevocable Children's Trust, for which shares Mr. Jaeckle
disclaims beneficial ownership.                                   
(4)    Includes 13,333 shares underlying currently exercisable stock options.   
(5)    Includes 70,382 shares of Common Stock held by the Fleming Charitable    
  Remainder Unitrust, 5,095 shares of Common Stock held by the Fleming
 Family Foundation and 6,667 shares underlying currently exercisable
       stock options. Does not include 2,547 shares of Common Stock held by each
      of the Irrevocable Trust FBO M. Fleming and the Irrevocable Trust FBO A.
Fleming, respectively, for which Dr. Fleming disclaims beneficial 
       ownership. If the restructuring transaction is approved, Dr. Fleming will
return 99,733 shares of our common stock to us.                   
(6)    Includes 21,667 shares underlying currently exercisable stock options.   
(7)    Includes 6,667 shares underlying currently exercisable stock options.    
(8)    Includes 85,925 shares underlying currently exercisable stock options.   
(9)    Includes 63,280 shares underlying currently exercisable stock options.   
       Does not include 10,000 shares of Common Stock held by The David G. Hicks
Irrevocable Children's Trust, for which shares Mr. Hicks disclaims
beneficial ownership.                                             
(10)   Includes 54,201 shares underlying currently exercisable stock options.   
(11)   Includes options to purchase 802,965 shares of Common Stock.             

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SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
 INFORMATION

Modification of Arrangements With Four Affiliated Practices                     

In December 1998, we entered into transactions with four of our affiliated      
practices, Orlin & Cohen Orthopaedic Associates, LLP; Greater Chesapeake        
Orthopaedic Associates, LLC; Vero Orthopaedics II, P.A.; and Medical            
Rehabilitation Specialists, II, P.A. (collectively, the "Modification           
Arrangements"). Under the terms of the Modification Arrangements, we sold to    
each of the practices accounts receivable, fixed assets and certain other assets
relating to the respective practices and replaced the original service          
agreements with new agreements. Under the new agreements, which terminate at    
certain dates between November 2001 and March 2003, we provide substantially    
reduced services to the practices, and the practices pay significantly reduced  
service fees. These Modification Arrangements were closed effective December 31,
1998. As a result of the completion of the Modification Arrangements, we        
reacquired 2,124,959 shares of our common stock and reduced our outstanding     
indebtedness at December 31, 1998 by approximately $5.5 million through the     
cancellation of convertible notes payable to one of the affiliated practices.   
Additionally, in 1999, we used additional proceeds from the Modification        
Arrangements to reduce the amount outstanding under our credit facility by      
approximately $8.5 million.                                                     

Restructuring Transaction                                                       

In March 1999, we entered into restructuring agreements with ten affiliated     
practices, Floyd R. Jaggears, Jr., M.D., P.C., II; Riyaz H. Jinnah, M.D., II,   
P.A.; The Orthopaedic and Sports Medicine Center, II, P.A.; Orthopaedic         
Associates of West Florida, P.A.; Orthopedic Institute of Ohio, Inc.;           
Orthopaedic Surgery Centers, P.C. II; Princeton Orthopaedic Associates, II,     
P.A.; Reconstructive Orthopaedic Associates, II, P.C.; Southeastern Neurology   
Group II, P.C.; and Steven P. Surgnier, M.D., P.A., II, collectively, all       
designed to effect the "restructuring transaction"). The restructuring          
transaction will:                                                               

o    Provide for the repurchase by affiliated physicians or affiliated
practices of practice assets and for new management service 
arrangements in exchange for cash and/or common stock;      

   o    Limit management services provided to the affiliated practices by us
under the management services arrangements;                 

o    Reduce the term of our management service arrangements with the  
affiliated practices; and                                   

o    Lower service fees paid to us by the affiliated practices.       

The purchase price paid to us will consist of payments for the book value of the
assets to be purchased by the practices, less the practice liabilities as of the
closing date of the restructuring transaction and payments for the execution of 
new management services agreements to replace the existing service agreements.  
If the restructuring transaction is consummated, we expect to reacquire         
3,786,957 shares of our common stock and have the ability to reduce our         
outstanding indebtedness by approximately $17.6 million, including $0.6 million 
through cancellation of outstanding convertible debentures.                     

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The following unaudited pro forma consolidated financial statements give effect 
to the Modification Arrangements and the restructuring transaction. The pro     
forma consolidated financial statements have been prepared by management based  
upon the historical financial statements of Specialty Care Network, Inc. and    
subsidiaries and certain preliminary estimates and assumptions deemed           
appropriate by management. These pro forma consolidated financial statements may
not be indicative of actual results if the transactions had occurred on the     
dates indicated or which may be realized in the future. Neither expected        
benefits nor cost reductions anticipated by us following consummation of the    
Modification Arrangements and the restructuring transaction have been reflected 
in the pro forma consolidated financial statements. The pro forma balance sheet 
as of December 31, 1998 gives effect to the restructuring transaction as if such
transaction had occurred, and the related new service agreements were executed, 
on December 31, 1998. The pro forma consolidated statement of operations for the
twelve months ended December 31, 1998 assumes the Modification Arrangements and 
the restructuring transaction had occurred, and the related new service         
agreements were executed on January 1, 1998.                                    

The following unaudited pro forma financial statements should be read in        
conjunction with the historical consolidated financial statements of Specialty  
Care Network, Inc. and subsidiaries, including the related notes thereto, and   
"Management's Discussion and Analysis of Financial Condition and Results of     
Operations," that appear elsewhere in this proxy statement.                     

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Specialty Care Network, Inc. and Subsidiaries 

Unaudited Pro Forma Consolidated Balance Sheet

                                                        [Enlarge/Download Table]


                                                                        MODIFICATION   RESTRUCTURING                        
                                                                        ARRANGEMENTS    TRANSACTION                         
                                                       DECEMBER 31,     PRO FORMA        PRO FORMA    FOOTNOTE              
                                                           1998         ADJUSTMENTS     ADJUSTMENTS    LEGEND    PRO FORMA  
                                                       -------------   -------------   -------------  --------  ----------- 
                                                                                                                            
Assets:                                                                                                                     
Cash and cash equivalents                              $   1,418,201   $          --   $  5,979,848      (1)    $ 7,398,049 
Accounts receivable, net                                  22,281,471              --    (13,488,774)     (2)      8,792,697 
Due from affiliated practices in litigation, net           4,747,940              --             --               4,747,940 
Receivables from sales of affiliated practices assets                                                                       
  and execution of new service agreements                  7,953,068      (7,953,068)            --      (3)             -- 
Loans to physician stockholders                              521,355              --       (268,241)     (2)        253,114 
Prepaid expenses, inventories and other                    1,500,382              --       (539,935)     (2)        960,447 
Prepaid and recoverable income taxes                       4,258,102              --     (2,849,839)     (4)      1,408,263 
                                                       =============   =============   ============             =========== 

Total current assets                                      42,680,519      (7,953,068)   (11,166,941)             23,560,510 

Property and equipment, net                               11,050,365              --     (4,139,742)     (2)      6,910,623 
Intangible assets, net                                       134,319              --             --                 134,319 
Management service agreements, net                        13,153,048              --     (6,819,301)     (5)      6,333,747 
Advances to affiliates                                       944,520              --             --                 944,520 
Other assets                                               2,216,507              --       (911,505)     (2)      1,305,002 
                                                       -------------   -------------   ------------             ----------- 
Total assets                                           $  70,179,278   $  (7,953,068)  $(23,037,489)            $39,188,721 
                                                       =============   =============   ============             =========== 

Liabilities and Stockholders Equity:                                                                                        
Current portion of capital lease obligations           $     244,446   $          --   $   (133,446)     (2)    $   111,000 
Accounts payable                                             785,649              --       (199,226)     (2)        586,423 
Accrued payroll, incentive compensation and related                                                                         
  expenses                                                 2,453,653              --     (1,158,151)     (2)      1,295,502 
Accrued expenses                                           2,730,069              --       (216,991)     (2)      2,513,078 
Line-of-credit                                            52,925,000      (9,531,568)   (18,070,448)   (3)(6)    25,322,984 
Deferred income                                                   --       1,578,500      5,979,848      (7)      7,558,348 
Due to affiliated practices                                3,326,014              --     (2,440,390)     (2)        885,624 
Deferred income taxes                                      1,083,178              --     (1,083,178)     (8)             -- 
Convertible debentures                                       589,615              --       (589,615)     (9)             -- 
                                                       -------------   -------------   ------------             ----------- 
Total current liabilities                                 64,137,624      (7,953,068)   (17,911,597)             38,272,959 

Capital lease obligations, less current portion              680,152              --       (491,077)     (2)        189,075 
                                                       -------------   -------------   ------------             ----------- 
Total liabilities                                         64,817,776      (7,953,068)   (18,402,674)             38,462,034 

Stockholders equity:                                                                                                        
Preferred stock                                                   --              --             --                      -- 
Common stock                                                  18,619              --             --                  18,619 
Additional paid-in capital                                66,993,627              --             --              66,993,627 
Accumulated deficit                                      (57,687,071)             --     (2,267,967)    (10)    (59,955,038)
Treasury stock                                            (3,963,673)             --     (2,366,848)    (11)     (6,330,521)
                                                       -------------   -------------   ------------             ----------- 
Total stockholders' equity                                 5,361,502              --     (4,634,815)                726,687 
                                                       -------------   -------------   ------------             ----------- 
Total liabilities and stockholders' equity             $  70,179,278   $  (7,953,068)  $(23,037,489)            $39,188,721 
                                                       =============   =============   ============             =========== 

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Specialty Care Network, Inc. and Subsidiaries 

Unaudited Pro Forma Consolidated Statement Of Operations

                                                        [Enlarge/Download Table]


                                                            MODIFICATION    RESTRUCTURING                          
                                                            ARRANGEMENTS     TRANSACTION                           
                                            YEAR ENDED        PRO FORMA       PRO FORMA     FOOTNOTE               
                                         DECEMBER 31, 1998   ADJUSTMENTS      ADJUSTMENT     LEGEND     PRO FORMA  
                                         -----------------  -------------   -------------   ---------   ---------- 
                                                                                                                   
Revenue:                                                                                                           
   Service fees                            $  76,649,778    $ (12,849,936)  $ (29,253,267)   (12)    $  34,546,575 
   Other                                       2,531,524       (1,155,737)     (1,095,841)   (13)          279,946 
                                           -------------    -------------   -------------            ------------- 
                                              79,181,302      (14,005,673)    (30,349,108)              34,826,521 
                                           -------------    -------------   -------------            ------------- 
Costs and expenses:                                                                                                
   Clinic expenses                            55,188,411       (9,903,219)    (24,952,090)   (14)       20,333,102 
   General and administrative                 14,468,537         (605,913)     (1,832,951)   (15)       12,029,673 
   Impairment loss on service                                                                                      
     agreements                               94,582,227      (12,542,253)    (48,154,504)   (16)       33,885,470 
   Litigation and other costs                  3,564,392             --          (661,277)   (16)        2,903,115 
   Impairment loss on intangible assets                                                                            
     and other long-lived assets               3,316,651             --          (253,242)   (17)        3,063,409 
                                           -------------    -------------   -------------            ------------- 
                                             171,120,218      (23,051,385)    (75,854,064)              72,214,769 
                                           -------------    -------------   -------------            ------------- 

Loss from operations                         (91,938,916)       9,045,712      45,504,956              (37,388,248)
Other:                                                                                                             
   Gain on sale of equity investment           1,240,078             --              --                  1,240,078 
   Interest income                               187,450             --              --                    187,450 
   Interest expense                           (3,741,089)         980,528       1,514,559    (18)       (1,246,002)
                                           -------------    -------------   -------------            ------------- 
Loss before income taxes                     (94,252,477)      10,026,240      47,019,515              (37,206,722)
Income tax benefit                            32,466,391       (4,010,496)    (18,807,806)   (19)        9,648,089 
                                           -------------    -------------   -------------            ------------- 
Net loss                                   $ (61,786,086)   $   6,015,744   $  28,211,709            $ (27,558,633)
                                           =============    =============   =============            ============= 
Net loss per common share (basic)          $       (3.39)                                            $       (2.22)
                                           =============                                             ============= 
Weighted average number of common                                                                                  
   shares used in computation (basic)         18,237,827       (2,010,069)     (3,786,957)   (20)       12,440,801 
                                           =============    =============   =============            ============= 
Net loss per common share (diluted)        $       (3.39)                                            $       (2.22)
                                           =============                                             ============= 
Weighted average number of common                                                                                  
   shares used in computation (diluted)       18,237,827       (2,010,069)     (3,786,957)   (20)       12,440,801 
                                           =============    =============   =============            ============= 

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Notes to the Specialty Care Network, Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Balance Sheet

Unaudited Pro Forma Consolidated Balance Sheet Adjustments:                     

1.   The increase in cash reflects prepaid service fees paid by certain         
affiliated practices party to the restructuring transaction.          

2.   Represents the net book value of the assets to be purchased and liabilities
to be assumed by the affiliated practices who are party to the        
restructuring transaction.                                            

3.   Reclassifies the receivables from the four affiliated practices that       
    entered into the Modification Arrangements effective December 31, 1998, as
a reduction to the amounts outstanding under the credit facility, to  
reflect the actual use of the proceeds.                               

4.   Reflects the federal and state tax obligations due to the restructuring    
transaction.                                                          

5.   Reflects the write-off of the remaining net book value of the management   
    service agreements for the affiliated practices party to the restructuring
transaction.                                                          

6.   Reduction to the amount outstanding under the credit facility to reflect   
 the amount of cash to be received in conjunction with the restructuring
transaction.                                                          

7.   Reflects the prepayment of service fees by two of the affiliated practices 
   entering into the Modification Arrangements, effective December 31, 1998,
   in the amount of $1,578,500 and the prepayment of service fees by five of
the affiliated practices party to the restructuring transaction in the
amount of $5,979,848.                                                 

8.   Adjust the deferred tax obligation due to the restructuring transaction.   

9.   Reflects the cancellation of convertible debentures payable to one of the  
 affiliated practices in conjunction with the restructuring transaction.

10.  Represents the loss on the sale of assets and amendment and restatement of 
service agreements with the practices party to the restructuring      
transaction.                                                          

11.  Reflects the estimated fair value of the common stock we will receive in   
    connection with the restructuring transaction, using the closing price per
share of $.625 as reported by Nasdaq on April 5, 1999.                

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Notes to the Specialty Care Network, Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Statement of Operations

Unaudited Pro Forma Consolidated Statement of Operations Adjustments:           

12.  Reflects the following adjustments to service fees revenue:                

                                                        [Enlarge/Download Table]

                                                            MODIFICATION     PROPOSED    
                                                            ARRANGEMENTS   RESTRUCTURING 
                                                             PRO FORMA       PRO FORMA   
                                                            ADJUSTMENTS     ADJUSTMENTS  
                                                           -------------   ------------- 
                                                                                         
Elimination of service fees under long-term service                                      
agreements (including clinic expense reimbursement)        $ (14,661,149)  $ (33,252,289)

Recognition of service fees based on restructured service                                
agreements                                                 $   1,811,213   $   3,999,022 
                                                           -------------   ------------- 
                                                           $ (12,849,936)  $ (29,253,267)

13.  Reflects the reduction of other revenue associated with the affiliated     
practices who are party to the Modification Arrangements and the      
restructuring transaction.                                            

14.  Represents the elimination of clinic expenses.                             

15.  Reflects the reduction in amortization expense resulting from the write-off
of the net book value of the management service agreements.           

16.  Adjusts the impairment loss on service agreements and the expense for      
 litigation costs reflected for the year ended December 31, 1998 for the
  Modification Arrangements and the restructuring transaction, in order to
reflect the non-recurring nature thereof.                             

17.  Reflects the reduction in the impairment loss on other long-lived assets   
related to the ten affiliated practices who are parties to the        
 restructuring transaction, in order to reflect the non-recurring nature
thereof.                                                              

18.  Represents decreases in interest expense due to the repayment of debt with 
the cash proceeds received from the sale of assets and elimination of 
convertible debt in conjunction with the Modification Arrangements and
restructuring transaction.                                            

19.  Reflects adjustment of the income tax benefit using a combined federal and 
state effective tax rate of 40%.                                      

20.  Reflects the effects of the shares of common stock we will reacquire in    
connection with the Modification Arrangements and restructuring       
transaction.                                                          

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Selected Financial Data                                                         

Statement of Operations Data                                                    

                                                        [Enlarge/Download Table]

                                                     Year Ended            Year Ended        Year Ended    
                                                 December 31, 1998     December 31, 1997  December 31, 1996
                                                 -----------------     -----------------  -----------------
                                                                                                           
Revenue:                                                                                                   
      Service fees                                     $  76,649,778      $ 45,966,531       $ 4,392,050   
      Other                                                2,531,524         3,689,390                --   
                                                       -------------      ------------       -----------   

                                                          79,181,302        49,655,921         4,392,050   
                                                       -------------      ------------       -----------   
Costs and expenses:                                                                                        
      Clinic expenses                                     55,188,411        31,644,618         2,820,743   
      General and administrative                          14,468,537         7,861,015         3,770,263   
      Impairment loss on service agreements               94,582,227                --                --   
      Litigation and other costs                           3,564,392                --                --   
      Impairment loss on intangible assets and                                                             
         other long-lived assets                           3,316,651                --                --   
                                                       -------------      ------------       -----------   
      Total costs and expenses                           171,120,218        39,505,633         6,591,006   
                                                       -------------      ------------       -----------   
(Loss) income from operations                            (91,938,916)       10,150,288        (2,198,956)  
Other:                                                                                                     
      Gain on sale of equity investment                    1,240,078                --                --   
      Interest income                                        187,450           536,180            11,870   
      Interest expense                                    (3,741,089)         (942,144)          (90,368)  
                                                       -------------      ------------       -----------   
(Loss) income before income taxes                        (94,252,477)        9,744,324        (2,277,454)  
Income tax benefit (expense)                              32,466,391        (3,873,926)          506,071   
                                                       -------------      ------------       -----------   

Net (loss) income                                      $ (61,786,086)     $  5,870,398       $(1,771,383)  
                                                       =============      ============       ===========   
Net (loss) income per common share (basic)(1)          $       (3.39)     $       0.38       $     (0.16)  
                                                       =============      ============       ===========   
Weighted average number of common shares                                                                   
      used in computation (basic)(1)                      18,237,827        15,559,368        11,422,387   
                                                       =============      ============       ===========   

Net (loss) income per common share (diluted)(1)        $       (3.39)     $       0.37       $     (0.14)  
                                                       =============      ============       ===========   

Weighted average number of common                                                                          
      shares and common share equivalents                                                                  
      used in computation (diluted)                       18,237,827        16,071,153        12,454,477   
                                                       =============      ============       ===========   

                                                                [Download Table]

Balance Sheet Data                                                                 
                           December 31, 1998   December 31, 1997  December 31, 1996
                           -----------------   -----------------  -----------------
                                                                                   
Working capital (deficit)       $(21,457,105)       $ 21,924,386      $ 7,637,724  
Total assets                      70,179,278         140,301,650       16,013,125  
Total long-term debt                 680,152          33,885,141        5,142,450  

(1)  The 1996 net income (loss) per share and weighted average share  
    amounts have been restated to comply with Statement of Financial
Accounting Standards No. 128, Earnings Per Share.           

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS         
OF OPERATIONS                                                                   

GENERAL                                                                         

Specialty Care Network, Inc is a health care management services company that   
provides practice management services to physicians. We also provide a health   
care rating internet site, HealthCareReportCards.com, that rates the quality of 
outcomes at various hospitals for several medical procedures. In addition,      
through our subsidiary, Ambulatory Services, Inc., we are establishing a        
business engaged in the development and management of freestanding and in-office
ambulatory surgery centers.                                                     

We have entered into long-term service agreements with practices affiliated with
us pursuant to which we, among other things, provide facilities and management, 
administrative and development services, and employ most non-physician          
personnel, in return for specified service fees. The operating expenses incurred
by us include the salaries, wages and benefits of personnel (other than         
physician owners and certain technical medical personnel), supplies, expenses   
involved in administering the clinical practices of the affiliated practices and
depreciation and amortization of assets. We seek to reduce certain operating    
expenses, as a percentage of net revenue, of the affiliates practices. The      
negotiated amounts of our service fee also affect operating expenses, measured  
as a percentage of net revenue. In addition to the operating expenses discussed 
above, we incur personnel and administrative expenses in connection with our    
corporate offices, which provide management, administrative and development     
services to the affiliated practices.                                           

RESTRUCTURING TRANSACTION                                                       

In March 1999, we entered into restructuring agreements with ten of our         
affiliated practices. The agreements:                                           

o  Provide for the repurchase by affiliated physicians or affiliated
practices of practice assets and for new management service   
arrangements in exchange for cash and/or common stock;        

o  Limit management services provided to the affiliated practices by
us under our service agreements;                              

o  Reduce the term of our service agreements with the affiliated    
practices; and                                                

o  Lower service fees paid to us by the affiliated practices.       

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The purchase price paid to us will consist of payments for the book value of the
assets to be purchased by the practices, less the practice liabilities as of the
closing date of the transaction and payments for the execution of a new         
management services agreement to replace the existing service agreement. If the 
restructuring transaction is approved by the Company's stockholders and bank    
syndicate, the Company expects to reacquire 3,786,957 shares of its common stock
and have the ability to reduce its indebtedness by approximately $17.6 million  
including $0.6 million through cancellation of an outstanding convertible       
debenture. (See Note 11, to the Consolidated Financial Statements, for further  
discussion of the new management service agreements).                           

MODIFICATION OF ARRANGEMENTS WITH FOUR PRACTICES                                

Near the end of 1998, we entered into transactions with four of our affiliated  
practices. In these transactions, we sold to each of the practices accounts     
receivable, fixed assets and certain other assets relating to the respective    
practices and replaced the original management service arrangements with new    
arrangements. Under the management services agreements, which terminate at      
certain dates between November 2001 and March 2003, we provide substantially    
reduced services to the practices, and the practices pay significantly reduced  
service fees. These transactions were closed effective December 31, 1998. As a  
result of the completion of these four transactions, we reacquired 2,124,959    
shares of its common stock and reduced our outstanding indebtedness at December 
31, 1998 by approximately $5.5 million through the cancellation of a convertible
note with one of the affiliated practices. Additionally, in 1999, we used the   
proceeds from the completion of these four transactions to reduce the amount    
outstanding under our credit facility by approximately $8.5 million.            

ACCOUNTING TREATMENT                                                            

Commencing January 1, 1999, costs of obtaining long-term service agreements are 
amortized using the straight-line method over estimated lives of 3 - 5 years    
(see Note 3 to the Consolidated Financial Statements for discussion regarding   
the amortization period for our long-term service agreements and changes in     
accounting estimates). Under the service agreements between us and each of the  
affiliated practices, we have the exclusive right to provide management,        
administrative and development services during the term of the agreement.       

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In light of the pending restructuring transaction, as well as numerous other    
factors in the physician practice management industry in general, during the    
fourth quarter of 1998, management undertook an evaluation of the carrying      
amount of our service agreements pursuant to the provisions of Statement of     
Financial Accounting Standards No. 121, Accounting for the Impairment of        
Long-Lived Assets and for Long-Lived Assets to be Disposed of. As a result of   
this evaluation, we recorded an impairment loss on our service agreements of    
approximately $94.6 million in December 1998. (See Note 2 to the Consolidated   
Financial Statements for further discussion of this impairment charge.)         

RESULTS OF OPERATIONS                                                           

YEAR ENDED DECEMBER 31, 1998                                                    

Revenue                                                                         

Our service fees revenue, including reimbursement of clinic expenses, increased 
by $30.6 million to $76.6 million for the twelve months ended December 31, 1998 
compared to $46.0 million for the same period in 1997. These increases primarily
reflect affiliation transactions that occurred during the latter part of 1997   
and in the first quarter in 1998. Other revenue for the twelve months ended     
December 31, 1998 was $2.5 million compared to $3.7 million for the same period 
in 1997. The decrease in other revenue was primarily due to a decrease in       
business consulting fees earned and bad debt recovery in 1998 compared to the   
same period of 1997. As a result of the transactions with the four practices in 
December 1998, we expect service fee revenue to decline in 1999. If the         
restructuring transaction is completed, service fees revenue will decrease      
materially.                                                                     

Clinic expenses and general and administrative expenses                         

For the twelve months ended December 31, 1998, total clinic expenses were $55.1 
million compared to $31.6 million for the same period of 1997. Clinic expenses  
are costs incurred by us, in accordance with the service agreements, on behalf  
of the affiliated practices for which they are obligated to reimburse us.       
Reimbursement of clinic expenses is a component of the service fee revenue      
recorded by us. Principally, as a result of the transactions with the four      
practices in December 1998, we expect clinic expenses to decline in 1999. If the
restructuring transaction is completed, clinic expenses will decrease more      
substantially.                                                                  

For the twelve months ended December 31, 1998, general and administrative       
expenses were $14.5 million compared to $7.9 million for the same period of     
1997. This increase was primarily due to increased amortization expense related 
to additional long-term service agreements that we entered into with affiliated 
practices in the latter part of 1997 and first quarter 1998. In addition, we    
shortened the lives over which the service agreements are amortized over        
effective June 1998 (see Note 3 to the Consolidated Financial Statements).      

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Impairment losses, litigation and other costs                                   

In light of the pending restructuring transaction, as well as numerous other    
factors in the physician practice management industry in general, during the    
fourth quarter of 1998, management undertook an evaluation of the               
carrying amount of our management service agreements pursuant to the provisions 
of Statement of Financial Accounting Standards No. 121, Accounting for the      
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. As 
a result of this evaluation, we recorded an impairment loss on our              
management service agreements of approximately $94.6 million in December 1998.  
(See Note 2 to the Consolidated Financial Statements for further discussion of  
this impairment charge.)                                                        

We are currently involved in disputes with TOC Specialists, P.L., The           
Specialists Orthopaedic Medical Corporation and 3B Orthopaedics, P.C., which are
practices affiliated with us. (See Note 13 to the Consolidated Financial        
Statements, for further discussion related to these legal proceedings). As a    
result of these disputes, we have recorded a charge of approximately $2.7       
million to reserve for service fees recorded for these practices, which to date 
have not been paid. In addition, as of December 31, 1998, we had incurred       
approximately $.2 million in legal fees directly related to these disputes. In  
connection with the proposed restructuring transaction described above, we have 
also incurred expenses of approximately $.7 million for financial advisors and  
legal consultation.                                                             

We have entered into an agreement in principle with the former stockholders of  
Provider Partnerships, Inc. ("PPI"), a corporation acquired by us in August     
1998. PPI is a company engaged in providing consulting services to hospitals,   
and it also provided certain assets that were developed by us into our          
HealthCareReportCards.com web site. We entered into the agreement in principle  
to resolve certain issues raised by the former stockholders of PPI relating to  
the transaction in which we acquired PPI. The agreement in principle provides   
for, among other things, the following:                                         

o    The formation of a new company that will own the                 
        HealthCareReportCards.com web site and one or more additional health
   care rating web sites. The new company will be a majority-owned
  subsidiary of Specialty Care Network, Inc., and the former PPI
          shareholders will have a minority shareholder interest in the company;

o    The former PPI shareholders will return the 420,000 shares of our
      common stock that they received in connection with our acquisition
of PPI;                                                     

o    We will return most of the assets of PPI to the former PPI       
shareholders; and                                           

o    The PPI shareholders will become majority shareholders of the new
   company if we do not obtain $4 million in financing for the new
company by December 31, 1999.                               

Because of the dispute with the former PPI stockholders, we recorded an         
impairment loss in December 1998 of approximately $1.2 million on the intangible
asset created with the acquisition of PPI. In addition, as a result of the      
proposed restructuring transaction, management performed a review of the        
carrying amount of our other long-lived assets, which resulted in an impairment 
loss of approximately $2.1 million during the fourth quarter of 1998.           

Gain on sale of equity investment. In March 1998, we sold our entire interest in
West Central Ohio Group, Ltd., an Ohio limited liability company, for a pre-tax 
gain of approximately $1.2 million.                                             

Interest expense. During the twelve months ended December 31, 1998, we incurred 
interest expense of $3.7 million compared to $.9 million for the same period of 
1997. This increase was primarily the result of additional borrowings under our 
bank credit facility, which were made to fund our affiliation transactions and  
to fund our purchase of ancillary equipment for installation at affiliated      
practices.                                                                      

YEAR ENDED DECEMBER 31, 1997                                                    

During 1996, we were in our start-up phase and, consequently, the 1996 results  
are not comparable with the 1997 results.                                       

For 1997, we had service fees revenues of approximately $46.0 million, including
reimbursement of                                                                

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clinic expenses. Of this amount, approximately $17.6 million in service fees    
were derived from practices that affiliated with the Company during 1997. We    
also generated other revenues totaling approximately $3.7 million, which consist
mainly of business consulting fees, medical director fees and miscellaneous     
revenue, of which approximately $.5 million is derived from ongoing operations  
and may be deemed recurring.                                                    

During 1997, we incurred costs and expenses totaling approximately $39.5        
million, of which approximately $7.9 million are general and administrative     
expenses, principally comprised of personnel and administrative expenses        
relating to the provision of services to the affiliated practices. In addition, 
approximately $1.2 million of such expenses constitutes amortization expense    
relating to the costs and expenses incurred in the service agreement intangible 
asset.                                                                          

In 1997, we incurred approximately $942,000 of interest expense on weighted     
average outstanding debt of approximately $14.7 million. At the end of 1997,    
outstanding indebtedness on our bank line of credit was approximately $33       
million.                                                                        

YEAR ENDED DECEMBER 31, 1996                                                    

Prior to November 12, 1996, we had not entered into any service agreements and, 
consequently, generated no revenue. For the period from January 1, 1996 through 
October 31, 1996, we incurred a pre-tax loss of approximately $2.9 million,     
reflecting management salaries, business start-up expenses and travel, legal and
accounting costs associated with its initial five affiliation transactions. For 
the period from November 1, 1996 through December 31, 1996, we generated net    
revenue, including reimbursement of clinic expenses, of approximately $4.4      
million and pre-tax income of approximately $611,000. The income tax benefit    
reflected in our statement of operations differs from amounts currently payable 
because certain revenue and expenses are reported differently in the statement  
of operations than they are for tax filing purposes. For the year ended December
31, 1996, our effective tax rate was (22.2%). See "Liquidity and Capital        
Resources" below for additional information.                                    

The following table presents certain statement of operations data for the year  
ended December 31, 1996, for the ten months ended October 31, 1996, during which
we did not conduct any significant operations and devoted most of its efforts   
toward completing the initial affiliation transactions, and for the two months  
ended December 31, 1996, which includes operations following the affiliation    
with the initial affiliated practices on November 12, 1996.                     

                                                        [Enlarge/Download Table]

                                             Ten Months         Two Months       Twelve Months  
                                               Ended              Ended              Ended      
                                          October 31, 1996  December 31, 1996  December 31, 1996
                                          ----------------  -----------------  -----------------
                                                                                                
Revenue:                                                                                        
     Service fees                             $        --       $ 4,392,050     $ 4,392,050     
     Other                                             --                --              --     
                                              -----------       -----------     -----------     

                                                       --         4,392,050       4,392,050     

Costs and expenses:                                                                             
     Clinic expenses                                   --         2,820,743       2,820,743     
     General and administrative expenses        2,845,973           924,290       3,770,263     
                                              -----------       -----------     -----------     

                                                2,845,973         3,745,033       6,591,006     

Income (loss) from operations                  (2,845,973)          647,017      (2,198,956)    
Other:                                                                                          
     Interest income                                6,070             5,800          11,870     
     Interest expense                             (48,760)          (41,608)        (90,368)    
                                              -----------       -----------     -----------     

Income (loss) before income taxes             ($2,888,663)      $   611,209     $(2,277,454)    
                                              ===========       ===========     ===========     

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LIQUIDITY AND CAPITAL RESOURCES                                                 

For the year ended December 31, 1998, we incurred a loss from operations of     
approximately $91.9 million due primarily to an impairment charge related to our
management service agreements, as more fully described above. Additionally, as  
of December 31, 1998, we had a working capital deficit of approximately $21.5   
million and were not in compliance with certain of the financial ratio covenants
required by our credit facility. As a result of the non-compliance with certain 
financial ratio covenant, we are in default under the terms of the credit       
facility. In the event of default, the terms of the credit facility provide that
the bank syndicate can immediately terminate its obligation to make further     
advances under the respective commitments and/or declare our outstanding debt   
under the credit facility to be immediately due and payable. Accordingly, the   
total amount outstanding under the credit facility of approximately $52.9       
million has been included in our Consolidated Balance Sheet as a current        
liability at December 31, 1998. The bank syndicate notified us in December 1998 
that it was suspending any further advances under the credit facility. We are   
currently negotiating with the bank syndicate to obtain a waiver of             
non-compliance with the financial ratio covenants and to revise the financial   
ratio covenants to bring us into compliance for the remaining term of the credit
facility.                                                                       

The issues described above raise substantial doubt about our ability to continue
as a going concern. Management intends to address these issues through a        
restructuring transaction involving ten of our affiliated practices, which is   
intended to substantially reduce our outstanding debt and allow management to   
pursue the development of a health care rating internet site and of our         
ambulatory surgery center business. The proposed restructuring transaction,     
which is subject to approval by our stockholders as well as the bank syndicate, 
is more fully described above, under "Restructuring." Additionally, management  
believes that the cash flow from operations will be sufficient to fund our      
operations at the current level for the next twelve months. However, we are     
incurring significant legal fees and other costs related to pending litigation  
with three of our affiliated practices. In addition, we are incurring           
significant legal fees and other costs related to the proposed restructuring. We
anticipate that we will require additional funds to finance capital expenditures
relating to expansion of our business. We expect that capital expenditures      
during 1999 will relate primarily to (i) the development of its surgery center  
business, (ii) expansion and replacement of medical and office equipment for the
affiliated practices not restructuring, and (iii) the purchase of equipment to  
expand our computer capabilities. The availability and terms of any financing   
will depend on market and other conditions. We cannot assure that sufficient    
funds will be available on terms acceptable to us, if at all.                   

During 1998, our expenditures for property, plant and equipment were $9.1       
million. These expenditures primarily related to purchase of magnetic resonance 
imaging units and other ancillary equipment items at the affiliated practices.  
We borrowed $20.3 million under the credit facility in 1998, primarily to fund  
the cash requirements of our practice affiliations ($12.4 million) and costs    
associated with the acquisition of PPI ($0.2 million), to finance ancillary     
equipment purchases ($5.3 million), and to fund cash shortages due to two       
affiliated practices diverting accounts receivable cash receipts inappropriately
during the fourth quarter of 1998 ($2.4 million), we are currently in litigation
with those practices.                                                           

Pursuant to the service agreements with the affiliated practices, we purchase,  
subject to adjustment, the accounts receivable of the affiliated practices      
monthly.                                                                        

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The purchase price for such accounts receivable generally equals the gross      
amounts of the accounts receivable recorded each month, less adjustments for    
contractual allowances, allowances for doubtful accounts and other potentially  
uncollectible amounts based on the practice's historical collection experience, 
as determined by us. However, we and certain affiliated practices are currently 
making periodic adjustments so that amounts paid by us for the accounts         
receivable are adjusted upwards or downwards based on our actual collection     
experience. We expect to use working capital to fund our obligation to purchase,
subject to adjustment, the accounts receivable on an ongoing basis. No          
adjustments are made to reflect financing costs related to the carrying of such 
receivables by us.                                                              

YEAR 2000                                                                       

The Year 2000 (Y2K) issue is a result of a global programming standard that     
records dates as six digits (i.e. MM/DD/YY), using only the last two digits for 
the year. Any software application or hardware product that uses two-digit      
fields could interpret the year 2000 as the year 1900. Systems that do not      
properly recognize the correct year could generate erroneous data or cause a    
system to fail, resulting in business interruption. This situation is not       
limited to computers; it has the potential to affect many systems, components,  
and devices, which have embedded computer chips that may be date sensitive.     

We are coordinating our efforts to address the Y2K issue with our affiliated    
practices, third-party payors, and vendors. We cannot assure that the systems of
other companies on which our systems rely will be timely converted. A failure to
convert by another company or a conversion that is incompatible with our systems
could have a material adverse effect on us.                                     

In 1997, we established a Y2K Coordinator to oversee all corporate-wide Y2K     
initiatives. These initiatives encompass all of our computer software and       
embedded systems. Teams of internal and external specialists were established to
inventory and test critical computer programs and automated operational systems.
Additionally, a detailed project plan has been created that outlines all        
activities related to the Y2K issue. Generally speaking, the project involves   
three areas: Corporate Headquarters, Affiliated Practices and Third-party       
Payors.                                                                         

Corporate Headquarters: Because we began operations in 1996, most of our        
corporate computer hardware is relatively new. Additionally, most of the        
software applications are "off the shelf", resulting in few internal software   
modifications. In the prior six-month period, all significant internal          
applications have been reviewed and updated. We currently anticipate that all   
remaining internal applications will be Y2K compliant by the end of the second  
quarter of 1999. Total costs incurred by us to modify the software used at the  
corporate office were not material.                                             

Affiliated Practices: We have assessed the status of the computer systems at our
affiliated practices. Based on the results of this assessment, we have          
determined that the majority of our affiliated practices' systems are Y2K       
compliant. The remaining practices are currently upgrading their systems or are 
in the testing phase. Based upon our review, and discussion with our affiliated 
practices, we expect all remaining affiliated practices to be compliant by the  
end of the second quarter of 1999. All costs to modify systems to become Y2K    
compliant have been and will be borne by the affiliated practices.              

Third-Party Payors: Although our affiliated practices' internal systems are     
expected to be compliant by the end of the second quarter of 1999, our          
affiliated practices also have important relationships with third party payors  
and managed care organizations. We have been reviewing with these major payors  
and managed care organizations the status of their Y2K readiness. Most of our   
major payors are large insurance carriers and government agencies. Based on     
discussions with some of our affiliated practices, many of the major third-party
payors are either compliant or are in the testing phase at this time. However,  
we also understand there are some government payors, such as Medicare, that are 
not yet Y2K compliant. Any failure by one of our significant third-party payors 
to fully address all Y2K issues could have a material adverse effect on us.     

Although we believe we are addressing all significant Y2K issues which could    
affect us, we have few alternatives available, other than reversion to manual   
methods, in order to avoid the effects of not establishing Y2K readiness. As a  
result, if any significant issues arise with our corporate headquarters, our    
practices or third-party payors, we could incur significant additional costs to 
correct the problem. There can be no assurance that any remediation plan will   
address all the problems that may arise. For the Y2K non-compliance issues      
identified to date, the cost to upgrade or prepare for Y2K is not expected to   
have a material impact on our operating results.                                

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INFORMATION ABOUT SPECIALTY CARE NETWORK, INC.

GENERAL                                                                         

We are a health care management services company that provides practice         
management services to physicians. We also provide a health care rating internet
site, HealthCareReportCards.com, that rates the quality of outcomes at various  
hospitals for several medical procedures. In addition, through our subsidiary,  
Ambulatory Services, Inc., ("ASI") we are establishing a business engaged in the
development and management of freestanding and in-office ambulatory surgery     
centers. We also have a subsidiary, Provider Partnerships, Inc., ("PPI") that   
provides hospital consulting services. However, we expect to return the assets  
of PPI to its former stockholders in connection with the resolution of certain  
issues relating to our acquisition of PPI.                                      

PRACTICE MANAGEMENT SERVICES                                                    

Our practice management services focus on musculoskeletal care. Musculoskeletal 
care, or orthopaedics, is the treatment of conditions relating to bones, joints,
muscles and related connective tissues. We have contracted to provide services  
to 23 orthopaedic practice groups. We have contracted to provide comprehensive  
management services to 17 of the groups under exclusive, long-term service      
agreements. We refer to these groups as our "affiliated practices." We have     
contracted to provide more limited services to six of the groups. We are        
involved in litigation with three of our affiliated practices, and the          
description below of services provided does not currently apply to these        
practices. In addition, we manage outpatient surgery centers, physical therapy  
centers and an occupational medicine center which allow our affiliated          
practices to provide ancillary services, such as magnetic resonance imaging,    
orthotics and radiology.                                                        

We recently entered into restructure agreements with ten of our practices to    
restructure our relationship with them. We initially affiliated with these      
practices by acquiring substantially all of the assets and certain liabilities  
of these practices, and entered into long-term service agreements with them.    
Under the proposed restructuring transaction, we will sell to the practices     
assets relating to the practices, including many of the assets we acquired from 
the practices at the time of our original affiliation with them, and enter into 
new management services arrangements relating to the practices. Our services    
under the new arrangements will be limited to only certain practice needs, and  
we will lower the amount of our service fees. All but one of the management     
service agreements with the practices will have terms expiring between November,
2001 and March, 2003.                                                           

Approval of the restructuring transaction is subject to several conditions,     
including approval of our stockholders and consent of our bank syndicate. We can
give no assurance that these conditions will be met.                            

We were incorporated in December 1995 and began our management services in      
November 1996.                                                                  

Our Practice Management Services to Affiliated Practices                        

Our Management Services. We assist in strategic planning, preparation of        
operating budgets and capital project analysis. We coordinate group purchasing  
of medical supplies, and medical malpractice insurance for our affiliated       
practices as a group. We develop strategies for contracting with managed care   
plans and help to establish relationships with managed care plans. We assist in 
physician recruitment by introducing physician candidates to our affiliated     
practices. In addition, we advise in structuring employment arrangements. We    
also provide or arrange for a variety of additional services relating to the    
day-to-day non-medical operations of our affiliated practices. These services   
include management and monitoring of:                                           

o    billing levels, invoicing procedures and accounts receivable     
collection;                                                 

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o    accounting, payroll and legal services and records; and          

o    cash management and centralized disbursements.                   

By providing these management services, we reduce the administrative            
responsibilities of our affiliated physicians. This is designed to enable the   
physicians to dedicate more time toward the delivery of health care services.   
We have also assisted our affiliated practices in developing ancillary          
services, such as:                                                              

o    outpatient surgery;                                              

o    bone densitometry;                                               

o    outpatient imaging;                                              

o    pain management;                                                 

o    rehabilitation therapy; and                                      

o    orthotics.                                                       

We believe that our administrative support facilitates more effective billing   
and collections and has provided economies of scale in effecting certain        
purchases.                                                                      

Our Practice Services. We employ most of our affiliated practices' non-physician
personnel. These non-physician personnel, along with additional personnel at our
headquarters, provide the infrastructure that enables us to manage the          
day-to-day non-medical operations of each of our affiliated practices. We       
provide secretarial, bookkeeping, scheduling and other routine administrative   
support services. Under our service agreements, we must provide practice        
facilities and equipment to our affiliated practices. To satisfy these          
obligations, we lease the facilities utilized by our affiliated practices. In   
many cases, these facilities are owned by our affiliated physicians. We also    
purchase the equipment utilized by each of our affiliated practices.            

Our Management Information Systems. Our corporate accounting systems include    
interfaces between payroll, banking, accounts payable and accounts receivable   
applications. These interfaces enable us to capture, analyze and report         
centrally financial data from most of our affiliated practice locations and     
provide analyses of financial data on a fully integrated basis. In addition, our
internally developed purchase order system, which is installed at every         
affiliated practice location, monitors daily practice inventory purchases from  
order to receipt. This allows us to centrally control the disbursement of funds 
and to identify economies in purchasing.                                        

We believe that an important factor in the successful management of             
musculoskeletal disease is the creation of a database that tracks the results of
specific methods of treatment. This information can be used to establish        
treatment protocols. With the input of our affiliated physicians who specialize 
in specific orthopaedic subspecialties, we are gathering information from some  
of our affiliated practices in a standardized fashion. In addition to treatment 
information, we collect financial information such as:                          

o    personal patient data;                                           

o    physician and procedure identifier codes;                        

o    payor class; and                                                 

o    amounts charged and reimbursed.                                  

Information is gathered in areas such as:                                       

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  o    incidence rates (the number of specified procedural, diagnostic and
       medical events during a defined period with respect to a particular
patient population);                                        

  o    utilization (frequency of patient care and activity relating to the
patient); and                                               

o    Payor mix information                                            

We intend to use this information to assist our affiliated physicians in        
developing:                                                                     

o    clinical protocols;                                              

o    ensuring that standards of quality are met; and                  

o    determining the most cost-effective course for treating patients.

Our Contracting. We negotiate both fee-for-service and capitated contracts on   
behalf of our affiliated practices. Capitated contracts involve various forms   
of risk-sharing. There are two traditional categories of risk sharing. In the   
first instance, the health care provider accepts risk only with respect to the  
costs of physician services required by a patient (i.e., professional fee       
capitation). In the second scenario, the health care provider accepts risk for  
all of the medical costs required by a patient, including professional,         
institutional and ancillary services (i.e., global capitation). Managed care    
companies have refined traditional models by segmenting fees into episode of    
care and per member per month capitation. Under episode of care capitation,     
health care providers deliver care for covered enrollees with a specified       
medical condition, or enrollees who require a particular treatment, for a fixed 
fee on a per episode basis. Under per member per month capitation, the health   
care providers receive fixed monthly fees per covered enrollee and assume the   
financial responsibility for the treatment of medical conditions requiring      
procedures specified in the contract. We have negotiated "episode of care" or   
package pricing arrangements with several major health maintenance              
organizations and workers compensation carriers covering several surgical       
procedures.                                                                     

Practice Governance and Quality Assurance                                       

Each affiliated practice has a Joint Policy Board. The membership of the Joint  
Policy Board includes an equal number of representatives of Specialty Care      
Network and the affiliated practice. The Joint Policy Boards have               
responsibilities that include:                                                  

o    developing long-term strategic objectives;                       

o    developing practice expansion and payor contracting guidelines;  

o    promoting practice efficiencies;                                 

 o    identifying and recommending significant capital expenditures; and

o    facilitating communication and information exchanges.            

Our Contractual Agreements with Our Affiliated Practices                        

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We have entered into long-term service agreements with each of our affiliated   
practices to provide management and administrative services. We have included   
below a general summary of our service agreements. The actual terms of the      
individual service agreements vary in certain respects from the description     
below. These variances are a result of negotiations with the individual         
practices and the requirements of state and local laws and regulations.         
Beginning April 1, 1999, our obligations with respect to the practices that     
have entered into restructure agreements with us will be limited to providing   
furniture, fixtures and equipment necessary for the practices to operate their  
offices and, in some instances, the billing and collection service personnel.   
Our fees will also be reduced. This interim arrangement will continue until     
closing under the restructure agreements or June 15, 1999, whichever occurs     
first. If closing occurs, the practices will be subject to management services  
agreements having terms described below under "Our Practice Management Service  
to Other Practices - Our Contractual Agreements with the Other Practices."      

Our Responsibilities.  We, among other things:                                  

o    act as the exclusive manager and administrator of non-physician  
        services relating to the operation of our affiliated practices (with
       the exception of certain matters for which our affiliated practices
     maintain responsibility or which are referred to the Joint Policy
Boards of our affiliated practices);                        

  o    bill patients, insurance companies and other third-party payors and
collect the fees for professional medical and other services
rendered, including goods and supplies sold;                

o    provide or arrange for, as necessary, clerical, accounting,      
     purchasing, payroll, legal, bookkeeping and computer services and
 personnel, information management, preparation of certain tax
   returns, printing, postage and duplication services and medical
transcribing services;                                      

    o    supervise and maintain custody of substantially all files and records
       (medical records of our affiliated practices remain the property of
our affiliated practices);                                  

o    provide facilities and equipment for our affiliated practices;   

o    prepare, in consultation with the Joint Policy Boards and our    
      affiliated practices, all annual and capital operating budgets for
our affiliated practices;                                   

   o    order and purchase inventory and supplies as reasonably requested by
our affiliated practices;                                   

o    implement, in consultation with the Joint Policy Boards and our  
         affiliated practices, local public relations or advertising programs;
and                                                         

o    provide financial and business assistance in the negotiation,    
establishment, supervision and maintenance of contracts and 
         relationships with managed care plans and other similar providers and
payors.                                                     

Most employees providing such services were employed by our affiliated          
practices prior to the practice's affiliation with us.                          

The Responsibilities of Our Affiliated Practices. Our affiliated practices      
retain the responsibility for:                                                  

o    hiring and compensating physician employees and other medical    
professionals;                                              

o    ensuring that physicians have the required licenses, credentials,
      approvals and other certifications needed to perform their duties;
and                                                         

o    complying with certain federal and state laws and regulations    
applicable to the practice of medicine.                     

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 In addition, our affiliated practices maintain exclusive control of all
   aspects of the practice of medicine and the delivery of medical services.

Our Service Fees. We collect fees from our affiliated practices on a monthly    
basis generally equal to the following:                                         

o    the greater of a guaranteed base service fee or a percentage (the
   "service fee percentage"), ranging from 20%-50% of the adjusted
pre-tax income of our affiliated practices, which is defined
generally as revenue of our affiliated practices related to 
       professional services less amounts equal to certain clinic expenses
of our affiliated practices, not including physician owner  
compensation or most benefits to physician owners; and      

    o    amounts equal to the clinic expenses of our affiliated practices, not
        including physician owner compensation or most benefits to physician
owners.                                                     

o    Generally, for the first three years following a practice's      
          affiliation, the service fee is subject to a fixed dollar minimum. The
    fixed dollar minimum generally was determined by multiplying the
         affiliated practice's adjusted pre-tax income for the 12 months prior
       to its affiliation by the service fee percentage. In addition, with
       respect to our management (and, in certain instances, ownership) of
        certain facilities and ancillary services associated with certain of
    our affiliated practices, we are paid additional fees based on a
          percentage of net revenue or pre-tax income related to such facilities
and services.                                               

Our Accounts Receivable. Each month, most of our affiliated practices sell all  
of their monthly accounts receivable to us. The purchase price generally equals 
the gross amounts of the accounts receivable recorded each month, subject to    
adjustment for certain potentially uncollectible amounts. We are making periodic
adjustments so that amounts paid for the accounts receivable of certain         
affiliated practices are adjusted upwards or downwards based on our actual      
collection experience.                                                          

The Term of Our Service Agreements. Our service agreements with affiliated      
practices have initial terms of 40 years. They are automatically extended       
(unless specified notice is given) for additional five-year terms.              

Other Provisions. The service agreement contains additional provisions,         
including:                                                                      

o    certain non-competition provisions;                              

o    cross-indemnification provisions;                                

  o    required insurance coverage to be obtained by us and our affiliated
practices; and                                              

 o    provisions requiring replacement of physicians retiring within the
first five years of the agreement and limiting the number of
    physicians who may retire within any one-year period thereafter.

Third Party Reimbursement Policies                                              

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A significant amount of the revenues of the practices we serve are derived from 
government and private third party payors. The health care industry is          
experiencing a trend toward cost containment. In addition, the federal          
government has implemented a resource-based relative value scale payment        
methodology under Medicare for physician services.                              

The resource-based relative value scale is a fee schedule that, except for      
certain geographical and other adjustments, pays similarly situated physicians  
the same amount for the same services. The fee schedule is adjusted each year.  
It is subject to increases or decreases at the discretion of Congress. To date, 
the implementation of the resource-based relative value scale method of payment 
has reduced payment rates for certain of the procedures historically provided   
by the practices that contract with us. Further changes in the Medicare fee     
schedule payment methodology could adversely affect our business.               

Physician reimbursement rates paid by private third-party payors are, in large  
part, still based on established charges. However, resource-based relative value
scale types of payment systems are being adopted by private third-party payors. 
Increased implementation of such payment systems may result in reduced payments 
from private third-party payors and thereby reduce our revenue. Although private
third party payors are adopting resource-based relative value scale-type        
reimbursement or other managed care-type restrictions on reimbursement, such    
rates still are generally higher than Medicare payment rates. Further reductions
in reimbursement levels or other changes in reimbursement for health care       
services could be detrimental to the practices with which we have contracted or 
our business. Additionally, the treatment methods for orthopaedic conditions may
shift from surgical treatments to non-surgical treatments. In addition to the   
above concerns, any payment reductions or change in the patient mix of any of   
the practices that contract with us that results in a decrease in patients      
covered by private third-party payors could be detrimental to us.               

AMBULATORY SURGICAL SERVICES                                                    

Ambulatory Services, Inc. is a subsidiary of ours formed to engage in           
development and management services for ambulatory surgery centers. ASI is      
seeking to enter into arrangements with physicians, physician groups and        
hospitals, to plan, construct, and operate and, in some instances, own a        
portion of ambulatory surgery centers. We anticipate that our development of    
ASI's operations will require substantial capital commitments that we are not   
currently able to make. We are exploring alternatives to obtain financing,      
including the possibility of selling an equity interest in ASI.                 

Currently, through an agreement with Greater Chesapeake Associates, LLC, ASI is 
providing management services with regard to a surgery center affiliated with   
that practice. We have an approximately 33% ownership interest in this surgery  
center. We hope to expand ASI's services to include comprehensive consultation  
and project planning in connection with the construction of surgery centers. In 
addition, our development services would involve assisting medical providers    
in:                                                                             

  o    obtaining necessary certificates of need and fulfilling other legal
requirements;                                               

   o    assisting in planning for construction, including site selection and
interior design; and                                        

o    developing a project schedule and project budget coordination of 
construction activities.                                    

Management services offered by ASI include the following:                       

   o    accounting/financial services - including annual budget preparation,
   preparation of financial statements and tax reports and, at the
option of the provider, billing and collection functions;   

o    vendor contracting - acquisition of supplies and pharmaceuticals;

o    payor contracting;                                               

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o    marketing - design and implementation of a marketing plan for the
surgery center;                                             

o    management information system support;                           

o    payroll services; and                                            

o    regulatory compliance support services.                          

ASI has hired a Vice President, Operations and has also retained several        
consultants to assist in the development of its business. ASI is actively       
marketing its services at the present time. While we are hopeful that our       
efforts will result in a profitable business, we cannot assure that ASI will be 
successful.                                                                     

HEALTHCAREREPORTCARDS.COM INTERNET SITE                                         

We currently operate HealthCareReportCards.com. This is an internet site        
that applies a proprietary risk adjustment formula to data acquired from the    
Health Care Financing Administration of the U.S. Department of Health and       
Human Services to rate the quality of outcomes at U.S. hospitals with respect   
to several medical specialties, including the following:                        

o    cardiology                                                       

o    orthopaedics                                                     

o    neuroscience                                                     

o    pulmonary/respiratory                                            

o    vascular surgery                                                 

HealthCareReportCards.com purchased its initial dataset, known as the MEDPAR    
(Medicare Provider Analysis and Review) file, from the Health Care Financing    
Administration. Working with Susan Des Harnis, Ph.D., Chairman of the           
Department of Health Administration and Policy at the Medical University of     
South Carolina, HealthCareReportCards.com developed a risk-adjustment model to  
take into account variations in the risk of illness of patients cared for by    
different hospitals. Utilizing the risk adjusted data,                          
HealthCareReportCards.com rates hospitals with a five-star rating system. To    
receive a five-star rating, a hospital must have a score in the top ten percent 
of all hospitals performing a rated procedure or caring for patients with the   
appropriate diagnosis and the difference between actual and predicted           
performance must be statistically significant.                                  

Access to the HealthCareReportCards.com site is free. HealthCareReportCards.com 
seeks to fund its operations through the sale to four and five-star rated       
hospital of banners, hyperlinks and similar types of advertising on its web     
site.                                                                           

GOVERNMENT REGULATION AND SUPERVISION                                           

The delivery of health care services has become one of the most highly          
regulated of professional and business endeavors in the United States. Both the 
federal government and the individual state governments are responsible for     
overseeing the activities of individuals and businesses engaged in the delivery 
of health care services. Federal law and regulations are based primarily upon   
the Medicare and Medicaid programs. Each of these programs is financed, at      
least in part, with federal funds. State jurisdiction is based upon the state's 
interest in regulating the quality of health care in the state, regardless of   
the source of payment.                                                          

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We believe our physician practice management operations materially comply with  
applicable laws. However, we have not received or applied for a legal opinion   
from counsel or from any federal or state judicial or regulatory authority with 
respect to our practice management operations. Additionally, many aspects of    
our business have not been the subject of state or federal regulatory           
interpretation. The laws applicable to us and the practices that contract with  
us are subject to evolving interpretations. If we, or these practices, are      
reviewed by a government authority, we may receive a determination that could   
be adverse to us or the practices. Furthermore, the laws applicable to either   
us or the practices may be amended in a manner that could adversely affect us.  

The federal health care laws apply to us when we submit a claim on behalf of a  
practice that contracts with us to Medicare, Medicaid or any other              
federally-funded health care program. The principal federal laws that we must   
abide by in these situations include:                                           

o    those that prohibit the filing of false or improper claims for   
federal payment;                                            

    o    those that prohibit unlawful inducements for the referral of business
 reimbursable under federally-funded health care programs; and

o    those that prohibit the billing to Medicare or Medicaid for      
   provision of certain services by a provider to a patient if the
        patient was referred by a physician and the referring physician or a
 member of his immediate family has certain types of financial
relationships with the provider.                            

False and Other Improper Claims. The federal government may impose criminal,    
civil and administrative penalties on anyone that files a false claim for       
reimbursement from Medicare, Medicaid or other federally-funded programs.       
Criminal penalties apply in the case of claims filed with private insurers.     
While the criminal statutes are generally reserved for instances involving      
fraudulent intent, the civil and administrative penalty statutes are applied by 
the government in an increasingly broad range of circumstances. For example,    
the government has taken the position that a pattern of claiming payment for    
unnecessary services or services that are substandard may violate these         
statutes if the practice (or the party submitting the claim on behalf of the    
practice) should have known the services were unnecessary or substandard.       
Additionally, the amount of documentation that must be compiled to support a    
claim has increased the possibility that a submitted claim may be improper. In  
1997, the Department of Health and Human Services issued new documentation      
guidelines applicable to Medicare claims involving the musculoskeletal system,  
which are substantially more burdensome than the previous requirements.         

In late 1998, the Inspector General of the Department of Health and Human       
Services issued compliance guidance for third-party medical billing companies.  
This guidance contains specific elements that companies which bill for provider 
clients should include in their compliance program and identifies specific risk 
areas for billing companies. The guidelines encourage billing companies to      
facilitate the restitution of overpayments, coordinate compliance matters with  
providers, refrain from submitting false or inappropriate claims, and terminate 
contracts with providers and/or report providers who engage in continued        
misconduct or fraudulent or abusive conduct.                                    

We believe that our billing activities on behalf of our affiliated practices    
comply with applicable law and we are working to insure that they comply with   
the third-party billing guidelines. Governmental authorities may challenge or   
scrutinize our activities. A determination that we or our practices that have   
contracts with us have violated applicable laws could have an adverse impact on 
us.                                                                             

Federal Anti-kickback Law. A federal law commonly known as the "Anti-kickback   
Law" prohibits the knowing or willful, solicitation, receipt, offer or payment  
of any remuneration which is made in return for:                                

 o    the referral of patients covered under Medicare, Medicaid and most
other federally-funded health care programs; or             

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o    the purchasing, leasing, ordering, or arranging for any good,    
 facility, items or service reimbursable under those programs.

The law also prohibits remuneration that is made for the recommendation of, or  
the arranging for, the purchasing, leasing, or ordering of any good, facility,  
item or service, reimbursable under those programs. The law has been broadly    
interpreted by a number of courts to prohibit remuneration that is solicited,   
received, offered or paid for otherwise legitimate purposes if one purpose of   
the arrangement is to induce referrals or the other proscribed activities. Even 
bona fide investment interests in a health care provider may be questioned under
the Anti-kickback Law. The penalties for violations of this law include:        

o    civil monetary penalties;                                        

o    criminal sanctions;                                              

   o    exclusion from further participation in federally-funded health care
programs (mandatory exclusion in certain cases);            

  o    the ability of the Secretary of Health and Human Services to refuse
to enter into or terminate a provider agreement; and        

o    debarment from participation in other federal programs.          

In 1991, the federal government published regulations that provide exceptions   
or "safe harbors," to the Anti-kickback Law. Among the safe harbors included in 
the regulations were:                                                           

o    provisions relating to the sale of physician practices;          

o    management and personal services agreements;                     

o    office and equipment rental agreements; and                      

o    employee relationships.                                          

Subsequently, in 1993 proposed regulations were published offering safe harbor  
protection to additional activities, including referrals within group practices 
consisting of active investors. Proposed amendments clarifying the existing     
safe harbor regulations were published in 1994. The failure of an activity to   
qualify under a safe harbor provision, while potentially leading to greater     
regulatory scrutiny, does not render the activity illegal.                      

There are several aspects of our relationships with our affiliated physicians   
to which the Anti-kickback Law may be relevant. In some instances, for example, 
the government may construe some of our marketing and managed care contracting  
activities as recommending patients to our affiliated physicians who pay us a   
management fee, in part, for such activities.                                   

On April 15, 1998, the Inspector General of the Department of Health and Human  
Services issued Advisory Opinion No. 98-4, which was a response to a request by 
a physician for an advisory opinion as to whether a proposed management         
services contract between a medical practice management company and a physician 
practice would constitute illegal remuneration as defined in the Anti-kickback  
Law. Under the facts as presented in the advisory opinion request, a physician  
practice management company proposed to enter into a management agreement with  
a physician medical practice, under which the management company would provide  
the clinic facilities, clinic personnel other than the physicians, and the      
operating services for the medical practice including accounting, billing and   
purchasing services. Additionally, the management company contracted to provide 
the medical practice "with management and marketing services for the clinic,    
including the negotiation and oversight of healthcare contacts with various     
payors, including indemnity plans, managed care plans, and federal healthcare   
programs." Also, the management company's activities on behalf of the medical   
practice included the establishment of provider networks, The management fee to 
be paid by the medical practice to the management                               

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company was, in part, based on a percentage of the medical practice's monthly   
net revenues. In the advisory opinion, the Inspector General determined that    
the proposed management services arrangement did not satisfy a safe harbor      
under the Anti-kickback Law. However, the fact that the proposed management     
services arrangement did not fit within a safe harbor did not mean that the     
proposed arrangement was necessarily unlawful. Rather, the Inspector General    
stated that it would be necessary to analyze the proposed arrangement on a      
case-by-case basis. In analyzing the proposed arrangement, the Inspector        
General determined that it had insufficient information to ascertain the level  
of risk of fraud or abuse presented by the proposed arrangement, because the    
proposed arrangement may include financial incentives to increase patient       
referrals through the marketing and managed care contracting services provided  
by the management company. Additionally, the Inspector General stated in the    
advisory opinion that the proposed arrangement could present a problem because  
the proposed arrangement contained no safeguards against over-utilization and   
may include financial incentives that increase the risk of abusive billing      
practices. Accordingly, the advisory opinion, while not concluding that the     
proposed management services arrangement was a violation of the Anti-kickback   
Law, did not conclude definitively that such arrangement would not result in a  
violation of the Anti-kickback Law.                                             

In addition, we own an interest in a joint venture (and may, in the future, own 
an additional interest in entities) which owns and operates an outpatient       
surgery center. Some of our affiliated physicians also own an interest in the   
joint venture (and others may, in the future own an interest in an entity that  
owns and operates an outpatient surgery center) and may refer their patients to 
the surgery center for treatment. The Inspector General has stated that a joint 
venture arrangement where Physicians are both investors in the joint venture and
in a position to refer patients to the joint venture may violate the            
Anti-kickback Law where remuneration paid to the physicians in exchange for     
referrals is disguised as profit distribution. Also, we provide management      
services to outpatient surgery centers. The Inspector General has stated that   
the provisions of certain marketing services under a management agreement may   
implicate the Anti-kickback Law, as discussed above.                            

Although general marketing and managed care contracting activities and the      
ownership of interests in an outpatient surgery center by both us and our       
affiliated physicians do not qualify for protection under the safe harbor       
regulations, we believe that our activities and joint venture ownership         
arrangements are not the type of activities and arrangements the Anti-kickback  
Law prohibits. We are not aware of any legal challenge or proceeding pending    
against similar physician practice management activities or joint venture       
arrangements under the Anti-kickback Law. A determination that we violated the  
Anti-kickback Law would be detrimental to us.                                   

The Stark Self-Referral Law. The Stark Self-Referral Law prohibits a physician  
from referring a patient to an entity that provides "designated health          
services" reimbursable by Medicare or Medicaid if the physician or an immediate 
family member has a financial relationship with the entity. "Designated health  
services" include physical therapy services, diagnostic imaging services, and   
orthotics and prosthetics devices and services some or all of which are         
furnished by our affiliated practices. In addition to the conduct directly      
prohibited by the law, the statute also prohibits schemes that are designed to  
obtain referrals indirectly that cannot be made directly. The penalties for     
violating the law include:                                                      

o    a refund of any Medicare or Medicaid payments for services that  
resulted from an unlawful referral;                         

o    civil fines; and                                                 

o    exclusion from the Medicare and Medicaid programs.               

On January 9, 1998, the Health Care Financing Administration issued proposed    
rules regarding the Stark Self-Referral Law as it relates to the designated     
health services listed above. The proposed rules state that the entity that     
provides the designated health services may be a physician's practice or any    
other entity that actually owns the operations of the designated health         
services. An entity that merely owns certain components of a health services    
operation, such as the building that houses the operations or the medical       
equipment used in the operations will not be considered as owning the           
operations of the health services. It is not clear whether and to what extent   
our provision of management services to our affiliated practices (including our 
provision of medical equipment, personnel and management services with respect  
to designated health services provided by our affiliated practices) and our     
receipt of a service fee based on net patient revenues would cause us to be     
deemed to own the designated health services operation. It is also not clear    
whether our provision of more limited services to the other practices that      
contract with us would raise this issue. In addition, the proposed regulations  
would apply to an entity that does not bill under its own Medicare number but   
receives payment for the services from the billing entity as part of a          
so-called "under arrangements" agreement (a term of art under the regulations   
relating to certain hospital                                                    

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arrangements) or similar agreements. It is not clear whether the term "similar  
agreements" would apply to our arrangements with practices that have contracted 
with us. If we are deemed to "own the operation" of designated health services  
or to be engaged in an arrangement similar to an "under arrangements" agreement,
with respect to designated health services which are billed by our affiliated   
practices, we would be deemed a provider of designated health services addressed
by the proposed rules.                                                          

We believe that we will not be deemed to be a provider of designated health     
services. However, if we are deemed a provider of designated health services for
purposes of the Stark Self-Referral Law, and accordingly, the recipient of      
referrals from physicians affiliated with practices that have contracted with   
us, such referrals will be permissible only if:                                 

o    the financial arrangements under the service agreements with the 
     practices meet certain exceptions in the Stark Self-Referral Law;

   o    the ownership of our stock by the referring physicians meets certain
investment exceptions under the Stark Self-Referral Law; and

 o    we have no other financial arrangements with a referring physician
       which are not covered by an exception under the Stark Self-Referral
Law.                                                        

We believe that the financial arrangements under our management agreements with 
the practices qualify for applicable exceptions under the Stark Self-Referral   
Law. However, the issuance of the final rules, a review by courts or a review   
by regulatory authorities may result in a contrary determination. The ownership 
of our stock by the referring physicians will not meet the Stark Self-Referral  
Law exception related to investment interests. The proposed rules provide that  
in order to meet the investment interest exception the investment has to be in  
securities which, at the time they were obtained, could be purchased on the     
open market. This proposed rule would prohibit referral relationships between   
a physician and an entity in which such physician (or a family member) owns     
stock or options if such stock or options were acquired prior to the time that  
the entity was publicly held. Some of the physicians in our affiliated          
practices acquired our stock prior to our initial public offering. Other        
physicians in our affiliated practices acquired our stock after our initial     
public offering. However, the Stark Self-Referral Law requires that to satisfy  
the investment interest exception, our stockholder equity would have to exceed  
$75 million.                                                                    

Accordingly, none of the physicians who are in our affiliated practices and who 
own stock in our company would be covered by the investment interest exception  
and therefore could not refer patients for any designated health services which 
we are deemed to provide.                                                       

With respect to our ambulatory surgery center operations, where we may either   
provide management services to an ambulatory surgery center owned by physicians 
or a physician practice, own an interest in an ambulatory surgery center jointly
with physicians or a physician practice, or both, the proposed rules provide    
that services furnished in an ambulatory surgery center will not be deemed      
"designated health services" if payment for those services is included within   
the ambulatory surgery center's payment rate. Since we intend to operate the    
ambulatory surgery centers which we manage or own an interest in a manner       
that is intended to comply with this exception, we do not believe that the Stark
Self-Referral Law will apply to our ambulatory surgery center operations.       

A determination that we have violated the Stark Self-Referral Law would have a  
material adverse effect on us.                                                  

State Anti-Kickback Laws. Many states have laws that prohibit payment of        
kickbacks in return for the referral of patients. Some of these laws apply only 
to services reimbursable under state Medicaid programs. A number of these laws  
apply to all health care services in the state, regardless of the source of     
payment for the service. Based on court and administrative interpretation of    
federal anti-kickback laws, we believe that most of these laws prohibit         
payments to referral sources where a purpose for the payment is the referral.   
Most state anti-kickback laws have received only limited judicial and           
regulatory interpretation. Therefore, it is possible that our activities may be 
found not to comply with these laws. Noncompliance with such laws could subject 
us and the physicians in our affiliated practices to penalties and sanctions.   

State Self-Referral Laws. A number of states have laws that are similar in      
purpose to the Stark Self-Referral Law but which impose different restrictions. 
Some states only prohibit referrals when the physician's financial relationship 
with a health care provider is based upon an investment interest. Other state   
laws apply only to a limited number of health services. Some states do not      
prohibit referrals, but require that a patient be informed of the financial     
relationship before the referral is made. We believe that our operations comply 
with the self-referral laws of the states in which the practices that contract  
with us are located.                                                            

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Fee-Splitting Laws. Most states prohibit a physician from splitting fees with a 
referral source. Some states have a broader prohibition against any splitting of
a physician's fees, regardless of whether the other party is a referral source. 
In most states, we believe that a management fee payment made by a physician to 
a management company would not be considered fee-splitting if the payment       
constitutes reasonable payment for services rendered to the physician or        
physician's medical practice.                                                   

We are paid by physicians (and their medical practices) for whom we provide     
management services. Our service agreements and management service agreements   
have been designed to comply with applicable state laws relating to             
fee-splitting. However, a state authority may nevertheless determine that we and
the practices that contract with us are violating the state's fee-splitting     
laws. Such a determination could render any of our service agreements in such   
state unenforceable or subject to modification in a manner that is adverse to   
us.                                                                             

In November 1997, pursuant to the request by Magan L Bakarania, M.D. the Florida
Board of Medicine issued a declaratory statement that payments of a percentage  
of a physician group's net income to a practice management company in return for
services constituted fee-splitting and therefore that could subject Dr.         
Bakarania to disciplinary action. The specific services to be provided by the   
management company, which the Florida Board of Medicine stated would, in their  
opinion, result in a prohibited fee-splitting arrangement were services intended
to increase the physician group's revenue by:                                   

o    increasing patient referrals through the creation of preferred   
provider networks;                                          

o    establishing managed care networks; and                          

o    negotiation of managed care contracts                            

The declaratory statement only applies to the physician that requested the      
declaratory statement (and certain other physicians who formally joined in the  
Florida Board of Medicine proceedings). The Florida Board of Medicine agreed to 
stay final issuance of the declaratory statement pending appeal of the decision 
by the physician practice management company to a Florida court.                

On October 2, 1998, TOC Specialists, P.L., an affiliated practice located in    
Tallahassee, Florida, filed a petition for declaratory statement with the       
Florida Board of Medicine requesting advice as to whether TOC Specialists, P.L. 
and its physician owners would be subject to discipline under the statutory     
prohibitions against fee-splitting, based upon the services agreement between us
and TOC Specialists, P.L. Because of the pending appeal of the declaratory      
statement issued with respect to Dr. Bakarania, the Florida Board of Medicine   
has agreed not to consider TOC Specialists, P.L.'s petition until the pending   
appeal has been concluded. Although the issuance of a declaratory statement by  
the Florida Board of Medicine with respect to TOC Specialists, P.L. stating that
the management services arrangement between us and TOC Specialists, P.L.        
violates the Florida fee-splitting statute would not directly affect us or our  
agreement with TOC Specialists, P.L. because we are not a party to the petition 
filed by TOC Specialists, P.L., such an adverse decision would be detrimental to
us since it could serve as the basis for an assertion by TOC Specialists, P.L.  
that the services agreement between us and the practice results in a violation  
of Florida law and subjects the TOC Specialists, P.L. physicians to disciplinary
action unless the services agreement is either terminated or modified in a      
manner that may be detrimental to us.                                           

Corporate Practice of Medicine. Most states prohibit corporations from engaging 
in the practice of medicine. Many of these state doctrines prohibit a business  
corporation from employing a physician. Some states allow a licensed physician  
to affiliate with corporate entities for the delivery of medical services. On   
the other hand, some states interpret the "practice of medicine" broadly to     
include activities such as ours. This is true even if the corporation's         
activities only have an indirect impact on the practice of medicine, the        
physician rendering the medical services is not an employee of the corporation, 
and the corporation exercises no discretion with respect to the diagnosis or    
treatment of a particular patient.                                              

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We structure our service and management service agreements so that we do not    
exercise any responsibility on behalf of physicians that should be construed as 
affecting the practice of medicine. Accordingly, we believe that our operations 
do not violate state laws relating to the corporate practice of medicine. Such  
laws and legal doctrines have been subjected to only limited judicial and       
regulatory interpretation with respect to physician practice management         
companies. If challenged, we may not be considered to be in compliance with all 
such laws and doctrines. A determination in any state that we are engaged in the
corporate practice of medicine could render our agreements with practices       
located in such state unenforceable or subject to modification in a manner      
adverse to us.                                                                  

Health Care Reform. In recent years, a variety of legislative proposals designed
to change access to and payment for health care services in the United States   
have been introduced. Although no health reform proposals have been passed by   
Congress to date, other proposed health care reform legislation, including the  
regulation of patient referral practices, reimbursement of health care          
providers, formation and operation of physician joint ventures and tort reform, 
has been and may be considered by Congress and the legislatures of many of the  
states in which we operate. No predictions can be made as to whether health care
reform legislation or similar legislation will be enacted or, if enacted, its   
effect on us. Any federal or state legislation prohibiting, among other things, 
the referral to or treatment of patients at surgery centers by health care      
providers with an investment interest in the surgery centers may have a material
adverse effect on our surgery center joint venture. In the event that federal or
state regulations prohibit the ownership of surgery centers by physicians, we   
would seek to purchase the interests held by the physicians. We believe that we 
would be able to purchase the interest of the physician members of our joint    
ventures, if required.                                                          

Ambulatory Surgery Center Regulatory Environment. Our surgery center and the    
physicians utilizing our centers are subject to numerous regulatory,            
accreditation and certification requirements, including requirements related to 
licensure, certificate of need, reimbursement from insurance companies and other
private third-party payors, Medicare and Medicaid participation and             
reimbursement, and utilization and quality review organizations. The grant and  
renewal of these licenses, certifications and accreditations are based upon     
governmental and private regulatory agency inspections, surveys, audits,        
investigations or other reviews, including self-reporting requirements. An      
adverse review or determination by any regulatory authority could result in     
denial of a center's plan of development or proposed expansion of facilities or 
services, the loss or restriction of licensure by a center or one of its        
practitioners, or loss of center certification or accreditation. A regulatory   
authority could also reduce, delay or terminate reimbursement to a center or    
require repayment of reimbursement received. The loss, denial or restriction of 
any such licensure, accreditation, certification (including certificates of need
or exemption therefrom) or reimbursement through changes in the regulatory      
requirements, an enforcement action, or otherwise, could have a material adverse
effect on us.                                                                   

AMA Restrictions. In June 1994, the American Medical Association severely       
restricted the ability of physicians to refer to entities in which such         
physicians have an ownership interest, except when the physician directly       
provides care or services at a facility that is an extension of the physician's 
practice and in very limited circumstances such as in rural areas where there is
lack of available capital from non-physician sources. If the American Medical   
Association changes its ethical requirements to preclude all referrals by       
physicians, physician referrals to our ambulatory surgery centers could be      
adversely affected. It is possible that a prohibition on physician ownership    
could adversely affect our future operations, although we believe that the      
majority of physicians would continue to perform surgery at the surgery centers 
even if they were no longer limited partners.                                   

Infectious Waste. As generators of infectious waste, the Company's surgery      
centers are required to satisfy all federal, state and local waste disposal     
requirements. If any regulatory agency finds a center to be in violation of     
waste laws, penalties and fines may be imposed for each day of violation, and   
the affected center could be forced to cease operations. The Company believes   
its surgery centers dispose of such waste properly.                             

Antitrust Laws. The federal antitrust laws (principally the Sherman Act, the    
Clayton Act and the Federal Trade Commission Act) are designed to maintain      
market competition. They address both structural issues (market share through   
merger, acquisition or otherwise) and conduct issues (contracts or combinations 
in restraints of trade). The Federal Trade Commission and the Department of     
Justice addressed competitive issues, both structural and conduct, in the       
health care industry in their 1996 Statements of Enforcement Policy in Health   
Care. The statements could apply to various aspects of our business. While we   
believe that we are in compliance with these laws, there is no assurance that   
our operations will not become the focus of inquiry and potential challenge.    
Responding to such challenges could result in substantial costs.                

Insurance Licensure Laws. All states have licensure requirements to regulate    
the business of insurance and the operation of HMOs. Some states also have      
separate licensure requirements for provider-sponsored managed care networks    
(also known as "provider-sponsored organizations," or "PSOs") and for other     
managed care entities such as third-party administrators. A person who fails to 
obtain the appropriate insurance license may be subject to civil and criminal   
penalties in certain states. These licensure requirements for insurers, HMOs    
and PSOs would not generally apply to companies that provide only management    
services to physician providers. However, there is little uniformity in how the 
states interpret the scope of their respective laws and regulations.            

We believe that our operations do not violate insurance licensure laws for      
insurers, HMOs and PSOs in the states where we currently do business. Yet,      
there is a risk that state regulatory authorities may apply these laws to       
require us to be licensed as an insurer, an HMO, or a PSO. Compliance with such 
laws could result in substantial costs. In addition, practices that contract    
with us may require licensure as PSOs under separate statutory requirements for 
PSOs or, if such practices enter into capitated or other risk-assumption        
arrangements, under requirements relating to HMOs or insurers.                  
See "Provider Risk Assumption," below.                                          

Finally, we may need to obtain separate licensure as a third-party              
administrator, as a utilization review agent, or as an HMO or insurance         
marketing agent if our services for physicians are deemed by a state authority  
to involve "administration," "utilization review" or "marketing functions." If  
we are deemed to be in noncompliance with insurance licensure laws, our         
business would be adversely affected.                                           

In Florida, entities performing "fiduciary or fiscal intermediary services" on  
behalf of health care professionals who contract with HMOs must register with   
the Florida Department of Insurance under a "Fiscal Intermediary Services" law. 
This statue defines "fiduciary or fiscal intermediary services" to include (i)  
receipt or collection of reimbursements for services rendered on behalf of      
health care professionals; (ii) patient and provider accounting; (iii) financial
reporting and auditing; (iv) receipts and collections management; (iv)          
compensation and reimbursement disbursement services; and (v) other related     
fiduciary services rendered pursuant to contracts between health care           
professionals and health maintenance organizations. A party otherwise qualifying
as a fiscal intermediary services organization and which is operated for the    
purpose of acquiring and administering provider contracts with managed care     
plans for professional health  care services must secure and maintain in force a
fidelity bond in the minimum amount of $10 million. The fidelity bond must (i)  
be posted with the state; (ii) be on an approved form; (iii) insure against     
misappropriation of funds by the registrant; and (iv) run to the benefit of the 
interested managed care plans, subscribers and health care providers.           

We are reviewing the management services we provide to Florida practices and    
investigating the possible application of this law to our Florida operations. If
we conclude the law applies to those operations, we will take appropriate       
steps to register or otherwise comply with its requirements.                    

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Provider Risk Assumption. When health care providers or provider networks agree 
to provide services on a capitated basis, they assume "insurance risk" and may  
be regarded by the regulatory authorities as conducting an "insurance business" 
for which licensure is required. Whether licensure as an insurer, health        
maintenance organization or other equivalent will be required depends on the    
relationship between the provider or network and the individuals who receive    
the services.                                                                   

If the relationship is "direct" such that the provider network has directly     
contracted with the "insured" (whether and individual or group policyholder) to 
provide services in return for a fixed payment, all jurisdictions would likely  
find the provider or provider network to be engaged in the "doing of an         
insurance business" requiring licensure and full regulation equivalent to that  
which applies to commercial health insurers and health maintenance              
organizations.                                                                  

If, however, the provider or network has contracted with a licensed insurer or  
health maintenance organization to provide services to that entity's policy     
holders or members, licensure is not required in most states, even if the       
provider or network agreed to do so on a capitated basis and thereby assumed    
insurance risk. These latter arrangements, where a licensed insurer or health   
maintenance organization is interposed between the insured and the capitated    
provider or network, are referred to as "downstream" risk-sharing arrangements. 

Most states that have considered the questions have determined on policy        
grounds not to regulate or require licensing of a capitated provider or         
provider network so long as it is "downstream" from a licensed insurer or       
health maintenance organization. However, a few other states will require       
licensing of "downstream" capitation arrangements of those arrangements involve 
"global" or "episode of care" capitation allowances.                            

On behalf of certain of the practices, we regularly negotiate "downstream"      
capitated service arrangements, including global and episode of care capitation 
allowances. It would not be practical to have the practices licensed as either  
an insurer of health maintenance organization if this were required as a result 
of those capitation arrangements. The inability to enter into such capitation   
arrangements would adversely affect us.                                         

Managed Care Contracting Laws. An increasing volume of state regulation         
addresses the terms of contracts between managed care payors and managed care   
providers. Some of these laws and regulations can affect the composition of a   
managed care network. Other laws and regulations are aimed at protecting health 
care consumers. A determination that we or our affiliated practices do not      
comply with such laws could be detrimental to us.                               

Physician Incentive Plan Rule. A regulation of the Health Care Financing        
Administration, United States Department of Health and Human Services, imposes  
limitations with respect to, and prescribes the terms and conditions under      
which, health maintenance organizations operating "physician incentive plans"   
may offer incentives to physicians that could tend to reduce or limit medically 
necessary services to an enrollee. This regulation applies to physician         
incentive plans which base compensation, in whole or in part, on the use or cost
of services furnished to Medicare beneficiaries or Medicaid recipients. Among   
other things, this regulation requires the organization to provide adequate     
stop-loss protection for physicians if the organization's system for            
compensating physicians does not provide mandated limits on the amount of       
physician compensation that is put at risk by the incentive plan. This          
regulation may adversely affect our operations and the operations of our        
affiliated practices.                                                           

Employee Leasing Services. Several states have legislation prohibiting the      
provision of "employee leasing services" without a license. We                  

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continue to evaluate the application of such laws to our service agreements. We 
will seek licensure where we believe it to be appropriate. Failure to obtain a  
license may result in civil or criminal penalties.                              

OUR COMPETITION                                                                 

Physician Practice Management Services                                          

We compete with numerous entities. Physician practice management companies and  
some hospitals, clinics and HMOs also engage in activities similar to ours.     
Several of our competitors have established operating histories and greater     
resources than ours. We may not be able to compete effectively with such        
competitors.                                                                    

The practices that contract with us compete with local musculoskeletal care     
service providers as well as some managed care organizations. We believe that   
changes in governmental and private reimbursement policies have increased       
competition among musculoskeletal care providers. We believe that cost,         
accessibility and quality of services provided are the principal factors that   
affect competition. If affiliated practices are not able to compete effectively 
in the markets that they serve, we would be adversely affected.                 

The practices that contract with us also compete with other providers for       
managed musculoskeletal care contracts. We believe that trends toward managed   
care increased competition for such contracts. Other practices and management   
service organizations may have more experience in obtaining such contracts than 
us or the practices that contract with us. We may not be able to successfully   
acquire sufficient managed care contracts to compete effectively.               

Ambulatory Surgery Center Services                                              

The Company competes principally with hospitals and other operators of          
freestanding surgery centers to attract physicians and patients to its          
ambulatory surgery centers and for inclusion in managed care programs. In       
developing new surgery centers and acquiring existing surgery centers the       
Company will compete with other surgery center companies and local hospitals. In
competing for physicians and patients, important competitive factors are        
convenience, cost, quality of service, physician loyalty and reputation.        
Hospitals may have competitive advantages in attracting physicians and patients,
including established standing in the community, historical physician loyalty   
and convenience for physicians making rounds or performing inpatient surgery in 
the hospital. However, the Company believes that many physicians may prefer to  
utilize and affiliate with freestanding ambulatory surgery centers due to       
greater scheduling flexibility, more consistent nurse staffing and faster       
turnaround time between cases, thereby allowing a physician to perform more     
surgeries in a defined period of time.                                          

Health Care Rating Web Site                                                     

Several companies have instituted health care rating services on the internet.  
In addition, because barriers to entry are low, we anticipate that other        
companies may seek to begin health care rating services on the internet. As a   

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result, competition to obtain advertising from hospitals and other health care  
providers is expected to intensify in the future.                               

We attempt to compete by emphasizing the objective nature of our data, the      
source of our data and the sophistication of the methodology used to provide our
data. We think that these factors should make HealthCareReportCards.com an      
attractive site for advertising by those hospitals that have received a four or 
five-star rating.                                                               

OUR EMPLOYEES                                                                   

As of January 1, 1999, we had 885 employees, of whom 59 were located at our     
headquarters and 826 were located at our affiliated practices. As a result of   
the proposed restructuring transaction and interim arrangements with certain    
participating practices, we anticipate that we will no longer employ a          
substantial majority of these persons.                                          

OUR CORPORATE LIABILITY AND INSURANCE                                           

Professional malpractice claims and similar claims are risks in connection with 
the provision of medical services. Under our agreements with practices we serve,
we do not influence or control the practice of medicine by physicians. We do not
have responsibility for compliance with regulatory requirements directly        
applicable to physicians and physician groups. Nevertheless, as a result of our 
relationship with medical practices, we could be subject to medical malpractice 
actions. Our medical professional liability insurance provides coverage of up to
$5 million per incident, with maximum aggregate coverage of $5 million per year.
Our general liability insurance provides coverage of up to $5 million per       
incident, with maximum aggregate coverage of $5 million per year. We believe our
insurance will extend to professional liability claims asserted against our     
employees that work at our affiliated practices. The practices that have        
contracted with us also maintain comprehensive professional liability insurance.
The cost of insurance and expenses resulting from claims against us that exceed 
our policy limits could adversely affect us.                                    

RISK FACTORS                                                                    

If we consummate a proposed restructuring transaction that substantially        
restructures our arrangements with ten practices, we will confront substantial  
challenges. Under the proposed restructuring transaction, we will sell to the   
practices non-medical assets relating to the practices. As part of the          
transaction, we will also enter into new management service arrangements with   
the practices that will reduce the term of the management agreements from 40    
years to terms generally expiring between November 2001 and March 2003. We will 
limit our services only to specific practice needs. Fees payable under the      
management service agreements will be substantially reduced. In return, we will 
receive approximately $17.0 million in cash and 3,786,957 shares of our common  
stock. In addition, approximately $.6 million related to a convertible debenture
by us to physicians in one of our affiliated practices will be canceled. The    
amount of cash we receive in the restructuring transaction is subject to        
adjustment based on the value, at the closing of the restructuring transaction, 
of most of the assets that we are selling to the practices and liabilities being
assumed by the practices. If the restructuring transaction is completed, we will
confront the following risks:                                                   

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  o    Our revenues will decrease substantially - Although our obligations
    to the participating practices under the new management services
  agreements will also be reduced substantially, we will have to
       institute additional cost saving measures in order to avoid losses.

o    We may not receive revenues from service agreements with the     
         participating practices after the term of the new management services
         agreements - This means that between November 2001 and March 2003, we
  will no longer receive revenues from some of the participating
          practices unless they agree to an extension of the management services
          agreement. Presently, we do not anticipate that such an extension will
     occur. Some of the practices have agreed to pay a lump sum fee at
          closing, and will provide no further payments under the agreements. As
          a result, we increasingly must rely on our other businesses, including
      our health care rating internet site and ambulatory surgery center
businesses.                                                 

  o    The other businesses on which we rely may not be successful - While
       we believe that the health care rating internet site and ambulatory
surgery center businesses that we will focus on present more
  promising opportunities for growth than our physician practice
        management business, these businesses have only recently been formed
and may not be successful.                                  

   o    We will continue to have substantial bank indebtedness - Although we
intend to use all of the cash proceeds of the restructuring 
        transaction to pay down our bank indebtedness, we anticipate that we
     will continue to have approximately $25.6 million of indebtedness
    under our bank credit facility. Our obligations under the credit
         facility will divert resources that otherwise would be useful for our
   non-physician practice management businesses. Moreover, we will
      continue to be in default under our credit facility. While we have
        been engaged in discussions with our banks to restructure our credit
arrangement, we cannot assure that we will be successful in 
       restructuring this arrangement. If the banks were to accelerate our
   obligations under the credit facility, our viability as a going
concern would be severely impaired.                         

Our Long-term Viability Will Be at Risk If the Restructuring Transaction Is Not 
Consummated. While we will confront significant risks if the restructuring      
transaction is consummated, we believe we will confront even more substantial   
risks if the restructuring transaction is not consummated. Among the risks we   
will confront if the restructuring transaction is not consummated are the       
following:                                                                      

  o    We may confront additional disputes with our affiliated practices -
Currently, we are in litigation with three of our affiliated
 practices. Two of the other affiliated practices that are not
 participating in the restructuring transaction are seeking to
     terminate their service agreements based on allegations (which we
  dispute) that we are in default of our obligations under their
        agreements. If the restructuring transaction is not approved, we may
   well confront additional disputes with the practices that would
      otherwise participate in the restructuring transaction. Several of
          these practices have, in the past claimed that we are in default under
       the terms of the service agreement (we do not agree), and some have
         even threatened litigation. The diversion of management resources and
      financial costs in connection with these disputes would materially
adversely affect us.                                        

    o    We would continue to be in default under our credit facility - We are
          not currently in compliance with certain financial covenants under our
         credit facility. If the restructuring transaction is not completed we
    believe it is unlikely that we will be able to comply with those
       covenants. Based on our current operating structure, if our lenders
     determine to take action to enforce their rights under the credit
          facility, our long term viability as a going concern would be severely
impaired.                                                   

o    Our operating performance has declined - Due to the proposed     
      restructuring transaction and transactions in 1998 that led to new
        management service arrangements with four practices, we have written
        down our long-term service agreements by $94.6 million. Largely as a
         result, we recorded a net loss for 1998 of $61.8 million, as compared
         to a net income of $5.9 million for 1997. Our operating results would
         have declined even if we had not taken the write-off. In light of the
     transitional nature of our operations, we may not be able to once
again become profitable.                                    

Our Web Site Business Could Be Adversely Affected If We Are Not Able to Resolve 
Issues With the Former PPI Stockholders                                         

       We believe that largely because of the difficulties we encountered in the
latter part of 1998, the former stockholders of PPI raised certain issues       
relating to the transaction in which we acquired PPI. We hired special counsel  
to assist us in analyzing their contentions. After completion of the analysis   
and extensive negotiations, we determined to seek to reach an amicable          
resolution of the issues. We have entered into an agreement in principle with   
the former PPI stockholders to resolve this matter. The agreement provides for  
the following:                                                                  

o      We will form a new company that will own the HealthCareReportCards.com   
 web site and other related internet products. (It is possible that,
       instead of a new company, our wholly-owned Health Care Report Cards, Inc.
      subsidiary will be subject to the following provisions.) With respect to
       the new company, the agreement in principle provides, among other things,
for the following:                                                

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 o      The former PPI stockholders will have a 25 percent ownership
          interest in the new company. Peter A. Fatianow, an employee of
             Specialty Care Network who developed a new product to be included
      in our healthcare rating web site, will own a five percent
              interest in the new company. The remainder will initially be owned
by us.                                              

    o      The PPI stockholders' 25 percent ownership position will not be
           diluted unless certain events occur, including the reduction of
            our stock ownership interest below 50.1 percent after completion
            of an initial round of financing or below 55 percent following a
subsequent round of financing.                      

       o      Until their ownership interest in the new company is reduced below
              five percent, the PPI stockholders will have representation on the
           new company's Board of Directors proportionate to the amount of
         stock that they own. Certain corporate matters will require a
supermajority vote of the board of directors.       

   o      We will facilitate financing to fund the operations of the new
              company. If we are unable to facilitate a financing of at least $4
            million by December 31, 1999, we will transfer sufficient shares
             of the new company stock that we own so that the PPI stockholders
     will become the majority stockholders of the new company.

      o      The new company will provide specified compensation to the former
        PPI stockholders (who will be employees of the new company).

o      We will guarantee payment of new company expenses until December 31, 1999
       or, if sooner, the date the new company receives third party financing of
$1 million.                                                       

o      The former PPI stockholders will have specified preemptive rights,       
tag-along rights and registration rights with respect to their new
company shares.                                                   

o      We will sell most of the assets of PPI to the former PPI stockholders for
      nominal consideration. We will retain revenues from PPI contracts earned
  through March 31, 1999, and will fund up to a maximum of $500,000 of
expenses of the PPI business through December 31, 1999.           

o      The PPI stockholders will return the 420,000 shares of our common stock  
   that they received in connection with our acquisition of PPI. We have
     agreed to reimburse the PPI stockholders for any tax liability they may
incur with regard to the return of the shares.                    

o      The PPI stockholders will return the options to purchase 760,000 shares  
of our common stock that they now hold.                           

o      The parties to the agreement will mutually release each other from claims
relating to our acquisition of PPI.                               

        The agreement in principle is subject to the preparation and execution
of a definitive agreement. We are optimistic, but cannot assure, that a         
definitive agreement will be signed.                                            

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We Will Need Additional Financing - The contraction of our physician practice   
management business, and our efforts to establish our other businesses will     
cause us to seek additional capital. In the future we may seek additional funds 
through debt financing or the issuance of equity or debt securities. We may not 
be able to secure sufficient funds on terms acceptable to us, if at all. If     
equity securities are issued, either to raise funds or in connection with future
affiliations, our stockholders' equity may be diluted. If additional funds are  
raised through debt, we may be subject to significant restrictions. As noted    
above, we are currently in default under our bank credit facility due to our    
failure to comply with certain financial covenants. Our ability to effect       
additional financings will likely continue to be impaired unless we can         
successfully restructure our indebtedness. We cannot assure that we will be able
to obtain a restructured loan arrangement.                                      

We anticipate that, in order to raise required capital, we will have to sell a  
portion of the equity of our subsidiaries that operate our health care rating   
web site and ambulatory surgery center businesses. Such sales will decrease our 
share of revenues and profits, if any, of these entities.                       

Our Stock Price Has Declined Markedly. While we cannot identify with certainty  
the cause for the decline, we believe the following factors, among others have, 
and some may continue to have an adverse effect on our stock price:             

o    conditions in the physician practice management industry;        

o    changes in earnings estimates by securities analysts;            

o    announcements regarding non-compliance with bank covenants;      

o    litigation;                                                      

o    change in accounting rules regarding amortization period for     
intangible assets; and                                      

o    operating and financial results.                                 

Variations in our operating and financial results have been caused by the       
timing of the actions by affiliated practices that we believe are related to    
the decline in our stock price, such as diverting accounts receivables          
receipts, non-payment of service fees and engaging litigation against us.       

We Depend on Our Affiliated Practices and Physicians. If the practices that     
contract with us are not successful, we will be materially adversely affected.  
Moreover, certain of our affiliated practices have claimed, for various reasons,
that their service agreement is no longer in effect. Others have attempted to   
invoke termination provisions based on a contention that we have defaulted in   
carrying out our obligations under the service agreements. We believe that these
claims are invalid. Nevertheless, if the practices are able to terminate any of 
our service agreements, we could be materially adversely affected. Some of the  
practices that contract with us derive a significant portion of their revenue   
from a limited number of physicians. A practice's loss of one or more key       
members could reduce our revenue.                                               

There is a Risk of Change in Payment for Medical Services. We may not be able to
offset successfully any or all payment reductions that may be imposed by        
government and private third party payors. The health care industry is          
experiencing a trend toward cost containment. Government and private third-party
payors are imposing lower reimbursement and utilization rates and negotiating   
reduced payment schedules with service providers. Reductions in payments to     
health care providers or other changes in reimbursement for health care services
may have a negative effect on us. See "Business - Third Party Reimbursement."   

Our Business is Extensively Regulated by the Government. The delivery of health 
care is subject to extensive federal and state regulation. Much of this         
regulation is complex and open to different interpretations. We believe our     
operations materially comply with applicable laws. Nevertheless, a review of    
our operations by federal or state                                              

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judicial or regulatory authorities could result in a determination that we      
violated one or more provisions of federal or state law.                        

The federal and state laws to which we are subject cover a broad range of       
activities. Among other things, these laws:                                     

o    prohibit the filing of false or other improper medical claims;   

    o    prohibit "kickback" and similar activities intended to induce patient
referrals or the ordering of reimbursable items or services;

o    prohibit physicians from making referrals to entities providing  
 "designated health services" with which the physicians have a
financial relationship;                                     

o    prohibit fee-splitting under certain circumstances; and          

o    prohibit corporations from engaging in the practice of medicine. 

In addition, a variety of laws of general applicability many have a restrictive 
effect on our operations and activities. These laws include:                    

o    antitrust;                                                       

o    insurance;                                                       

o    environmental;                                                   

o    occupational safety;                                             

o    employment;                                                      

o    medical leave; and                                               

o    civil rights laws.                                               

Violations of these laws could result in:                                       

o    severe civil or criminal penalties;                              

o    exclusion from participation in Medicare and Medicaid programs or
other federally funded health care programs; and            

o    censure or delicensing of physician-violators.                   

See "Government Regulation and Supervision."                                    

There have been numerous recent federal and state initiatives for comprehensive 
or incremental reforms affecting the payment for and availability of health     
care services. Many of the proposals under consideration could adversely affect 
us if they are enacted.                                                         

Several states have legislation prohibiting the provision of "employee leasing  
services" without a license. We are evaluating the application of such laws to  
our provision of non-physician personnel to physician practices. We will seek   
licensure where it is appropriate. We may not receive the license for which we  
apply. Our failure to obtain a license where required may result in civil or    
criminal penalties. Additionally, lack of licensure may affect our ability to   
provide personnel in accordance with the terms of our service agreements.       

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We Depend on Our Information Systems. Our information systems are needed to:    

   o    helping our affiliated practices realize operating efficiencies; and

  o    negotiating, pricing and managing capitated managed care contracts.

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We must continue to invest in, and administer, management information systems to
support these activities. There may be unanticipated delays, complications and  
expenses in implementing, integrating and operating these systems. We will have 
to modify, improve or replace these systems if new technologies become          
available. Modifications, improvements or replacements could be expensive and   
interrupt our operations. We may not be able to implement successfully and      
maintain adequate practice management, financial and clinical information       
systems.                                                                        

We May be Affected by the Year 2000 Issue. The Year 2000 issue is the result of 
computer programs being written using two digits rather than four to define the 
applicable year. In other words, date-sensitive software may recognize a date   
using the "00" as the year 1900 rather than the year 2000. This could result in 
system failures or miscalculations causing disruptions of operations,           
including, among others, a temporary inability to process transactions, send    
invoices, or engage in similar normal business activities.                      

Because we were formed in 1996, most of our corporate computer hardware is      
relatively new. In addition, most of the software applications are "off the     
shelf." All vendors of these "off the shelf" products have been contacted and   
remediation activities are underway with respect to those applications that are 
not currently Year 2000 compliant. Internal applications are currently being    
reviewed and updated. However, if we fail to attain compliance by Year 2000, we 
could be materially adversely affected.                                         

We are seeking to coordinate our efforts to address the Year 2000 issue with    
our affiliated practices, payors and vendors. However, the systems of other     
companies on which we rely may not be timely converted. A failure to convert by 
another company, or a conversion that is incompatible with our systems, could   
have a material adverse effect on us.                                           

There Are Risks Associated with Our Managed Care Contracts. Our success in our  
physician practice management operations will depend in part upon our and our   
affiliated practices' abilities to negotiate contracts with HMOs, employer      
groups and other private third-party payors. We may not be able to enter into   
satisfactory arrangements with such payors for reasons beyond our control.      

We have negotiated contracts providing a fixed global fee for each episode of   
care covering certain musculoskeletal procedures. Certain affiliated practices  
also have other capitated fee arrangements that existed prior to their          
affiliation with us. We anticipate that our affiliated practices may enter into 
additional contracts based on capitated and global fee arrangements. To the     
extent that patients or enrollees covered by such arrangements require more     
frequent or more extensive care than anticipated, our affiliated practices      
would bear the cost. In the worst case, revenue negotiated under these          
contracts would be insufficient to cover the costs of the care provided. See    
"Business - Payor Contracting."                                                 

Several states have regulations prohibiting physicians from entering into       
capitated payment or other risk sharing contracts except through HMOs or        
insurance companies. In addition, some states subject physicians and physician  
networks to insurance laws and regulations which provide for minimum capital    
requirements. We would be adversely affected if practices that contract with us 
are unable to enter into capitated fee arrangements. Moreover, the costs of     
compliance with insurance laws may be significant. See "Government Regulation   
and Supervision - Insurance Laws."                                              

We may not establish or maintain satisfactory relationships with managed care   
and other third-party payors. In addition, we may lose significant revenue as a 
result of the termination of third-party payor contracts or otherwise.          

We Face Intense Competition. Several companies with established operating       
histories and greater resources than ours are pursuing management contracts with
musculoskeletal practices or development and management services arrangements   
for ambulatory surgery centers. Because of the depressed level of our stock     
price and our limited financial resources, we do not believe that we can        
complete any additional affiliations with musculoskeletal medical               

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practices on terms beneficial to us. Moreover, unless we can obtain financing   
for our ambulatory surgery center business, we will not be able to compete      
effectively. In addition, practices that have contracted with us may not be     
able to compete effectively in the markets they serve.                          

We Depend Upon Our Key Personnel. We are dependent upon the ability and         
experience of our executive officers, as well as on our other key personnel. If 
we are unable to retain these persons, or if we are unable to find additional   
management and other key personnel as required, we could be adversely affected. 
We have employment contracts with all but one of our executive officers.        

Our Insurance May Be Inadequate to Protect us From the Costs of Potential       
Liability and Legal Proceedings. The provision of medical services by           
physicians entails an inherent risk of exposure to professional malpractice     
claims and other similar claims. While the practices that contract with us      
generally maintain malpractice insurance, any claim asserted against any of     
those practices may not be covered by, or may exceed the coverage limits of,    
applicable insurance.                                                           

We do not engage in the practice of medicine. Nevertheless, we could be         
implicated in professional malpractice and similar claims. Although we maintain 
insurance, claims asserted against us for professional or other liability may   
not be covered by, or may exceed the coverage limits of, our insurance.         

The availability and cost of professional liability insurance is beyond our     
control. We may not be able to maintain insurance in the future at a cost that  
is acceptable. See "Corporate Liability and Insurance."                         

There are Risks Related to Our Purchase of Our Affiliated Practices'            
Receivables. We purchase each of our affiliated practices accounts receivable   
each month. The purchase price for such accounts receivable generally equals the
gross amounts of the accounts receivable recorded each month, less:             

o    adjustments for contractual allowances;                          

o    allowances for doubtful accounts; and                            

o    other potentially uncollectible amounts based on the practice's  
historical collection rate, as determined by us.            

Actual collections may be less than the amounts we paid for the receivables, or 
payment of receivables may not be made on a timely basis.                       

The Market for Internet Advertising is Uncertain. We expect that                
HealthCareReportCards.com will seek to derive a substantial amount of its       
revenues from advertising for the foreseeable future, and demand and market     
acceptance for internet advertising is uncertain.                               

There are currently no standards for the measurement of the effectiveness of    
internet advertising, and the industry may need to develop standard             
measurements to support and promote internet advertising as a significant       
advertising medium. If such standards do not develop, existing advertisers may  
not continue their levels of internet advertising. Furthermore, advertisers     
that have traditionally relied upon other advertising media may be reluctant to 
advertise on the internet. Our web site business would be adversely affected if 
the market for internet advertising fails to develop or develops more slowly    
than expected.                                                                  

Software programs that limit or prevent advertising from being delivered to an  
internet user's computer are available. Widespread adoption of this software    
could adversely affect the commercial viability of internet advertising.        

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We May Be Sued For Information Retrieved from the Web. We may be subjected to   
claims for defamation, negligence, copyright or trademark infringement,         
personal injury or other legal theories relating to the information we publish  
on the HealthCareReportCards.com web site. These types of claims have been      
brought, sometimes successfully, against online services as well as other print 
publications in the past. We could also be subjected to claims based upon the   
content that is accessible from our Web sites through links to other Web site.  

There is Intense Competition for Internet-based Business. The number of web     
sites competing for the attention of health care related advertisers has        
increased and we expect it to continue to increase. Because                     
HealthCareReportCards.com is a relatively new business, it must compete with    
more established and better financed entities. Moreover, since barriers to entry
are not great, increased competition is likely. This could result in price      
reductions and reduced margins, which could adversely affect our web site       
business.                                                                       

The Receipt of Advertising Revenues by Our Web Site is Uncertain. The time      
between the date of initial contact with a potential advertiser for the         
HealthCareReportCards.com web site and the execution of a contract with the     
advertiser is not predictable, and is subject to delays over which we have      
little or no control, including:                                                

o    customers' budgetary constraints;                                

o    customers' internal acceptance reviews;                          

o    the success and continued internal support of advertisers' own   
development efforts; and                                    

   o    the possibility of cancellation or delay of projects by advertisers.

We may expend substantial funds and management resources and yet not obtain     
advertising revenues. Accordingly, our results of operations may be adversely   
affected if sales to advertisers are delayed or do not otherwise occur.         

We are Dependent on Continued Growth in Use of the Internet. Our web site       
business would be adversely affected if internet usage does not continue to     
grow. A number of factors may inhibit internet usage, including:                

o    inadequate network infrastructure;                               

o    inconsistent quality of service; and                             

o    lack of availability of cost-effective, high-speed service.      

If internet usage grows, the internet infrastructure may not be able to support 
the demands placed on it by this growth and its performance and reliability may 
decline. In addition, Web sites have experienced interruptions in their service 
as a result of outages and other delays occurring throughout the internet       
network infrastructure. If these outages or delays frequently occur in the      
future, internet usage, as well as the usage of our Web sites, could grow more  
slowly or decline.                                                              

We May be Unable to Respond to Rapid Technological Change. The internet is      
characterized by rapidly changing technologies, frequent new product and        
service introductions and evolving industry standards. If                       
HealthCareReportCards.com is to be successful, we need to effectively integrate 
the various software programs and tools required to enhance and improve our web 
site. Our future success will depend on our ability to adapt to rapidly         
changing technologies by continually improving the performance features and     
reliability of our web site. We may experience difficulties that could delay or 
prevent the successful development, introduction or marketing of new services.  
We could also incur substantial costs if we need to modify our service or       
infrastructures to adapt to these changes.                                      

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Governmental Regulation and Legal Uncertainties Could Add Additional Costs to   
Doing Business on the Internet. There are currently few laws or regulations     
that specifically regulate communications or commerce on the internet. However, 
laws and regulations may be adopted in the future that address issues such as   
user privacy, pricing, and the characteristics and quality of products and      
services. Several telecommunications companies have petitioned the Federal      
Communications Commission to regulate internet service providers and online     
service providers in a manner similar to long distance telephone carriers and   
to impose access fees on those companies. This could increase the cost of       
transmitting data over the internet. Moreover, it may take years to determine   
the extent to which existing laws relating to issues such as property           
ownership, libel and personal privacy are applicable to the internet. Any new   
laws or regulations relating to the internet could adversely affect our         
business.                                                                       

Our Systems May Fail or Experience a Slowdown and Our Users Depend on Others for
Access to Our Web Sites - Substantially all of our communications hardware and  
some of our other computer hardware operations are located at KDM Consulting    
Service's facilities in Aurora, Colorado. Fire, floods, earthquakes, power loss,
telecommunications failures, break-ins and similar events could damage these    
systems. Computer viruses, electronic break-ins or other similar disruptive     
problems could also adversely affect our web site. Our business could be        
adversely affected if our systems were affected by any of these occurrences. Our
insurance policies may not adequately compensate us for any losses that may     
occur due to any failures or interruptions in our systems. We do not presently  
have any secondary "off-site" systems or a formal disaster recovery plan.       

In addition, our users depend on internet service providers, online service     
providers and other web site operators for access to our web site. Many of them 
have experienced significant outages in the past, and could experience outages, 
delays and other difficulties due to system failures unrelated to our systems.  

We May Not be Able to Deliver Various Services if Third Parties Fail to Provide 
Reliable Software, Systems and Related Services to Us - We are dependent on     
various third parties for software, systems and related services. Several of the
third parties that provide software and services to us have a limited operating 
history, have relatively immature technology and are themselves dependent on    
reliable delivery of services from others. As a result, our ability to deliver  
various services to our users may be adversely affected by the failure of these 
third parties to provide reliable software, systems and related services to us. 

Properties                                                                      

We have a five-year lease for our approximately 12,000 sq. foot headquarters    
facility in Lakewood, Colorado, which expires on March 15, 2001. We have        
entered into leases for the facilities utilized by our affiliated practices for 
annual lease payments of approximately $4.1 million. Several of the leases      
involve properties owned by physician owners of our affiliated practices. If we 
complete the restructuring transaction, we expect our annual lease payments for 
such facilities to decrease to $2.5 million.                                    

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Legal Proceedings                                                               

The Specialists Litigation                                                      

There are two actions currently pending between us and the Specialists          
Orthopedic Medical Corporation, one of our affiliated practices, and the        
Specialists Surgery Center, a partnership that operates a surgery center        
(collectively "the Specialists"), one in Solano County Superior Court, which was
recently stayed by that court ("the state action"), and one in the United States
District Court for the Eastern District of California, which is currently being 
litigated (the "federal action").                                               

The state action was filed on November 13, 1998 in the Solano County Superior   
Court by the Specialists and four physicians who practice at, and own an        
interest in, one or both of the plaintiff entities (the "Specialists Doctors"), 
against the Specialists' former administrator; legal, accounting and consulting 
advisors to the plaintiffs in connection with the affiliation transactions      
(collectively with the administrator, the "Advisors"); entities affiliated with 
certain of the Advisors; us; an employee of the Company, and 25 unnamed         
defendants.                                                                     

The complaint contains numerous allegations against one or more of the Advisors,
including among others, fraud, misrepresentation, conversion, breach of         
fiduciary duty, negligence, professional negligence and legal malpractice. With 
respect to us, and our employee, the complaint alleges, among other things, that
we and our employee conspired with the Advisors to induce the Specialists       
Doctors to enter into the transactions by which we acquired the practice assets 
and entered into the service agreements with Specialists; that we and our       
employee misrepresented the terms of the transaction to the Specialists Doctors;
that, in connection with the issuance of our common stock to the Doctors, we and
the other defendants violated California securities law by making material      
misstatements or omitting material facts; that the service agreements are void; 
that the required service fees are unconscionable; and that the service         
agreements do not represent the true intention of the parties with regard to the
service fees to be charged.                                                     

The Specialists Doctors seek a judicial declaration that the service fees are   
unenforceable, a reformation of the service agreements to reflect service fees  
within the alleged intent of the parties, an accounting of the cash proceeds    
from the acquisition transactions, special damages of $2.48 million (including  
$300,000 paid to us), compensatory, consequential and punitive damages, damages 
for emotional distress, attorney fees and costs.                                

In addition, co-defendant Ronald Fike, the Specialists' former administrator,   
filed a cross-complaint on December 18, 1998, naming as cross-defendants all    
co-defendants (including us and our employee), all plaintiffs and seven new     
parties. The cross-complaint alleges causes of action for breach of contract,   
slander, negligent infliction of emotional distress, deceit and conspiracy, and 
indemnity. We and our employee are named as defendants to the last three causes 
of action only.                                                                 

We believe the allegations, as they pertain to us and an employee of the        
Company, are without merit and have vigorously contested the action and         
cross-complaint. As an initial response, we have filed a Motion to Stay or      
Dismiss both the action and the cross-complaint, based upon a forum selection   
clause contained in the original acquisition agreement, requiring the           
Specialists and Mr. Fike to file any and all actions in Jefferson County,       
Colorado. The court granted our Motion on March 12, 1999, and stayed the action 
in its entirety, as to all named parties.                                       

In the federal action, filed by us on January 12, 1999 in the United States     
District Court for the Eastern District of California against the Specialists   
and the Doctors, we are seeking relief for various breaches of contract,        
conversion of our assets, and tortious interference with contractual relations. 
Additionally, our complaint seeks to recover damages for the Specialists'       
wrongful possession and detention of our personal property, and the wrongful    
ejectment of us from our leasehold interest in various real properties we have  
leased.                                                                         

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Defendants filed a Motion to Stay or dismiss the action, claiming that the      
forum selection clause contained in the various agreements at issue mandated    
litigation in state, rather than federal, court. The Court granted defendants'  
motion on April 8, 1999.                                                        

On April 12, 1999, we filed a complaint in Solano County Superior court,        
alleging the same causes of action as our previously filed complaint in federal 
court. In addition, on April 13, 1999, we filed an Application for a Right to   
Attach Order and Writ of Attachment. We seek to attach any and all assets of    
the Specialists, and the Doctors, in order to secure the claims in our state    
complaint. This matter is set for hearing on April 30, 1999.                    

TOC Litigation                                                                  

There are two actions pending between us and TOC Specialists, P.L. ("TOC") and  
its physician owners (collectively, the "TOC Doctors"), one in the Circuit Court
of the Second Judicial Circuit in and for Leon County, Florida, which was       
recently stayed by that court (the "state action"), and one in the United States
District Court for the Northern District of Florida, Tallahassee Division, which
is currently being litigated (the "federal action").                            

On November 16, 1998, we filed a complaint in the Circuit Court of the Second   
Judicial Circuit in and for Leon County, Florida against TOC, the 15 TOC        
doctors, and the State of Florida, Department of Health, Board of Medicine. The 
complaint alleges that, in violation of their service agreement with us, TOC and
the TOC Doctors diverted our accounts receivable receipts into an account       
controlled by TOC and the TOC Doctors, that TOC and the TOC Doctors failed to   
pay our service fees, and that TOC and the TOC Doctors failed to provide the    
necessary records to us for us to effectively perform our management functions. 
Additionally, the complaint alleges that TOC and the TOC Doctors improperly     
attempted to terminate the service agreement, attempted to interfere with our   
contractual relations with other affiliated practices, and violated the         
confidentiality, noncompetition and restrictive covenant provisions of the      
service agreement.                                                              

TOC and the TOC Doctors answered that complaint on December 7, 1998, and filed a
counterclaim against us alleging breach of service agreement, fraud in the      
inducement, fraud, negligent misrepresentation, conspiracy to commit fraud,     
breach of fiduciary duties, and violations of Florida securities law. The       
counterclaim also named Kerry Hicks, our President and Chief Executive Officer  
and Patrick Jaeckle, our Executive Vice President - Corporate Development, as   
defendants. The state court action was stayed on January 13, 1999.              

On December 1, 1998, while the state court litigation was ongoing, TOC and 10 of
the TOC doctors filed a complaint against us in the United States District Court
for the Northern District of Florida, Tallahassee Division. That complaint also 
named Kerry Hicks and Patrick Jaeckle as defendants. The complaint alleges      
violations of the Securities Exchange Act, breach of contract, fraud, negligent 
misrepresentation, and breach of fiduciary duty. These, absent the federal      
securities claim, were essentially the same causes of action asserted as a      
counterclaim against us by the defendants in the earlier state court litigation.

On January 11, 1999, we filed our answer and counterclaim to the federal court  
action. We also named four other TOC doctors as defendants in our counterclaim. 
In our answer and counterclaim we denied all wrongdoing, and asserted claims    
against TOC and the TOC Doctors for merger agreement indemnification, breach of 
contract, breach of good faith and fair dealing, tortious interference with     
contractual relations, conversion, and civil theft.                             

We have, in addition to monetary damages, claimed a right to injunctive relief  
to prohibit dissemination of financial information and to further limit tortious
interference with contractual relations, and sought an injunction to enforce the
TOC restrictive covenants. The federal court litigation is ongoing, and is      
presently in the discovery phase.                                               

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    We believe that we have strong legal and factual defenses to these
claims of TOC and the TOC doctors, and intend to vigorously defend the          
allegations against us while aggressively pursuing our counterclaims.           

3B Litigation                                                                   

On January 22, 1999, 3B Orthopaedics, P.C. ("3B"), one of our 
affiliated practices, Robert E. Booth, Jr., M.D., Arthur Bartolozzi, M.D., and  
Richard A. Balderston, M.D., (collectively, the "Plaintiffs") filed a complaint 
against us in the United States District Court for the Eastern District of      
Pennsylvania.                                                                   

   The complaint asserts causes of action under Pennsylvania law for
breach of contract and seeks unspecified compensatory damages and a declaratory 
judgment terminating any and all applicable agreements between the parties. In  
essence, the plaintiffs claim that we breached our obligations to them under an 
unexecuted service agreement, and any other agreement, by failing to provide the
promised management services and that the plaintiffs were damaged when they had 
to provide such services themselves. The plaintiffs seek to invalidate          
restrictive covenants entered into in favor of us through the lawsuit.          

    We filed our answer on March 24, 1999, denying all of the material
allegations of the plaintiffs' complaint and asserting affirmative defenses and 
various counterclaims. We have asserted counterclaims against all plaintiffs for
breach of contract, unjust enrichment, conversion, and breach of the implied    
duty of good faith and fair dealing. We have also asserted a counterclaim solely
against Dr. Booth for breach of fiduciary duty based upon his conduct as a      
member of our board of directors from approximately November 1996 through       
October 1998. We dispute the plaintiffs' claim that we failed to provide the    
promised management services. Among other remedies, we seek to enforce          
restrictive covenants entered into by the physician plaintiffs and to recover,  
among other things, damages equal to 300% of the physician plaintiffs'          
professional services' revenue. We also seek the return of all cash and all of  
our common stock, or the proceeds from the sale of our stock, given to the      
physician plaintiffs pursuant to the November 12, 1996, merger between the      
plaintiffs' former practice, Reconstructive Orthopaedic Associates, P.C. and us.
Prior to the formation of 3B, the defendant physicians practiced with           
Reconstructive Orthopaedic Associates, P.C.                                     

We believe that we have strong legal and factual defenses to  
plaintiffs' claims. We intend to vigorously defend against the lawsuit and      
aggressively pursue our counterclaims.                                          

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Mid-Atlantic Orthopaedic Specialists, P.C. Default Notice                       

        On January 4, 1999, Mid-Atlantic Orthopaedic Specialists, P.C., one of
our affiliated practices, gave us notice that they intended to terminate the    
service agreement between us and the practice based on our material default in  
the performance of our duties and obligations imposed upon us by the service    
agreement. Under the terms of the service agreement, in the event that an       
affiliated practice asserts a material default under the service agreement, we  
have sixty days in which to cure any such default. In our response letter to    
the practice, we informed the practice that we did not believe that we were in  
material default under the service agreement and that in any event the practice 
had failed to give us adequate notice of a material default in order to give us 
a reasonable opportunity to cure any specific default within the sixty-day      
period provided for in the service agreement. After reviewing this matter in    
detail, we continue to believe that we are not in material default under the    
terms of our service agreement with Mid-Atlantic Orthopaedic Specialists, P.C.  
In the event that Mid-Atlantic Orthopaedic Specialists, P.C. attempts to        
terminate the service agreement with us, we have informed the practice that we  
will pursue any and all legal remedies available to us including aggressive     
litigation in federal and state courts.                                         

Associated Orthopaedics & Sports Medicine, P.A. Default Notice                  

         On March 18, 1999, Associated Orthopaedics & Sports Medicine, P.A., one
of our affiliated practices, gave us notice of default under the terms of the   
service agreement between us and the medical practice. Under the terms of the   
service agreement between us and Associated Orthopaedics & Sports Medicine,     
P.A., we have thirty days to cure any material default under the service        
agreement. After reviewing the letter dated March 18, 1999 and the items of     
default specified therein, and our operations with respect to this practice, we 
do not believe that we are in material default under the terms of the service   
agreement. We have notified the practice that we do not believe that we are in  
material default under the terms of the service agreement, that with respect to 
the matters set forth in their letter of March 18, 1999, we will continue to    
work with the practice to resolve any outstanding issues, and that in any event 
should the practice terminate the service agreement we will pursue any and all  
legal remedies available to us, including aggressive litigation in federal and  
state courts.                                                                   

Vanderbilt University Default Notice                                            

 On March 19, 1999, we received a default notice from Vanderbilt
University, with respect to a management services agreement we entered into     
with Vanderbilt University to provide certain limited management services to    
their orthopaedics department. Under the terms of the management services       
agreement, we have sixty days to cure any material default. We have reviewed    
the provisions of the default notice, and are undertaking steps to determine if 
any such defaults have in fact occurred, whether they are material, and what    
steps, if any, we need to take in order to cure any material defaults. In       
addition, on March 19, 1999, we received notice from Vanderbilt University that 
they would not renew the management services agreement upon its stated          
termination date of June 30, 1999.                                              

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 INDEX TO FINANCIAL STATEMENTS

                                                                [Download Table]
                                                                                   
SPECIALTY CARE NETWORK, INC. AND SUBSIDIARIES:                                     
    Report of Independent Auditors ............................................. 96
    Consolidated Balance Sheets ................................................ 98
    Consolidated Statements of Operations.......................................100
    Consolidated Statements of Stockholders' Equity ............................101
    Consolidated Statements of Cash Flows ......................................102
    Notes to Consolidated Financial Statements .................................104

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Report of Independent Auditors

Board of Directors and Stockholders                                             
Specialty Care Network, Inc.                                                    

We have audited the accompanying consolidated balance sheets of Specialty Care  
Network, Inc. and subsidiaries (collectively the "Company") as of December 31,  
1998 and 1997, and the related consolidated statements of operations,           
stockholders' equity, and cash flows for each of the three years in the period  
ended December 31, 1998. 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 generally accepted auditing          
standards. Those standards require that we plan and perform the audit to obtain 
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting 
the amounts and disclosures in the financial statements. An audit also includes 
assessing the accounting principles used and significant estimates made by      
management, as well as evaluating the overall financial statement presentation. 
We believe that our audits provide a reasonable basis for our opinion.          

In our opinion, the financial statements referred to above present fairly, in   
all material respects, the consolidated financial position of Specialty Care    
Network, Inc. and subsidiaries at December 31, 1998 and 1997, and the           
consolidated results of their operations and their cash flows for each of the   
three years in the period ended December 31, 1998, in conformity with generally 
accepted accounting principles.                                                 

The accompanying consolidated financial statements have been prepared assuming  
that the Company will continue as a going concern. As more fully described in   
Note 2, the Company has incurred a significant operating loss related to the    
restructuring and impairment of its affiliated physician practice arrangements, 
has a working capital deficit and is in technical violation of certain financial
covenants in its bank credit facility. These conditions raise substantial doubt 
about the Company's ability to continue as a going concern. Management's plans  

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in regard to these matters are also described in Note 2. 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 these     
uncertainties.                                                                  

                                         /s/ ERNST & YOUNG LLP
                                         ---------------------
                                         Ernst & Young LLP

Denver, Colorado                                                                
March 26, 1999                                                                  

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 Specialty Care Network, Inc. and Subsidiaries

 Consolidated Balance Sheets

                                                                [Download Table]

                                                               DECEMBER 31        
                                                          1998           1997     
                                                       ------------   ------------
                                                                                  
ASSETS                                                                            
Cash and cash equivalents                              $  1,418,201   $  3,444,517
Accounts receivable, net                                 22,281,471     25,957,367
Due from affiliated practices in litigation, net          4,747,940           --  
Receivables from sales of affiliated practices assets                             
   and execution of new service agreements                7,953,068           --  
Loans to physician stockholders                             521,355        914,737
Prepaid expenses, inventories and other                   1,500,382        796,903
Prepaid and recoverable income taxes                      4,258,102           --  
                                                       ------------   ------------
Total current assets                                     42,680,519     31,113,524

Property and equipment, net                              11,050,365      5,276,219
Intangible assets, net of accumulated amortization of                             
   $64,241 and $189,485 in 1998 and 1997,                                         
   respectively                                             134,319      1,137,808
Management service agreements, net of accumulated                                 
    amortization of $4,350,647 and $1,210,391 in                                  
    1998 and 1997, respectively                                                   
                                                         13,153,048    100,732,431
Advances to affiliates and other                            944,520        922,022
Other assets                                              2,216,507      1,119,646

                                                       ------------   ------------
Total assets                                           $ 70,179,278   $140,301,650
                                                       ============   ============

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                                                        [Enlarge/Download Table]

                                                                   DECEMBER 31       
                                                             1998            1997    
                                                         ------------    ------------
                                                                                     
LIABILITIES AND STOCKHOLDERS' EQUITY                                                 
Current portion of capital lease obligations             $    244,446    $    263,007
Accounts payable                                              785,649         701,087
Accrued payroll, incentive compensation and related                                  
   expenses                                                 2,453,653       2,014,573
Accrued expenses                                            2,730,069       1,507,382
Line-of-credit                                             52,925,000            --  
Income taxes payable                                             --           944,632
Due to affiliated practices                                 3,326,014       2,885,602
Deferred income taxes                                       1,083,178         872,855
Convertible debentures                                        589,615            --  
                                                         ------------    ------------
Total current liabilities                                  64,137,624       9,189,138

Line-of-credit                                                   --        33,000,000
Capital lease obligations, less current portion               680,152         885,141
Deferred income taxes                                            --        32,115,476
                                                         ------------    ------------
Total liabilities                                          64,817,776      75,189,755

Commitments and contingencies                                                        

Stockholders' equity:                                                                
   Preferred stock, $0.001 par value, 2,000,000                                      
     shares authorized, no shares issued or outstanding          --              --  
   Common stock, $0.001 par value, 50,000,000                                        
     shares authorized, and 18,618,873 and                                           
     17,703,293 shares issued and outstanding in 1998                                
     and 1997, respectively                                    18,619          17,703
   Additional paid-in capital                              66,993,627      60,995,177
   (Accumulated deficit) retained earnings                (57,687,071)      4,099,015
   Treasury stock                                          (3,963,673)           --  
                                                         ------------    ------------
Total stockholders' equity                                  5,361,502      65,111,895
                                                         ============    ============
Total liabilities and stockholders' equity               $ 70,179,278    $140,301,650
                                                         ============    ============

See accompanying notes to consolidated financial statements.                    

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 Specialty Care Network, Inc. and Subsidiaries

 Consolidated Statements of Operations

Years ended December 31, 1998, 1997 and 1996

                                                        [Enlarge/Download Table]

                                             1998            1997            1996      
                                         -------------   -------------   ------------- 
                                                                                       
Revenue:                                                                               
   Service fees                          $  76,649,778   $  45,966,531   $   4,392,050 
   Other                                     2,531,524       3,689,390            --   
                                         -------------   -------------   ------------- 
                                            79,181,302      49,655,921       4,392,050 
                                         -------------   -------------   ------------- 
Costs and expenses:                                                                    
   Clinic expenses                          55,188,411      31,644,618       2,820,743 
   General and administrative               14,468,537       7,861,015       3,770,263 
   Impairment loss on service                                                          
     agreements                             94,582,227            --              --   
   Litigation and other costs                3,564,392            --              --   
   Impairment loss on intangible assets                                                
     and other long-lived assets             3,316,651            --              --   
                                         -------------   -------------   ------------- 
                                           171,120,218      39,505,633       6,591,006 
                                         -------------   -------------   ------------- 
(Loss) income from operations              (91,938,916)     10,150,288      (2,198,956)
Other:                                                                                 
   Gain on sale of equity investment         1,240,078            --              --   
   Interest income                             187,450         536,180          11,870 
   Interest expense                         (3,741,089)       (942,144)        (90,368)
                                         -------------   -------------   ------------- 
(Loss) income before income taxes          (94,252,477)      9,744,324      (2,277,454)
Income tax benefit (expense)                32,466,391      (3,873,926)        506,071 
                                         =============   =============   ============= 
Net (loss) income                        $ (61,786,086)  $   5,870,398   $  (1,771,383)
                                         =============   =============   ============= 

Net (loss) income per common share                                                     
   (basic)                               $       (3.39)  $        0.38   $       (0.16)
                                         =============   =============   ============= 

Weighted average number of common                                                      
   shares used in computation (basic)       18,237,827      15,559,368      11,422,387 
                                         =============   =============   ============= 

Net (loss) income per common                                                           
   share (diluted)                       $       (3.39)  $        0.37   $       (0.14)
                                         =============   =============   ============= 

Weighted average number of common                                                      
   shares and common share equivalents                                                 
   used in computation (diluted)            18,237,827      16,071,153      12,454,477 
                                         =============   =============   ============= 

See accompanying notes to consolidated financial statements.                    

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 Specialty Care Network, Inc. and Subsidiaries

 Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998, 1997 and 1996

                                                        [Enlarge/Download Table]


                                             COMMON STOCK                          (ACCUMULATED                               
                                           $0.001 PAR VALUE          ADDITIONAL      DEFICIT)                                 
                                     ----------------------------     PAID-IN       RETAINED       TREASURY                   
                                        SHARES          AMOUNT        CAPITAL       EARNINGS        STOCK           TOTAL     
                                     ------------    ------------   ------------   ------------  ------------    ------------ 
                                                                                                                              
Balances at January 1, 1996            1,690,000    $      1,690   $       --     $       --     $       --      $      1,690 
Purchase and retirement of                                                                                                    
     common stock in connection                                                                                               
     with a severance agreement         (425,000)           (425)          --             --             --              (425)
Shares issued to one of the                                                                                                   
     affiliated practices                100,000             100        299,900           --             --           300,000 
Convertible debt and accrued                                                                                                  
     interest thereon converted to                                                                                            
     common shares                     2,020,900           2,021      2,220,018           --             --         2,222,039 
Shares issued in connection                                                                                                   
     with the acquisitions of                                                                                                 
     net assets of affiliated                                                                                                 
     practices                         7,659,115           7,659      5,483,159           --             --         5,490,818 
Dividends paid to physician                                                                                                   
     owners as promoters                    --              --       (1,537,872)          --             --        (1,537,872)
Net loss                                    --              --             --       (1,771,383)          --        (1,771,383)
                                    ------------    ------------   ------------   ------------  ------------    ------------  
Balances at December 31, 1996         11,045,015          11,045      6,465,205     (1,771,383)          --         4,704,867 
Shares issued in connection with                                                                                              
  an initial public offering of                                                                                               
  common stock, including the                                                                                                 
  underwriters' overallotment          3,208,338           3,208     22,188,283           --             --        22,191,491 
Shares and other equity                                                                                                       
  instruments issued in                                                                                                       
  connection with the                                                                                                         
  acquisitions of net assets of                                                                                               
  affiliated practices                 3,222,891           3,223     31,147,368           --             --        31,150,591 
Exercise of employee stock options       227,049             227        265,160           --             --           265,387 
Tax benefit related to employee                                                                                               
  stock options                             --              --          717,140           --             --           717,140 
Non-cash compensation expense                                                                                                 
  related to employee stock                                                                                                   
  options                                   --              --          212,021           --             --           212,021 
Net income                                  --              --             --        5,870,398           --         5,870,398 
                                    ------------    ------------   ------------   ------------  ------------    ------------  
Balances at December 31, 1997         17,703,293          17,703     60,995,177      4,099,015           --        65,111,895 
Shares and other equity                                                                                                       
  instruments issued in                                                                                                       
  connection with the                                                                                                         
  acquisitions of net assets of                                                                                               
  affiliated practices and                                                                                                    
  Provider Partnerships, Inc.            879,480             880      5,561,101           --             --         5,561,981 
Exercise of employee stock options        36,100              36        231,314           --             --           231,350 
2,237,644 shares acquired as                                                                                                  
  treasury stock                            --              --             --             --       (3,963,673)     (3,963,673)
Tax benefit related to employee                                                                                               
  stock options                             --              --           86,863           --             --            86,863 
Non-cash compensation expense                                                                                                 
  related to employee stock                 --              --          119,172           --             --           119,172 
  options                                                                                                                     
Net loss                                    --              --             --      (61,786,086)          --       (61,786,086)
                                     ------------    ------------   ------------   ------------  ------------    ------------ 
Balances at December 31, 1998          18,618,873    $     18,619   $ 66,993,627   $(57,687,071) $ (3,963,673)   $  5,361,502 
                                     ============    ============   ============   ============  ============    ============ 

See accompanying notes to consolidated financial statements.                    

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 Consolidated Statements of Cash Flows

Years ended December 31, 1998, 1997 and 1996

                                                        [Enlarge/Download Table]

                                                             1998           1997           1996     
                                                         ------------   ------------   ------------ 
                                                                                                    
OPERATING ACTIVITIES                                                                                
Net (loss) income                                        $(61,786,086)  $  5,870,398   $ (1,771,383)
Adjustments to reconcile net (loss) income to net                                                   
   cash provided by (used in) operating activities:                                                 
     Non-cash compensation expense related to                                                       
       employee stock options                                 119,172        212,021           --   
     Depreciation expense                                   2,227,101        965,492        136,216 
     Amortization expense                                   4,374,607      1,377,746         22,130 
     Gain on sale of equity investment                     (1,240,078)          --             --   
     Impairment loss on service agreements, non-cash       94,582,227           --             --   
     Impairment loss on intangible assets and                                                       
       other long-lived assets, non-cash                    3,316,651           --             --   
     Litigation and other costs, non-cash                   3,431,734           --             --   
     Interest on convertible debentures                          --             --           52,039 
     Deferred income tax benefit                          (31,520,026)    (1,279,497)    (1,735,346)
     Changes in operating assets and liabilities, net                                               
       of the effects of the non-cash acquisitions of                                               
       net assets of affiliated physician practices and                                             
       Provider Partnerships, Inc., and sale of assets                                              
       and execution of new service agreements:                                                     
         Accounts receivable, net                          (9,092,730)    (9,313,152)    (2,066,190)
         Prepaid expenses and other assets                 (1,265,926)    (1,572,849)      (204,911)
         Prepaid and recoverable income taxes              (4,170,177)          --             --   
         Accounts payable                                     223,450        (88,566)        49,764 
         Accrued payroll, incentive compensation                                                    
           and related expenses                               735,390        876,369        982,982 
         Accrued expenses                                   1,196,577     (1,083,330)       850,035 
         Income taxes payable                                (944,632)       432,497      1,229,275 
         Due to affiliated physician practices, net           734,676      1,798,545      1,087,057 
                                                         ------------   ------------   ------------ 
Net cash provided by (used in) operating activities           921,930     (1,804,326)    (1,368,332)

INVESTING ACTIVITIES                                                                                
Purchases of property and equipment                        (9,141,785)    (1,568,795)      (354,595)
Proceeds from the sale of equity investment                 1,075,000           --             --   
Repayments of advances to affiliates and                                                            
   notes receivable                                         1,022,621           --             --   
Increases in intangible assets                               (116,048)    (1,111,257)      (186,452)
Equity investment and related advances                     (1,753,742)      (922,022)          --   
Acquisitions of physician practices and Provider                                                    
   Partnerships, Inc., net of cash acquired               (12,636,948)   (44,452,105)          --   
                                                         ------------   ------------   ------------ 
Net cash used in investing activities                     (21,550,902)   (48,054,179)      (541,047)

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Consolidated Statement of Cash Flows (continued)

                                                        [Enlarge/Download Table]

                                                                     1998            1997            1996      
                                                                 -------------   -------------   ------------- 
                                                                                                               
FINANCING ACTIVITIES                                                                                           
Proceeds from initial public offering, net of                                                                  
   period offering costs                                         $        --     $  22,939,338   $        --   
Proceeds from line-of-credit agreement                              20,325,000      35,500,000       4,177,681 
Proceeds from convertible debentures                                      --              --         2,170,000 
Principal repayments on line-of-credit agreement                      (400,000)     (6,677,681)           --   
Principal repayments on capital lease obligations                     (221,757)       (229,711)        (33,422)
Retirement of common stock                                                --              --              (425)
Purchases of treasury stock                                           (921,491)           --              --   
Capital contribution from one physician practice                          --              --           300,000 
Prepaid offering costs                                                    --              --          (747,847)
Dividends paid to promoters                                               --              --        (1,537,872)
Exercise of employee stock options                                     231,350         265,387            --   
Advances from officers and stockholders                                   --              --            (9,410)
Principal payments from loans to physician                                                                     
   stockholders                                                         78,427       1,026,419            --   
Loans to physician stockholders                                       (488,873)       (964,737)       (976,419)
                                                                 -------------   -------------   ------------- 
Net cash provided by financing activities                           18,602,656      51,859,015       3,342,286 
                                                                 -------------   -------------   ------------- 

Net (decrease) increase in cash and                                                                            
   cash equivalents                                                 (2,026,316)      2,000,510       1,432,907 
Cash and cash equivalents at beginning of period                     3,444,517       1,444,007          11,100 
                                                                 =============   =============   ============= 
Cash and cash equivalents at end of period                       $   1,418,201   $   3,444,517   $   1,444,007 
                                                                 =============   =============   ============= 

SUPPLEMENTAL CASH FLOW INFORMATION                                                                             
Interest paid                                                    $   3,509,592   $     910,000   $      38,329 
                                                                 =============   =============   ============= 
Income taxes paid                                                $   4,169,506   $   4,720,926   $        --   
                                                                 =============   =============   ============= 

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING                                                                     
   AND FINANCING ACTIVITIES                                                                                    
   Effects of the acquisitions of net assets of                                                                
     affiliated physician practices:                                                                           
       Assets acquired                                           $  23,196,873   $ 110,952,707   $  10,761,466 
       Liabilities assumed                                            (294,042)     (2,429,726)     (2,187,759)
       Income tax liabilities assumed                                     --       (32,920,285)     (3,082,889)
       Convertible note payable issued                              (6,044,054)           --              --   
       Less: Cash paid for acquisitions                            (12,400,360)    (44,452,105)           --   
                                                                 -------------   -------------   ------------- 
                                                                 $   4,458,417   $  31,150,591   $   5,490,818 
                                                                 =============   =============   ============= 
   Realized loss on four affiliated practice                                                                   
     restructurings in 1998:                                                                                   
       Assets disposed of                                        $  29,909,279   $        --     $        --   
       Liabilities transferred                                      (1,361,040)           --              --   
       Convertible debentures payable forgiven                      (5,454,439)           --              --   
       Treasury stock acquired                                      (2,656,199)           --              --   
       Less: Receivable from affiliated practices                   (7,953,068)           --              --   
                                                                 -------------   -------------   ------------- 
   Pretax impairment loss on four restructurings closed in 1998  $  12,484,533   $        --     $        --   
                                                                 =============   =============   ============= 

Conversion of convertible debentures and accrued                                                               
   interest thereon into common stock                            $        --     $        --     $   2,222,039 
                                                                 =============   =============   ============= 

See accompanying notes to consolidated financial statements.                    

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Notes to Consolidated Financial Statements

 December 31, 1998

1. DESCRIPTION OF BUSINESS                                                      

Specialty Care Network, Inc. and subsidiaries (collectively the "Company") is a 
health care management services company that provides practice management       
services to physicians. Commencing on November 12, 1996, the Company began      
providing comprehensive management services under long-term management service  
agreements with five physician practices in various states.                     

The Company provides practice management services to physicians in practices    
that focus on musculoskeletal care. Healthcare Report Cards, Inc., ("HRCI") was 
formed in September 1998 as a wholly-owned subsidiary of the Company. In        
November 1998, HRCI launched an Internet web site,                              
HealthcareReportCards.com((TM)), that rates the quality of outcomes at various  
hospitals for several medical procedures. In addition, in December 1998,        
Ambulatory Services, Inc., ("ASI") was formed as a wholly-owned subsidiary of   
the Company. ASI was formed to engage in the development and management of      
freestanding and in-office ambulatory surgery centers.                          

The Company's wholly-owned subsidiary, Provider Partnerships, Inc. ("PPI"),     
provides consulting services to hospitals to increase their operating           
performance, with a specific focus on the cardiac area. However, the Company is 
currently involved in a dispute with the principals of PPI. Management of the   
Company is exploring alternatives to terminate its relationship with PPI. (See  
Note 12 for further discussion regarding the Company's acquisition of PPI and   
Note 2 for discussion of the dispute with the principals of PPI.)               

2. BASIS OF PRESENTATION AND RESTRUCTURING                                      

For the year ended December 31, 1998, the Company incurred a loss from          
operations of approximately $91.9 million due primarily to an impairment charge 
related to its management service agreements, as more fully described below.    
Additionally, as of December 31, 1998, the Company had a working capital deficit
of approximately $21.5 million and was not in compliance with certain of the    
financial ratio covenants required by the Company's Credit Facility. As a result
of the non-compliance with certain financial ratio covenants, the Company is in 
default under the terms of the Credit Facility. In the event of default, the    
terms of the Credit Facility provide that the bank syndicate can immediately    
terminate its obligation to make further advances under the respective          
commitments and/or declare the Company's outstanding debt under the Credit      
Facility to be immediately due and payable. Accordingly, the total amount       
outstanding under the Credit Facility of approximately $52.9 million has been   
included in the Company's Consolidated Balance Sheet as a current liability at  
December 31, 1998. The bank                                                     

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Notes to Consolidated Financial Statements (continued)

2. BASIS OF PRESENTATION AND RESTRUCTURING (CONTINUED)                          

syndicate notified the Company in December 1998 that it was suspending any      
further advances under the Credit Facility. The Company is currently negotiating
with the bank syndicate to revise the financial ratio covenants to bring the    
Company into compliance for the remaining term of the Credit Facility. (See Note
6 for further discussion of the Company's Credit Facility).                     

The issues described above raise substantial doubt about the Company's ability  
to continue as a going concern. Management of the Company intends to address    
these issues through a restructuring transaction involving ten of its affiliated
practices, which is intended to substantially reduce the Company's outstanding  
debt and allow management to pursue the development of HRCI's health care rating
internet site and pursue the development of ambulatory surgery centers through  
the Company's wholly-owned subsidiary, ASI. The proposed restructuring          
transaction, which is subject to approval by the Company's stockholders as well 
as the bank syndicate, is more fully described below. The accompanying          
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 might result from the outcome
of these uncertainties.                                                         

RESTRUCTURING                                                                   

In March 1999, the Company entered into restructuring agreements with ten of its
affiliated practices. The agreements:                                           

o  Provide for the repurchase by affiliated physicians or affiliated
practices of practice assets and for new management service   
arrangements in exchange for cash and/or common stock;        

    o  Limit management services provided to the affiliated practices by the
Company under its management services arrangements;           

      o  Reduce the term of the Company's service agreements with the affiliated
practices; and                                                

  o  Lower service fees paid to the Company by the affiliated practices.

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Notes to Consolidated Financial Statements (continued)

2. BASIS OF PRESENTATION AND RESTRUCTURING (CONTINUED)                          

The purchase price paid to the Company will consist of payments for the book    
value of the assets to be purchased by the practices, less the practice         
liabilities as of the closing date of the transaction and payments for the      
execution of a new management services agreement to replace the existing service
agreement. If the restructuring transaction is consummated, the Company expects 
to reacquire 3,786,957 shares of its common stock and have the ability to reduce
its outstanding indebtedness by approximately $17.6 million including $0.6      
million through cancellation of an outstanding convertible debenture. (See Note 
11, Physician Practice Net Asset Acquisitions and Service Agreements, New       
Management Service Agreement Discussion, for further discussion of the new      
management service agreements).                                                 

Modification of Arrangements With Four Practices                                

Near the end of 1998, the Company entered into transactions with four of its    
affiliated practices. In these transactions, the Company sold to each of the    
practices accounts receivable, fixed assets and certain other assets relating to
the respective practices and replaced the original service agreements with new  
agreements. Under the new agreements, which terminate at certain dates between  
November 2001 and March 2003, the Company provides substantially reduced        
services to the practices, and the practices pay significantly reduced service  
fees. These transactions were closed effective December 31, 1998. As a result of
the completion of these four transactions, the Company reacquired 2,124,959     
shares of its common stock and reduced its outstanding indebtedness at December 
31, 1998 by approximately $5.5 million through the cancellation of a convertible
note with one of the affiliated practices. Additionally, in 1999, the Company   
used additional proceeds from these four transactions to reduce the amount      
outstanding under its Credit Facility by approximately $8.5 million.            

IMPAIRMENT LOSSES, LITIGATION AND OTHER COSTS                                   

Impairment Loss on Management Service Agreements                                

In light of the pending restructuring transaction, as well as numerous other    
factors in the physician practice management industry in general, during the    
fourth quarter of 1998, management of the Company undertook an evaluation of the
carrying amount of its management service agreements pursuant to the provisions 
of Statement of Financial                                                       

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Notes to Consolidated Financial Statements (continued)

2. BASIS OF PRESENTATION AND RESTRUCTURING (CONTINUED)                          

Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of. As a result of this evaluation, the
Company recorded an impairment loss on its management service agreements of     
approximately $94.6 million in December 1998. This impairment loss consisted of 
approximately $12.5 million related to the management service agreements on the 
four transactions which closed effective December 31, 1998, approximately $53.6 
million related to the management service agreements for practices which have   
entered into restructuring agreements pending stockholder and bank syndicate    
approval, approximately $9.0 million related to the management service          
agreements for practices which are currently involved in litigation with the    
Company and approximately $19.5 million related to the management service       
agreements for practices which are maintaining their long-term agreements with  
the Company. (See Note 13 for further discussion of legal proceedings involving 
the Company's Affiliated Practices).                                            

Litigation And Other Costs                                                      

The Company is currently involved in disputes with TOC Specialists, P.L., The   
Specialists Orthopaedic Medical Corporation and 3B Orthopaedics, P.C., which are
affiliated practices of the Company. (See Note 13 for further discussion related
to these legal proceedings). As a result of these disputes, the Company has     
recorded a charge of approximately $2.7 million to reserve for service fees     
recorded for these practices, which to date have not been paid. In addition, as 
of December 31, 1998, the Company had incurred approximately $0.2 million in    
legal fees directly related to these disputes.                                  

In connection with the proposed restructuring transaction described above, the  
Company has also incurred expenses of approximately $0.7 million for financial  
advisors and legal consultation.                                                

Impairment loss on Intangible Assets And Other Long-Lived Assets                

The Company is engaged in negotiations to resolve certain issues raised by the  
former stockholders of Provider Partnerships, Inc. ("PPI"), a corporation       
acquired by the Company in August 1998. PPI is a company engaged in providing   
consulting services to hospitals, and it also provided certain assets that were 
developed by the Company into its HealthCareReportCards.com web site.           

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Notes to Consolidated Financial Statements (continued)

2. BASIS OF PRESENTATION AND RESTRUCTURING (CONTINUED)                          

It is currently contemplated by the Company that an arrangement will be reached 
with the PPI stockholders that will involve, among other things, the following: 

o  The formation of a new company that will own the                 
      HealthCareReportCards.com web site and one or more additional health
 care rating web sites. The new company will be a majority owned
        subsidiary of the Company, and the former PPI shareholders will have a
minority shareholder interest in the company;                 

    o  The former PPI stockholders will return the 420,000 shares of Company
  common stock that they received in connection with the Company's
acquisition of PPI;                                           

  o  The Company will return most of the assets of PPI to the former PPI
stockholders; and                                             

o  The PPI stockholders will become majority shareholders of the new
        company if the Company does not obtain $4 million in financing for the
new company by December 31, 1999.                             

Because of this dispute, the Company recorded an impairment loss in December    
1998 of approximately $1.2 million on the intangible asset created with the     
acquisition of PPI.                                                             

Additionally, as a result of the proposed restructuring transaction, management 
of the Company performed a review of the carrying amount of its other long-lived
assets, which resulted in an impairment loss of approximately $2.1 million      
during the fourth quarter of 1998.                                              

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                                   

PRINCIPLES OF CONSOLIDATION                                                     

The consolidated financial statements include Specialty Care Network, Inc. and  
its wholly-owned subsidiaries. All significant intercompany balances and        
transactions have been eliminated in consolidation. The Company uses the equity 
method of accounting to account for investments in entities in which it exhibits
significant influence, but not control, and does not have an ownership interest 
in excess of 50%.                                                               

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Notes to Consolidated Financial Statements (continued)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)                       

PRINCIPLES OF ACQUISITION ACCOUNTING AND CHANGE IN ACCOUNTING ESTIMATE          

The accompanying financial statements give effect to the acquisitions of        
substantially all of the assets of five physician practices on November 12,     
1996, through an asset purchases, a share exchange and mergers, at their        
historical cost basis in accordance with the accounting treatment prescribed by 
Securities and Exchange Commission Staff Accounting Bulletin No. 48, Transfers  
of Nonmonetary Assets by Promoters or Shareholders. In connection with all      
subsequent affiliations with physician practices, a substantial portion of the  
consideration paid to the physician owners of the practice is restricted        
securities and cash, and is allocated to the management service agreement (the  
"Service Agreements"). Hereinafter, all physician practices that have affiliated
with the Company, including the initial five physician practices, are referred  
to collectively as the "Affiliated Practices." The Company also recognizes the  
income tax effects of temporary differences related to all identifiable         
acquisition intangible assets, including the Service Agreements.                

Beginning June 1, 1998, the Company reduced the amortizable lives of its        
long-term management service agreements to a range of 5 to 30 years by assigning
specific lives to each management service agreement based on factors such as    
practice market share, length of operating history and other factors.           
Previously, the Company amortized such service agreements over the term of the  
underlying agreements, which is generally forty years. This action was taken in 
response to viewpoints expressed by the Securities and Exchange Commission      
regarding the amortization periods used by the physician practice management    
industry. The change in accounting estimate resulted in additional amortization 
expense of approximately $870,000 for the period June 1, 1998 through December  
31, 1998, or $0.03 per common share for the year ended December 31, 1998 after  
consideration of the related income tax effect.                                 

In addition, as a result of the Company's evaluation of the carrying amount of  
its management service agreements (as more fully described in Note 2),          
effective January 1, 1999, the Company reduced the estimated useful lives of    
its management service agreements to lives ranging from 3 to 5 years.           

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Notes to Consolidated Financial Statements (continued)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)                       

USE OF ESTIMATES                                                                

The preparation of financial statements in conformity with generally accepted   
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and footnotes. Although 
these estimates are based on management's knowledge of current events and       
actions they may undertake in the future, actual results could differ from those
estimates.                                                                      

REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE                                     

Service fee revenue is recognized based upon the contractual arrangements of the
underlying long-term Service Agreements between the Company and the Affiliated  
Practices. The five largest Affiliated Practices represent 48%, 39%, and 100%,  
of total management service fee revenue for the years ended December 31, 1998,  
1997 and 1996, respectively. See Note 11 for further discussion of such         
contractual arrangements, including certain guaranteed minimum management fees. 

Other revenue consists primarily of business evaluation fees, recoveries of bad 
debts and other miscellaneous income. Accounts receivable represents amounts due
from patients and other independent third parties for medical services provided 
by the Affiliated Practices and management fee revenue earned by the Company.   
Under the Service Agreements, each Affiliated Practice agrees to sell and assign
to the Company, and the Company agrees to buy, all of the Affiliated Practices' 
accounts receivable each month during the existence of the Service Agreement.   
The purchase price for such accounts receivable generally equals the gross      
amounts of the accounts receivable each month less adjustments for contractual  
allowances, allowances for doubtful accounts and other potentially uncollectible
amounts based on the Affiliated Practice's historical collection rate, as       
determined by the Company. However, the Company and certain of the Affiliated   
Practices are currently making periodic adjustments so that amounts paid by the 
Company for the accounts receivable are adjusted upwards or downwards based on  
the Company's actual collection experience. The Company generally bears the     
collection risk with respect to accounts receivable acquired in connection with 
an affiliation transaction.                                                     

EARNINGS PER SHARE                                                              

In 1997, Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"),  
Earnings Per Share, was issued. SFAS No. 128 replaced the calculation of primary
and                                                                             

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Notes to Consolidated Financial Statements (continued)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)                       

fully diluted earnings per share with basic and diluted earnings per share.     
Unlike primary earnings per share, basic earnings per share excludes any        
dilutive effects of options, warrants and convertible securities. Diluted       
earnings per share is very similar to fully diluted earnings per share under the
previous method of reporting earnings per share. All earnings per share amounts 
for all periods have been presented in conformity with SFAS No. 128             
requirements.                                                                   

FINANCIAL INSTRUMENTS                                                           

The carrying amounts of financial instruments as reported in the accompanying   
balance sheets approximate their fair value primarily due to the short-term     
and/or variable-rate nature of such financial instruments.                      

PROPERTY AND EQUIPMENT                                                          

Property and equipment are stated at cost, including assets acquired from the   
Affiliated Practices. Equipment held under capital leases is stated at the      
present value of minimum lease payments at inception of the related lease. Costs
of repairs and maintenance are expensed as incurred. Depreciation is computed   
using the straight-line method over the estimated useful lives of the underlying
assets. Amortization of capital lease assets and leasehold improvements are     
computed using the straight-line method over the shorter of the lease term or   
the estimated useful lives of the underlying assets. The estimated useful lives 
used are as follows:                                                            

                                                                [Download Table]
                                                            
Computer equipment and software                    3-5 years
Furniture and fixtures                             5-7 years
Leasehold improvements                               5 years

INTANGIBLE ASSETS                                                               

Intangible assets, which are stated at cost, primarily consist of deferred debt 
issuance costs of $1,297,709 at December 31, 1997, that were being amortized on 
a straight-line basis over a three-year period. In connection with the          
circumstances described in Note 6, the Company recognized an impairment loss    
related to its debt issuance costs in the fourth quarter of 1998 for the        
unamortized balance remaining at December 31, 1998.                             

Pursuant to the provisions of Statement of Financial Accounting Standards No.   
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived      
Assets to be Disposed Of, the carrying value of long-lived assets, including    
management service                                                              

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Notes to Consolidated Financial Statements (continued)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)                       

agreements and goodwill, is reviewed quarterly to determine if any impairment   
indicators are present. If it is determined that such indicators are present and
the review indicates that the assets will not be recoverable, based on          
undiscounted estimated cash flows over the remaining amortization and           
depreciation period, the carrying value of such assets are reduced to estimated 
fair market value. Impairment indicators include, among other conditions, cash  
flow deficits; an historic or anticipated decline in revenue or operating       
profit; adverse legal, regulatory or reimbursement developments; accumulation of
costs significantly in excess of amounts originally expected to acquire the     
asset; or a material decrease in the fair market value of some or all of the    
assets.                                                                         

The Company reviews its long-lived assets separately for each physician practice
because the cash flows and operations of each individual physician practice are 
largely independent of each other and of other aspects of the Company's         
business. Intangible and other long-lived assets are allocated to each physician
practice based on the specific identification methodology. During the years     
ended December 31, 1997 and 1996, no impairment charges were recognized by the  
Company. However, during the fourth quarter of 1998, based on the circumstances 
described in Note 2, the Company recorded impairment losses of approximately    
$94.6 million on its service agreements, $1.2 million on the intangible asset   
created with the acquisition of PPI and $2.1 million on its other long-lived    
assets, including deferred debt issuance costs.                                 

The evaluation of the recoverability of long-lived assets, including management 
service agreements and goodwill, is significantly affected by estimates of      
future cash flows from each of the Company's market areas and individual        
physician practices. If future estimates of cash flows from operations decrease,
the Company may be required to further write down its long-lived assets. Any    
such write-down could have a material adverse effect on the Company's financial 
position and results of operations.                                             

STOCK-BASED COMPENSATION                                                        

The Company accounts for its stock-based compensation arrangements under the    
provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock  
Issued to Employees ("APB No. 25"). In 1995, Financial Accounting Standards     
Board Statement No. 123, Accounting for Stock-Based Compensation ("SFAS No.     
123"), was issued, whereby companies may elect to account for stock-based       
compensation using a fair value based method or continue measuring compensation 
expense using the intrinsic value method prescribed in APB No. 25. SFAS No. 123 
requires that companies electing to continue to use the intrinsic value method  
make pro forma disclosure of net income                                         

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Notes to Consolidated Financial Statements (continued)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)                       

and net income per share as if the fair value based method of accounting had    
been applied.                                                                   

ESTIMATED MALPRACTICE PROFESSIONAL LIABILITY CLAIMS                             

The Company and its affiliated physician practices are insured with respect to  
medical malpractice risks on either an occurrence-rate or a claims-made basis.  
Management is not aware of any claims against it or its affiliated physician    
practices which might have a material impact on the Company's financial position
or results of operations.                                                       

REPORTING COMPREHENSIVE INCOME                                                  

Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), Reporting 
Comprehensive Income, was issued in June 1997. SFAS No. 130 establishes         
standards for reporting and display of comprehensive income and its components  
(e.g., revenue, expenses, gains, losses, etc.) in a full set of general purpose 
financial statements. This new accounting pronouncement requires that all items 
that are required to be recognized under accounting standards as components of  
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements and display the accumulated   
balance of other comprehensive income separately from retained earnings and     
additional paid-in capital in the equity section of the balance sheet. SFAS No. 
130 was effective for the Company's year ended December 31, 1998; however, as   
the Company currently has no comprehensive income items, there was no impact on 
the Company's financial statement presentation. If the Company has items of     
comprehensive income in future periods, these items will be reported and        
displayed in accordance with SFAS No. 130.                                      

OPERATING SEGMENTS                                                              

During 1998, the Company adopted Statement of Financial Accounting Standard No. 
131, Disclosures About Segments of an Enterprise and Related Information, ("SFAS
No. 131") which requires reporting of summarized financial results for operating
segments and establishes standards for related disclosures about products and   
services, geographic areas and major customers. The Company evaluates           
performance based on three different operating segments: physician practice     
management, internet services, and the development and management of ambulatory 
service centers. For 1998, 1997 and 1996, physician practice management was the 
only significant operating segment.                                             

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Notes to Consolidated Financial Statements (continued)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)                       

FUTURE ACCOUNTING PRONOUNCEMENTS                                                

Accounting For Derivative Instruments And Hedging Activities                    

In June 1998, Statement of Financial Accounting Standard No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS No. 133") was issued. SFAS 
No. 133 requires the recording all derivative instruments as assets or          
liabilities, measured at fair value. SFAS No. 133 is effective for fiscal years 
beginning after June 15, 1999 and, therefore, the Company will adopt the new    
requirement effective January 1, 2000. Management has not completed its review  
of SFAS No. 133 and has not yet determined the impact on its financial position 
or results of operations.                                                       

Reporting the Costs of Start-up Activities                                      

In April 1998, the AICPA issued SOP 98-5, Reporting the Costs of Start-up       
Activities. The SOP is effective beginning on January 1, 1999, and requires that
start-up costs capitalized prior to January 1, 1999 be written-off and any      
future start-up costs be expensed as incurred. The Company estimates the impact 
of adopting this SOP will not result in a material reduction of 1999 earnings as
there were no start-up costs capitalized as of December 31, 1998.               

RECLASSIFICATIONS                                                               

Certain reclassifications have been made to the 1997 financial statements to    
conform with the 1998 presentation.                                             

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Notes to Consolidated Financial Statements (continued)

4. ACCOUNTS RECEIVABLE AND MANAGEMENT FEE REVENUE                               

Accounts receivable consisted of the following:                                 

                                                                [Download Table]

                                                     DECEMBER 31       
                                                  1998          1997   
                                              -----------   -----------
                                                                       
Gross patient accounts receivable purchased                            
  from the affiliated physician practices     $41,779,935   $48,922,686
Less allowance for contractual adjustments                             
  and doubtful accounts                        22,161,082    26,225,860
                                              -----------   -----------
                                               19,618,853    22,696,826
Management fees, including reimbursement of                            
  clinic expenses                               2,501,628     3,260,541
Other receivables                                 160,990          --  
                                              -----------   -----------
                                              $22,281,471   $25,957,367
                                              ===========   ===========

Management fee revenue, exclusive of reimbursed clinic expenses, was            
approximately $21.5 million, $14.3 million and $1.6 million for the years ended 
December 31, 1998, 1997 and 1996, respectively. One of the Affiliated Practices 
exceeded 20% of the 1997 and 1996 totals.                                       

An integral component of the computation of management fees earned by the       
Company is net patient revenue of the Affiliated Practices. The Affiliated      
Practices recognize net patient revenue for medical services at established     
rates reduced by allowances for contractual adjustments and doubtful accounts.  
Contractual adjustments arise due to the terms of certain reimbursement and     
managed care contracts. Such adjustments represent the difference between       
charges at established rates and estimated recoverable amounts and are          
recognized by the Affiliated Practices in the period the services are rendered. 
Any differences between estimated contractual adjustments and actual final      
settlements under reimbursement and managed care contracts are reported as      
contractual adjustments in the year the final settlements are made. Net patient 
revenue is not recognized as revenue in the accompanying financial statements.  

The Company's Affiliated Practices derived approximately 19.4%, 21.9% and 22.6% 
of their net revenue from services provided under the Medicare program for the  
years ended December 31, 1998, 1997 and 1996, respectively. Laws and regulations
governing the Medicare program are complex and subject to interpretation. The   
Company believes that the Affiliated Practices are in compliance, in all        
material respects,                                                              

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Notes to Consolidated Financial Statements (continued)

4. ACCOUNTS RECEIVABLE AND MANAGEMENT FEE REVENUE (CONTINUED)                   

with all applicable laws and regulations and is not aware of any pending or     
threatened investigations involving allegations of potential wrongdoing. Such   
laws and regulations can be subject to future government review and             
interpretation. Violation of such laws could result in significant regulatory   
action including fines, penalties and exclusion from the Medicare program. Other
than the Medicare program, no single payor provided more than 10% of aggregate  
net clinic revenue or 5% of accounts receivable as of and for the years ended   
December 31, 1998, 1997 and 1996. Accordingly, concentration of credit risk     
related to patient accounts receivable is limited by the diversity and number of
providers, patients and payors.                                                 

Receivables from Affiliated Practices in litigation represent amounts due from  
three Affiliated Practices with which the Company is currently involved in      
disputes. See Note 13 for further discussion of legal proceedings involving the 
Company's Affiliated Practices. At December 31, 1998, gross accounts receivable 
for these practices were $12,145,102, net of an allowance for contractual       
adjustments and doubtful accounts of $7,397,144. Gross accounts receivable      
include patient accounts receivable purchased from the related Affiliated       
Practice, management fees and reimbursement of clinic expenses.                 

5. PROPERTY AND EQUIPMENT                                                       

Property and equipment consist of the following:                                

                                                                [Download Table]

                                                         DECEMBER 31         
                                                   1998               1997   
                                                -----------        ----------
                                                                             
Furniture and fixtures                          $10,455,889        $5,386,107
Computer equipment and software                   2,851,399         1,983,477
Leasehold improvements and other                    770,717         1,227,720
Construction in progress                          1,749,731                 -
                                                -----------        ----------
                                                 15,827,736         8,597,304
Accumulated depreciation and amortization         4,777,371         3,321,085
                                                ===========        ==========
Net property and equipment                      $11,050,365        $5,276,219
                                                ===========        ==========

Construction in progress relates primarily to magnetic resource imaging ("MRI") 
equipment installations at two of the Company's Affiliated Practices and        
construction of an ambulatory surgery center.                                   

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Notes to Consolidated Financial Statements (continued)

5. PROPERTY AND EQUIPMENT (CONTINUED)                                           

Included in the above are assets recorded under capital leases which consist of 
the following:                                                                  

                                                                [Download Table]

                                                      DECEMBER 31        
                                                  1998           1997    
                                              ------------   ------------
                                                                         
Furniture and fixtures                        $  1,234,383   $  1,536,411
Computer equipment                                 178,693        178,693
                                              ------------   ------------
                                                 1,413,076      1,715,104
Accumulated amortization                           917,336        983,603
                                              ============   ============
Net assets under capital leases               $    495,740   $    731,501
                                              ============   ============

6. DEBT                                                                         

Convertible Debentures Issued in 1996                                           

In connection with private placements in 1996, the Company raised $2.17 million 
of short-term unsecured convertible debt. The proceeds thereof were utilized to 
fund the Company's start-up and its organizational phase until certain net      
assets of the original five Affiliated Practices were acquired on November 12,  
1996.                                                                           

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Notes to Consolidated Financial Statements (continued)

6. DEBT (CONTINUED)                                                             

Contemporaneous with the acquisitions of these physician practices, the holders 
of the debentures converted the unpaid principal amounts plus any accrued       
interest thereon (calculated at 5.0%), into the Company's common stock at the   
conversion ratio of $1.00 ($1,920,332) and $3.00 ($301,707) of debenture        
principal and accrued interest for one share of common stock. The following     
table summarizes the conversions:                                               

                                                                [Download Table]

                                         ACCRUED             
                             PRINCIPAL   INTEREST    TOTAL   
                             ----------  --------  ----------
                                                             
Stockholders of the Company  $  640,000   $18,153  $  658,153
Physician practices and                                      
   related stockholders       1,530,000    33,886   1,563,886
                             ----------   -------  ----------
                             $2,170,000   $52,039  $2,222,039
                             ==========   =======  ==========

Convertible Debentures Issued in 1998                                           

In connection with an acquisition of an Affiliated Practice on March 31, 1998,  
the Company issued $5,454,439 of convertible debentures; however, such          
convertible debentures and the related accrued interest totaling $205,479 were  
subsequently canceled contemporaneous with a restructuring of the related       
Affiliated Practice's management service agreement on December 31, 1998. See    
Note 11 for further details.                                                    

In connection with an affiliation on October 1, 1998 of certain assets of two   
physicians who were made party to one of the Company's service agreements with  
an Affiliated Practice, the Company issued $589,615 of convertible debentures.  
The 2% convertible debentures are convertible into Company common stock at a    
conversion price of $10 per share. No debt was converted in 1998. The debentures
are due September 30, 1999. Management expects these debentures to be canceled  
in connection with the restructuring transactions described in Note 2.          

Line-of-Credit                                                                  

On November 1, 1996, the Company entered into a $30 million Revolving Loan and  
Security Agreement (the "Credit Facility") with a bank, which provided certain  
amounts necessary to effectuate acquisitions of Affiliated Practices. Through   
October 31, 1997, the Credit Facility interest rates ranged from 7.2% to 7.4%,  
primarily based on a LIBOR rate plus an applicable margin.                      

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Notes to Consolidated Financial Statements (continued)

6. DEBT (CONTINUED)                                                             

In November 1997, the Credit Facility was restated to permit maximum borrowings 
of $75 million, subject to certain limitations. Prior to the loan covenant      
violations described below, the Credit Facility could be used (i) to fund the   
cash portion of affiliation transactions, and (ii) for the development of       
musculoskeletal focused surgery centers. The Company could elect to borrow on   
the Credit Facility at a floating rate based on the prime rate plus an          
adjustable applicable margin of 0% to 0.75% or at a rate based on LIBOR plus an 
adjustable applicable margin of 1.0% to 2.25%. Currently, the Company's interest
rate is determined based on the prime rate plus 0.5%.                           

At December 31, 1998, the Company had approximately $52.9 million outstanding   
under the Credit Facility at an effective rate of interest of approximately 8.5%
per annum. The Credit Facility is secured by substantially all of the assets of 
the Company and contains several affirmative and negative covenants, including  
covenants limiting the Company's ability to incur additional indebtedness,      
limiting the Company's ability to and restricting the terms upon which the      
Company can affiliate with physician practices in the future, prohibiting the   
payment of cash dividends on, and the redemption or repurchase of, the Company's
common stock and requiring the maintenance of certain financial ratios and      
stockholders' equity.                                                           

As of December 31, 1998, the Company was not in compliance with certain of the  
financial ratio covenants required by the Company's Credit Facility. As a result
of the non-compliance, the Company is in default under the terms of the Credit  
Facility. In the event of default, the terms of the Credit Facility provide that
the bank syndicate can immediately terminate its obligation to make further     
advances under the respective commitments and/or declare the Company's          
outstanding debt under the Credit Facility to be immediately due and payable.   
Accordingly, the total amount outstanding under the Credit Facility of          
approximately $52.9 million has been included in the Company's Consolidated     
Balance Sheet as a current liability at December 31, 1998. The bank syndicate   
notified the Company in December 1998 that it was suspending further advances   
under the Credit Facility; however, as of March 26, 1999, the bank syndicate has
not demanded repayment of any amounts outstanding under the Credit Facility. The
Company is currently negotiating with the bank syndicate to revise the financial
ratio covenants to bring the Company into compliance for the remaining term of  
the Credit Facility. However, there can be no assurances that a mutually        
satisfactory arrangement can be reached and, accordingly, unsuccessful          
negotiation efforts could have a materially adverse impact on the Company's     
ability to continue as a going concern.                                         

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Notes to Consolidated Financial Statements (continued)

6.       DEBT (CONTINUED)                                                       

Prior to the Credit Facility covenant violation, the commitment fee on the      
unused portion of the Credit Facility was 0.25% per annum, subject to reduction 
to a minimum of 0.20% per annum if the Company's leverage coverage (a ratio of  
funded debt to consolidated cash flow) was less than 1.00.                      

7. COMMON STOCK                                                                 

At December 31, 1996, 1,180,000 and 85,000 shares of certain outstanding        
nontransferable common stock were held by current employees and former          
employees, respectively. Pursuant to the common stock subscription agreements   
and a related Stockholders Agreement, executed by the Company and its employees,
all unvested shares became vested as a result of the initial public offering of 
the Company's common stock.                                                     

During the year ended December 31, 1996, the Company issued an additional       
100,000 shares of common stock to one of its Affiliated Practices at $3.00 per  
share.                                                                          

On February 6, 1997, the Company's initial public offering of its common stock  
became effective. In connection therewith, 3,208,338 shares of common stock were
issued at $8.00 per share, including 208,338 common shares issued upon exercise 
of the underwriters' overallotment option.                                      

In connection with the acquisition, through merger, of substantially all of the 
assets and certain liabilities of Orthopaedic Surgery, Ltd. ("OSL"), on July 1, 
1997, the Company granted one physician associated with OSL the option to       
require the Company to purchase 74,844 shares of common stock issued to such    
physician as consideration for the OSL merger at a purchase price equal to      
approximately $11.21 per share. In addition, in connection with the acquisition,
by asset purchase, of substantially all of the assets and certain liabilities of
Steven P. Surgnier, M.D., P.A., the Company granted Dr. Surgnier the option to  
require the Company to purchase 37,841 shares of common stock at a purchase     
price equal to approximately $12.38 per share. During the year ended December   
31, 1998, the above mentioned options were exercised. The Company paid $921,491 
and canceled a loan to a physician stockholder in the amount of $385,983 as     
consideration for the repurchase of shares and has included this amount as      
treasury stock in its consolidated balance sheet at December 31, 1998.          

The Company records treasury stock at cost with regard to monetary transactions 
(e.g., settlement of put options). With regard to non-monetary transactions,    

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Notes to Consolidated Financial Statements (continued)

7. COMMON STOCK (CONTINUED)                                                     

including the Affiliated Practice restructurings effective December 31, 1998,   
the common stock transferred to the Company is record at estimated fair value.  

As of December 31, 1998, the Company had the following common shares reserved   
for future issuance:                                                            

                                                                [Download Table]
                                                                                 
Awards under the 1996 Equity Compensation Plan                          5,261,165
Awards under the 1996 Incentive and Non-Qualified Stock Option Plan         3,500
Warrants in connection with one of the Affiliated Practice                       
    acquisitions (Note 11)                                                       
                                                                          544,681
Convertible debentures                                                     58,961
Shares which may be released as additional consideration for one of              
    the Affiliated Practice acquisitions (Note 11)                        113,393
                                                                     ============
Total shares reserved for future issuance                               5,981,700
                                                                     ============

8. STOCK OPTION PLANS                                                           

On March 22, 1996, the Company adopted the 1996 Incentive and Non-Qualified     
Stock Option Plan (the "Plan") pursuant to which nontransferable options to     
purchase up to 5,000,000 shares of common stock of the Company were available   
for award to eligible directors, officers, advisors, consultants and key        
employees. On January 10, 1997, the Board of Directors voted to terminate the   
Plan. The exercise price for incentive stock options awarded during the year    
ended December 31, 1996 was not less than the fair market value of each share at
the date of the grant and the options granted thereunder were for a period of   
ten years. Options, which are generally contingent on continued employment with 
the Company, may be exercised only in accordance with a vesting schedule        
established by the Company's Board of Directors. Of the 553,500 shares          
underlying the option grants approved during the year ended December 31, 1996 at
an exercise price of $1.00 per share, 3,500 shares underlying the options remain
outstanding and exercisable at December 31, 1998. The other 550,000 grant       
options were forfeited or exercised during 1997.                                

On October 15, 1996, the Company's Board of Directors approved the 1996 Equity  
Compensation Plan (the "Equity Plan"), which provides for the granting of       
options to purchase up to 2,000,000 shares of the Company's common stock. The   
total number of shares authorized by the Equity Plan increased to 6,000,000 in  
1998                                                                            

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Notes to Consolidated Financial Statements (continued)

8.       STOCK OPTION PLANS (CONTINUED)                                         

Both incentive stock options and non-qualified stock options may be issued under
the provisions of the Equity Plan. Employees of the Company and any future      
subsidiaries, members of the Board of Directors and certain advisors are        
eligible to participate in this plan, which will terminate no later than October
14, 2006. The granting and vesting of options under the Equity Plan are provided
by the Company's Board of Directors or a committee of the Board of Directors.   

Pro forma information regarding net income and earnings per share is required by
SFAS No. 123 and has been determined as if the Company had accounted for its    
employee stock options under the fair value method of that accounting           
pronouncement. The fair value for options awarded during the years ended        
December 31, 1998, 1997 and 1996 were estimated at the date of grant using an   
option pricing model with the following weighted-average assumptions: risk-free 
interest rate over the life of the option of 6.0%; no dividend yield; and       
expected two to eight year lives of the options. The estimated fair value for   
these options was calculated using the minimum value method in 1996 and may not 
be indicative of the future impact since this model does not take into          
consideration volatility and the commencement of public trading in the Company's
common stock on February 7, 1997. The Black-Scholes model was utilized to       
calculate the value of the options issued during 1998 and 1997. The volatility  
factors utilized in 1998 and 1997 were 0.36 and 0.47, respectively.             

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 disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting period. Because compensation     
expense associated with an award is recognized over the vesting period, the     
impact on pro forma net (loss) income as disclosed below may not be             
representative of compensation expense in future years.                         

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Notes to Consolidated Financial Statements (continued)

8. STOCK OPTION PLANS (CONTINUED)                                               

The Company's pro forma information for the years ended December 31 is as       
follows:                                                                        

                                                        [Enlarge/Download Table]

                                             1998             1997            1996      
                                        --------------   --------------  -------------- 
                                                                                        
Pro forma net (loss) income             $  (64,073,357)  $    5,354,571  $   (1,815,272)
Pro forma net (loss) income per common                                                  
   share (basic)                                 (3.51)            0.34           (0.16)
Pro forma net (loss) income per common                                                  
   share (diluted)                               (3.51)            0.33           (0.15)

A summary of the Company's stock option activity and related information for the
years ended December 31 is as follows:                                          

                                                        [Enlarge/Download Table]

                                               1998                          1997                          1996           
                                   ----------------------------  ----------------------------  ---------------------------
                                                     Weighted-                     Weighted-                   Weighted-  
                                                      Average                       Average                     Average   
                                                      Exercise                     Exercise                     Exercise  
                                     Options           Price       Options           Price       Options         Price    
                                   ------------    ------------  ------------    ------------  ------------   ------------
                                                                                                                          
Outstanding at Beginning of Year      2,365,007    $       9.57     1,758,748    $       5.25          --     $       --  
   Granted                                                                                                                
     Exercise price equal to                                                                                              
       fair value of common stock     3,625,572            7.89     1,073,751           12.07       603,500           1.41
     Exercise price greater than                                                                                          
       fair value of common stock          --              --         160,000           10.00       726,658           8.00
     Exercise price less than                                                                                             
       fair value of common stock          --              --            --              --         428,590           6.00
     Exercised                          (36,100)           6.41      (227,049)           1.17          --             --  
     Forfeited                         (689,814)           9.82      (400,443)           2.26          --             --  
                                   ------------    ------------  ------------    ------------  ------------   ------------

     Outstanding at end of year       5,264,665            8.40     2,365,007    $       9.57     1,758,748   $       5.25
                                   ============                  ============    ============  ============   ============

Exercisable at end of year              644,341            9.75       231,537    $       7.38         3,500   $       1.00
                                   ============                  ============    ============  ============   ============

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Notes to Consolidated Financial Statements (continued)

8. STOCK OPTION PLANS (CONTINUED)                                               

                                                                [Download Table]

                                                1998        1997        1996   
                                              ---------   ---------   ---------
                                                                               
Weighted-Average Fair Value of Options:                                        
     Exercise price equal to fair value of                                     
       common stock                           $    2.56   $    4.62   $    0.19
     Exercise price greater than fair value                                    
       of common stock                             --          4.35        0.99
     Exercise price less than fair value of                                    
       common stock                                --          --          2.75

Exercise prices for options outstanding and the weighted-average remaining      
contractual lives of those options at December 31, 1998 are as follows:         

                                                        [Enlarge/Download Table]

                                   OPTIONS OUTSTANDING                       OPTIONS EXERCISABLE      
                    --------------------------------------------------  ------------------------------
                                       Weighted-                                                      
                                        Average         Weighted-                         Weighted-   
                                       Remaining         Average                           Average    
      Range of           Number       Contractual        Exercise           Number        Exercise    
  Exercise Prices     Outstanding         Life            Price           Exercisable       Price     
----------------------------------------------------------------------  ------------------------------
                                                                                                      
      $ 1.00                3,500           7.20           $ 1.00              3,500        $ 1.00    
        3.00              760,000           9.59             3.00                  -          3.00    
    6.00 - 6.99         1,462,394           9.00             6.53             55,973          6.00    
        8.00              584,666           8.06             8.00            282,001          8.00    
    9.00 - 9.99         1,001,020           9.33             9.86             25,867          9.65    
   10.00 - 12.99        1,086,078           9.12            11.97            149,551         11.70    
   13.25 - 13.25          367,007           9.11            13.25            127,449         13.25    
                     ------------                                       ------------                  
    1.00 - 13.25        5,264,665           9.07             8.40            644,341          9.75    
                     ============                                       ============                  

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Notes to Consolidated Financial Statements (continued)

9. LEASES                                                                       

The Company is obligated under operating and capital lease agreements for       
offices and certain equipment. In some circumstances, these lease arrangements  
are with entities owned or controlled by physician stockholders who are also    
equity holders of the Company's Affiliated Practices. Certain leases are subject
to standard escalation clauses and include renewal options. Future minimum      
payments under noncancelable capital and operating leases with lease terms in   
excess of one year are summarized as follows for the years ending December 31:  

                                                                [Download Table]

                                                 CAPITAL        OPERATING 
                                                  LEASES          LEASES  
                                                -----------    -----------
                                                                          
1999                                            $   321,742    $ 4,137,748
2000                                                306,917      4,155,303
2001                                                227,464      3,969,095
2002                                                235,064      3,234,134
2003                                                   --        1,830,231
Thereafter                                             --        6,904,599
                                                -----------    -----------
Total minimum lease payments                      1,091,187    $24,231,110
                                                               ===========
Less amount representing interest                  (166,589)              
                                                -----------               
Present value of net minimum lease payments         924,598               
Less current portion                                244,446               
                                                -----------               
Long-term portion                               $   680,152               
                                                ===========               

Rent expense for the years ended December 31, 1998, 1997 and 1996 under all     
operating leases was approximately $7,800,000, $4,800,000 and $400,000,         
respectively. Approximately $7,600,000, $4,600,000 and $355,000, respectively,  
of such amounts were charged directly to the Affiliated Practices as clinic     
expenses. Excluded from total minimum operating lease payments are approximately
$13.3 million in total future payments related to Affiliated Practices currently
in litigation with the Company. These Affiliated Practices are currently paying 
these leases directly. Additionally, one of the Company's Affiliated Practices  
which entered into restructuring agreements with the Company has assumed        
responsibility for its payables effective January 1, 1999. The total future     
lease payments for this Affiliated Practice of approximately $11.5 million has  
been excluded from the Company's future operating lease commitments in the table
above.                                                                          

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Notes to Consolidated Financial Statements (continued)

10. INCOME TAXES                                                                

The Company is a corporation subject to federal and certain state and local     
income taxes. The provision for income taxes is made pursuant to the liability  
method as prescribed in Statement of Financial Accounting Standards No. 109,    
Accounting for Income Taxes. The liability method requires recognition of       
deferred income taxes based on temporary differences between the financial      
reporting and income tax bases of assets and liabilities, using currently       
enacted income tax rates and regulations.                                       

Deferred income taxes reflect the net tax effects of temporary differences      
between the carrying amounts of assets and liabilities for financial reporting  
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities at December 31, 1998 and 1997 
are as follows:                                                                 

                                                                [Download Table]

                                                1998            1997     
                                             ------------    ------------
                                                                         
Deferred tax assets:                                                     
  Management service agreements              $  4,510,554    $       --  
  Deferred start-up expenditures                  678,515         718,491
  Property and equipment, net                     421,654         209,244
  Accrued liabilities                             307,603         345,030
  Allowance for doubtful accounts                 389,062          41,000
  Financing fees                                  293,697            --  
  Stock option compensation                          --            85,698
                                             ------------    ------------
                                                6,601,085       1,399,463
Valuation allowance for deferred                                         
  tax assets                                   (5,498,609)           --  
                                             ------------    ------------
Net deferred tax asset                          1,102,476       1,399,463
                                             ------------    ------------

Deferred tax liabilities:                                                
  Management service agreements                      --        31,125,220
  Net cash basis assets assumed                                          
     in physician practice affiliations         1,483,279       3,079,428
  Prepaid expenses                                483,399         183,146
  Deferred gain on installment sale               218,976            --  
                                             ------------    ------------
                                                2,185,654      34,387,794
                                             ------------    ------------
Net deferred tax liability                   $  1,083,178    $ 32,988,331
                                             ============    ============

The Company has established a $5,498,609 valuation allowance as of December 31, 
1998. The valuation allowance results from uncertainty regarding the Company's  
ability                                                                         

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Notes to Consolidated Financial Statements (continued)

10. INCOME TAXES (CONTINUED)                                                    

to produce sufficient taxable income in future periods necessary to realize the 
benefits of the related deferred tax assets.                                    

The income tax expense (benefit) for the years ended December 31, 1998, 1997 and
1996 is summarized as follows:                                                  

                                                                [Download Table]

                               1998            1997            1996     
                           ------------    ------------    ------------ 
                                                                        
Current:                                                                
  Federal                  $ (1,071,968)   $  4,074,033    $    971,192 
  State                         125,603       1,079,390         258,083 
                           ------------    ------------    ------------ 
                               (946,365)      5,153,423       1,229,275 
                           ------------    ------------    ------------ 
Deferred:                                                               
  Federal                   (24,424,176)       (991,430)     (1,362,954)
  State                      (7,095,850)       (288,067)       (372,392)
                           ------------    ------------    ------------ 
                            (31,520,026)     (1,279,497)     (1,735,346)
                           ------------    ------------    ------------ 
Total                      $(32,466,391)   $  3,873,926    $   (506,071)
                           ============    ============    ============ 

The income tax expense (benefit) differs from amounts currently payable because 
certain revenue and expenses are reported in the statement of operations in     
periods that differ from those in which they are subject to taxation. The       
principal differences relate to asset impairment charges that are not deductible
for income tax purposes, business acquisition and start-up expenditures that are
capitalized for income tax purposes and expensed for financial statement        
purposes, and the amortization of certain cash basis net assets included in     
taxable income in periods subsequent to the date of affiliation with physician  
practices.                                                                      

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Notes to Consolidated Financial Statements (continued)

10. INCOME TAXES (CONTINUED)                                                    

A reconciliation between the statutory federal income tax rate of 34% and the   
Company's (34.4%), 39.8% and (22.2%) effective tax rates for the years ended    
December 31, 1998, 1997 and 1996, respectively, is as follows:                  

                                                        [Enlarge/Download Table]

                                               1998            1997           1996       
                                            ------------    ------------   ------------  
                                                                                         
Federal statutory income tax rate                  (34.0%)          34.0%         (34.0%)
State income taxes, net of federal benefit          (5.8)            5.1           (2.8) 
Nondeductible business acquisition and                                                   
  other costs                                       --               0.7           11.5  
Miscellaneous                                       (0.4)           --              3.1  
Deferred tax asset valuation allowance               5.8            --             --    
                                            ------------    ------------   ------------  
Effective income tax rates                         (34.4%)          39.8%         (22.2%)
                                            ============    ============   ============  

11.      PHYSICIAN PRACTICE NET ASSET ACQUISITIONS AND SERVICE AGREEMENTS       

1996 ACTIVITY                                                                   

Effective November 12, 1996, the Company acquired substantially all of the      
assets, including accounts receivable and fixed assets, and certain liabilities,
including current trade payables, accrued expenses and certain capital lease    
obligations, of five physician practices. The physician owners, functioning as  
promoters, effectively contributed these assets and liabilities in exchange for 
an aggregate of 7,659,115 shares of common stock of the Company and $1,537,872  
in cash. Upon closing, the Company, under signed agreements, assumed all risks  
of ownership related to these net assets.                                       

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Notes to Consolidated Financial Statements (continued)

11.      PHYSICIAN PRACTICE NET ASSET ACQUISITIONS AND SERVICE AGREEMENTS       

The following table summarizes certain financial information related to this    
transaction for the five original Affiliated Practices:                         

                                                                [Download Table]

                                                 COMMON STOCK            CASH    
                                                 CONSIDERATION      CONSIDERATION
                                                  PAID BY THE         PAID BY THE
                                                    COMPANY            COMPANY   
                                                --------------     --------------
                                                   (Shares)                      
                                                                                 
Reconstructive Orthopaedic Associates, Inc.(1)       3,169,379     $    1,537,872
Princeton Orthopaedic Associates, P.A                1,196,793               --  
Tallahassee Orthopedic Clinic, P.A                   1,072,414               --  
Greater Chesapeake Orthopaedic Associates, LLC       1,568,922               --  
Vero Orthopaedics, P.A                                 651,607(2)            --  

(1) Pursuant to a Separation Agreement dated June 9, 1997, between the          
stockholders of Reconstructive Orthopaedic Associates, II, P.C. ("ROA") 
   (successor to Reconstructive Orthopaedic Associates, Inc.), and Drs. Booth,
 Bartolozzi and Balderston (collectively 3B Orthopaedics), 3B Orthopaedics
formed a new Pennsylvania corporation in order to practice medicine.    
  Currently, the Company is involved in a dispute with 3B Orthopaedics, (See
Note 13 for further discussion).                                        

(2) Excludes non-qualified stock options to purchase an additional 50,000 shares
   of the Company's common stock at $6.00 per share, which became fully vested
November 12, 1998.                                                      

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Notes to Consolidated Financial Statements (continued)

11. PHYSICIAN PRACTICE NET ASSET ACQUISITIONS AND SERVICE AGREEMENTS (CONTINUED)

1997 ACTIVITY                                                                   

During 1997, the Company acquired substantially all of the assets and certain   
liabilities of additional physician practices through a combination of asset    
purchases and mergers as detailed in the table below:                           

                                                        [Enlarge/Download Table]

-------------------- -------------------------------- -------------- ------------------------
    AFFILIATION                AFFILIATED              ACQUISITION        HEADQUARTERS       
       DATE                    PRACTICE(1)                 TYPE             LOCATION         
-------------------- -------------------------------- -------------- ------------------------
                                                                                             
March 1997           Medical Rehabilitation           Merger         Tallahassee, Florida    
                     Specialists II, P.A., Riyaz H.                  Baltimore, Maryland     
                     Jinnah, M.D., II, P.A., Floyd                   Thomasville, Georgia    
                     R. Jaggears, Jr., M.D., P.C.,                                           
                     II                                                                      

April 4, 1997        The Orthopaedic and Sports       Merger         Annapolis, Maryland     
                     Medicine Center, II, P.A.                                               

July 1, 1997         Southeastern Neurology Group     Asset          Portsmouth, Virginia    
                     II, P.C.                         Purchase/                              
                                                      Merger                                 

July 1, 1997         Orthopaedic Surgery Centers,     Merger         Portsmouth, Virginia    
                     P.C. II                                                                 

July 3, 1997         Associated Orthopaedics &        Merger         Plano, Texas            
                     Sports Medicine, P.A.                                                   

July 3, 1997         Associated Arthroscopy           Asset          Plano, Texas            
                     Institute, Inc.                  Purchase                               

July 3, 1997         Access Medical Supply, Inc.      Asset          Plano, Texas            
                     d/b/a Associated Physical        Purchase                               
                     Therapy                                                                 

July 3, 1997         Allied Health Services, P.A.     Asset          Plano, Texas            
                     d/b/a Associated Occupational    Purchase                               
                     Rehabilitation                                                          

July 7, 1997         Ortho-Associates P.A. d/b/a      Asset          Plantation, Florida     
                     Park Place Therapeutic Center    Purchase                               

July 16, 1997        Mid-Atlantic Orthopaedic         Asset          Hagerstown, Maryland    
                     Specialists\Drs. Cirincione,     Purchase                               
                     Milford, Stowell, and                                                   
                     Amalfitano, P.C.                                                        

August 29, 1997      Northeast Florida                Merger         Orange Park, Florida    
                     Orthopaedics, Sports Medicine                                           
                     and Rehabilitation II, P.A.                                             

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Notes to Consolidated Financial Statements (continued)

11. PHYSICIAN PRACTICE NET ASSET ACQUISITIONS AND SERVICE AGREEMENTS (CONTINUED)

                                                        [Enlarge/Download Table]

----------------------- ------------------------------- -------------- -----------------------------
     AFFILIATION                  AFFILIATED             ACQUISITION           HEADQUARTERS         
         DATE                     PRACTICE(1)                TYPE                LOCATION           
----------------------- ------------------------------- -------------- -----------------------------
                                                                                                    
August 29, 1997         Steven P. Surgnier, M.D.,       Asset          Mariana, Florida             
                        P.A., II                        Purchase                                    

September 1, 1997       Orthopaedic Associates of       Merger         Clearwater, Florida          
                        West Florida, P.A.                                                          

September 10, 1997      Orthopedic Institute of Ohio,   Merger         Lima, Ohio                   
                        Inc.                                                                        

November 14, 1997       The Specialists Orthopaedic     Merger/        Fairfield, California        
                        Medical Corporation             Asset                                       
                            Purchase                                                                

November 14, 1997       The Specialists Surgery Center  Asset          Fairfield, California        
                            Purchase                                                                

       (1)  Some of the Affiliated Practices listed are successors to entities
acquired by the Company.                              

Total consideration for the 1997 merger and asset acquisitions was 3,222,891    
shares of the Company's common stock and $44,452,105 in cash. As part of the    
consideration in three of the mergers, the Company issued an aggregate 13,322   
shares of common stock and paid an aggregate $189,000 in cash to Michael E.     
West, who served as a consultant to three of the predecessors to the Affiliated 
Practices. Mr. West subsequently became Senior Vice President of Operations of  
the Company in August 1997 and terminated his employment with the Company in    
March 1999. Furthermore, the Company granted one physician associated with      
Orthopaedic Surgery Centers, P.C. II the right, until June 30, 1998, to require 
the Company to re-purchase 74,844 shares of common stock issued to such         
physician in the merger at a purchase price equal to $11.21 per share and, in   
connection therewith, such shares were put to the Company in 1998 (see Note 7). 
Additionally, in connection with the asset purchase of Ortho-Associates P.A.    
d/b/a Park Place Therapeutic Center, the Company issued to the physician owners 
warrants to purchase, in the aggregate, 544,681 shares of common stock at an    
exercise price of $14.69 per share. The Company also has an escrowed deposit of 
approximately $900,000 in cash and 113,393 shares which may be released as      
additional consideration for one of the Company's physician practice            
acquisitions.                                                                   

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Notes to Consolidated Financial Statements (continued)

11. PHYSICIAN PRACTICE NET ASSET ACQUISITIONS AND SERVICE AGREEMENTS (CONTINUED)

Effective September 10, 1997, the Company acquired, by purchase from the        
physician owners of Orthopedic Institute of Ohio, Inc., one-half of the         
outstanding membership interests of West Central Ohio Group, Ltd., an Ohio      
limited liability company ("WCOG"). WCOG constructed an orthopaedic institute in
Lima, Ohio (the "Institute"), which commenced operations in February 1998. In   
connection with the acquisition, the Company paid $400,000 in cash for its      
investment in WCOG, which consisted of a $180,000 equity investment and $220,000
of goodwill. Included in advances to affiliates and other in the accompanying   
financial statements at December 31, 1997 is the $400,000 investment in WCOG and
$522,022 in advances to WCOG. Additionally, the Company agreed to pay an amount 
equal to 25% of WCOG's first $6,000,000 of net income as contingent             
consideration.                                                                  

1998 ACTIVITY                                                                   

In March 1998, the Company sold its entire interest in WCOG to the physician    
owners of Orthopedic Institute of Ohio, Inc. and a company (the "Acquiring      
Company") for total consideration of approximately $1,950,000. In addition, the 
Company was relieved of its obligation to pay an amount equal to 25% of WCOG's  
first $6,000,000 of net income as contingent consideration. The sale resulted in
a pre-tax gain of $1,240,078 which has been included in the accompanying        
consolidated financial statements for the year ended December 31, 1998. At      
December 31, 1998, the Company maintains non-interest bearing long-term advances
receivable from WCOG in the aggregate amount of $944,520. An officer and 50%    
stockholder of the Acquiring Company is the brother of the President and Chief  
Executive Officer of the Company (see also Note 12).                            

Effective March 31, 1998, in connection with the acquisition, by asset purchase,
of substantially all of the assets and certain liabilities of Orlin & Cohen     
Associates LLP ("OCOA"), the Company issued to OCOA 459,562 shares of common    
stock and a promissory note (convertible debenture) in the principal amount of  
$5,454,539 and paid cash in the amount of $11,375,000. In addition, the Company 
paid a finder's fee of $114,000 in connection with the acquisition. The         
promissory note (convertible debenture) was canceled pursuant to one of the     
transactions described in Note 2.                                               

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Notes to Consolidated Financial Statements (continued)

11. PHYSICIAN PRACTICE NET ASSET ACQUISITIONS AND SERVICE AGREEMENTS (CONTINUED)

MANAGEMENT SERVICE AGREEMENT DISCUSSION                                         

Concurrent with its acquisitions, the Company simultaneously entered into       
long-term service agreements with the Affiliated Practices. Pursuant to the     
terms of the Service Agreements, the Company, among other things, provides      
facilities and management, administrative and development services, including   
assistance in the negotiations of contracts signed between the affiliate        
practice and third party payors, in return for service fees. Such fees are      
payable monthly and consist of the following: (i) service fees based on a       
percentage ranging from 20%-50% of the adjusted pre-tax income of the Affiliated
Practices (generally defined as revenue of the Affiliated Practices related to  
professional services less amounts equal to certain clinic expenses but not     
including physician owner compensation or most benefits to physician owners)    
plus (ii) reimbursement of certain clinic expenses.                             

Typically, for the first three years following affiliation, however, the portion
of the service fees described under clause (i) is specified to be the greater of
the amount payable as described under clause (i) above or a fixed dollar amount 
(the "Base Service Fee"), which was generally calculated by applying the        
respective service fee percentage of adjusted pre-tax income of the predecessors
to the Affiliated Practices for the twelve months prior to affiliation. In      
addition, with respect to its management of certain facilities and ancillary    
services associated with certain of the Affiliated Practices, the Company       
receives fees ranging from 2%-8% of net revenue.                                

The Service Agreements have terms of forty years, with automatic extensions     
(unless specified notice is given) of additional five-year terms. A Service     
Agreement may be terminated by either party if the other party (i) files a      
petition in bankruptcy or other similar events occur or (ii) defaults on the    
performance of a material duty or obligation, which default continues for a     
specified term after notice. In addition, the Company may terminate the         
agreement if the Affiliated Practice's Medicare or Medicaid number is terminated
or suspended as a result of some act or omission of the Affiliated Practice or  
the physicians, and the Affiliated Practice may terminate the agreement if the  
Company misapplies funds or assets or violates certain laws.                    

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Notes to Consolidated Financial Statements (continued)

11. PHYSICIAN PRACTICE NET ASSET ACQUISITIONS AND SERVICE AGREEMENTS (CONTINUED)

Upon termination of a Service Agreement by the Company for one of the reasons   
set forth above, the Company generally has the option to require the Affiliated 
Practice to purchase and assume the assets and liabilities related to the       
Affiliated Practice at the fair market value thereof. In addition, upon         
termination of a Service Agreement by the Company during the first five years of
the term, the physician owners of the Affiliated Practice are required to pay   
the Company or return to the Company an amount of cash or stock of the Company  
equal to one-third of the total consideration received by such physicians in    
connection with the Company's affiliation with the practice.                    

Under the Service Agreements, each physician owner must give the Company twelve 
months notice of an intent to retire from the Affiliated Practice. If a         
physician gives such notice during the first five years of the agreement, the   
physician must also locate a replacement physician or physicians acceptable to a
Joint Policy Board and pay the Company an amount based on a formula relating to 
any loss of service fee for the first five years of the term. Furthermore, the  
physician must pay the Company an amount of cash or stock of the Company equal  
to one-third of the total consideration received by such physician in connection
with the Company's affiliation with the practice. The agreement also provides   
that after the fifth year no more than 20% of the physician owners at an        
Affiliated Practice may retire within a one-year period.                        

NEW MANAGEMENT SERVICE AGREEMENT DISCUSSION                                     

As discussed in Note 2, the Board of Directors of the Company has approved      
restructuring agreements with ten of the Company's Affiliated Practices. The    
purchase price paid to the Company will consist of payment for the book value of
the assets to be purchased by the practices, less the practice liabilities as of
the closing date of the transaction and payment for the execution of a new      
management services agreement to replace the existing service agreement.        

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Notes to Consolidated Financial Statements (continued)

11. PHYSICIAN PRACTICE NET ASSET ACQUISITIONS AND SERVICE AGREEMENTS (CONTINUED)

The ten Affiliated Practices and the proposed consideration are as follows:     

                                                        [Enlarge/Download Table]

                                                                                  COMMON     
AFFILIATED PRACTICE                                             CASH PAYMENT      STOCK      
------------------------------------------------------ --------------------------------------
                                                                                             
Floyd R. Jaggears, Jr., M.D., P.C., II                           $ 264,300           --      
Riyaz H. Jinnah, M.D., II, P.A.                                    170,476         73,000    
The Orthopaedic and Sports Medicine                                                          
   Center, II, P.A.                                              2,477,793        440,079    
Orthopaedic Associates of West Florida,                                                      
   P.A.                                                          2,496,785        332,983    
Orthopedic Institute of Ohio, Inc.                               3,289,373        505,040    
Orthopaedic Surgery Centers, P.C. II                             1,644,899        266,615    
Princeton Orthopaedic Associates, II, P.A.                       2,219,000        897,595    
Reconstructive Orthopaedic Associates, II,                                                   
   P.C.                                                          2,966,002      1,224,626    
Southeastern Neurology Group II, P.C.                            1,416,720         35,866    
Steven P. Surgnier, M.D., P.A., II                                 227,269         11,153    
                                                               -----------      ---------    
Totals                                                         $17,172,617      3,786,957    
                                                               ===========      =========    

In addition to the cash and common stock consideration, convertible debentures  
outstanding to one of the affiliated practices of approximately $0.6 million    
will be cancelled.                                                              

Under the new management service agreements, the Company will reduce the level  
of services currently provided to the practices participating in the            
restructuring. The following services will be offered to each practice:         

o  Assessing the financial performance, organizational structure, wages and     
strategic plan of the practice;                                           

o  Advising with respect to current and future marketing and contracting plans  
with third party payors and managed care plans;                           

o  Negotiating malpractice insurance coverage;                                  

o  Providing access to patient information databases;                           

o  Analyzing annual performance on a comparative basis with other practices that
have contracted with the Company; and                                     

o  Analyzing billing practices.                                                 

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Notes to Consolidated Financial Statements (continued)

11. PHYSICIAN PRACTICE NET ASSET ACQUISITIONS AND SERVICE AGREEMENTS (CONTINUED)

The Company will not provide any equipment, facilities, supplies or employee    
staffing at practice sites under the new management service agreements. In      
addition, the management services provided to the practices will be reduced. The
following management services are those that were performed under the prior     
arrangement but will not be provided under the new management service           
agreements:                                                                     

o  Personnel evaluations;                                                       

o  Billing and collection services;                                             

o  Computer hardware/software support;                                          

o  Payroll services;                                                            

o  Accounts payable processing/managing services;                               

o  On-site procurement; and                                                     

o  Any other type of day-to-day practice management services.                   

As a result of the reduced services offered, the service fees under the new     
management service agreements will be substantially reduced; however, such new  
service fees will generally be paid for a period ending five years from the     
initial practice affiliation date. The Company has also agreed that beginning   
April 1, 1999 and ending on the earlier of the date of closing of the           
restructuring transaction or June 15, 1999, the service fees under the current  
service agreements will be reduced from the current fees and the Company will   
also provide a limited level of services during such period. Upon the closing of
the restructuring transaction, the new management service agreement will control
the relationship.                                                               

12. ACQUISITION OF PROVIDER PARTNERSHIPS, INC. ("PPI")                          

During the third quarter of 1998, the Company acquired PPI in exchange for      
420,000 shares of its common stock. PPI is a recently formed company that       
provides consulting services to hospitals to increase their operating           
performance, with a specific focus on the cardiac areas.                        

One of the principals of PPI, who has been elected to serve as Executive Vice   
President-Provider Businesses of the Company, is the brother of the President   
and Chief Executive Officer of the Company.                                     

See Note 2, Impairment of Intangible Assets and Other Long-Lived Assets, for the
status of an ongoing dispute between the Company and the former principals of   
PPI.                                                                            

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Notes to Consolidated Financial Statements (continued)

13. LEGAL PROCEEDINGS                                                           

The Specialists Litigation                                                      

There are two actions currently pending between the Company and the Specialists 
Orthopaedic Medical Corporation, one of the Company's affiliated practices, and 
the Specialists Surgery Center, a partnership that operates a surgery center    
(collectively the "Specialists"), one in Solano County Superior Court, which was
recently stayed by that court ("the state action"), and one in the United States
District Court for the Eastern District of California, which is currently being 
litigated (the "federal action").                                               

The state action was filed on November 13, 1998 in the Solano County Superior   
Court by the Specialists and four physicians who practice at, and own an        
interest in, one or both of the plaintiff entities (the "Specialists Doctors"), 
against the Specialists' former administrator; legal, accounting and consulting 
advisors to the plaintiffs in connection with the affiliation transactions      
(collectively with the administrator, the "Advisors"); entities affiliated with 
certain of the Advisors; us; an employee of the Company, and 25 unnamed         
defendants.                                                                     

The complaint contains numerous allegations against one or more of the Advisors,
including among others, fraud, misrepresentation, conversion, breach of         
fiduciary duty, negligence, professional negligence and legal malpractice. With 
respect to the Company, and its employee, the complaint alleges, among other    
things, that the Company and its employee conspired with the Advisors to induce 
the Specialists Doctors to enter into the transactions by which the Company     
acquired the practice assets and entered into the service agreements with the   
Specialists; that the Company and its employee misrepresented the terms of the  
transaction to the Specialists Doctors; that, in connection with the issuance of
the Company's common stock to the Doctors, the Company and the other defendants 
violated California securities law by making material misstatements or omitting 
material facts; that the service agreements are void; that the required service 
fees are unconscionable; and that the service agreements do not represent the   
true intention of the parties with regard to the service fees to be charged.    

The Specialists Doctors seek a judicial declaration that the service fees are   
unenforceable, a reformation of the service agreements to reflect service fees  
within the alleged intent of the parties, an accounting of the cash proceeds    
from the acquisition transactions, special damages of $2.48 million (including  
$300,000 paid to us), compensatory, consequential and punitive damages, damages 
for emotional distress, attorney fees and costs.                                

In addition, co-defendant Ronald Fike, the Specialists' former administrator,   
filed a cross-complaint on December 18, 1998, naming as cross-defendants all    
co-defendants (including us and our employee), all plaintiffs and seven new     
parties. The cross-complaint alleges causes of action for breach of contract,   
slander, negligent infliction of emotional distress, deceit and conspiracy, and 
indemnity. The Company and its employee are named as defendants to the last     
three causes of action only.                                                    

Management believes the allegations, as they pertain to the Company and an      
employee of the Company, are without merit and have vigorously contested the    
action and cross-complaint. As an initial response, the Company has filed a     
Motion to Stay or Dismiss both the action and the cross-complaint, based upon a 
forum selection clause contained in the original acquisition agreement,         
requiring the Specialists and Mr. Fike to file any and all actions in Jefferson 
County, Colorado. The court granted the Company's Motion on March 12, 1999, and 
stayed the action in its entirety, as to all named parties.                     

In the federal action, filed by the Company on January 12, 1999 in the United   
States District Court for the Eastern District of California against the        
Specialists and the Specialists Doctors, the Company is seeking relief for      
various breaches of contract, conversion of its assets, and tortious            
interference with contractual relations. Additionally, the Company's complaint  
seeks to recover damages for the Specialists' wrongful possession and detention 
of its personal property, and the wrongful ejectment of the Company from        
leasehold interests in various real properties it has leased.                   

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Notes to Consolidated Financial Statements (continued)

13. LEGAL PROCEEDINGS (CONTINUED)                                               

Defendants have filed a Motion to Stay or Dismiss the action.                   

In addition, the Company has recently filed an Application for a Right to Attach
Order and Writ of Attachment. The Company seeks to attach any and all of the    
assets of the Specialists and the Specialists Doctors, in order to secure the   
claims in our federal complaint. This matter is set for hearing on April 26,    
1999.                                                                           

TOC Litigation                                                                  

There are two actions pending between the Company and TOC Specialists, P.L.     
("TOC") and its physician owners (collectively, the "TOC Doctors"), one in the  
Circuit Court of the Second Judicial Circuit in and for Leon County, Florida,   
which was recently stayed by that court (the "TOC state action"), and one in the
United States District Court for the Northern District of Florida, Tallahassee  
Division, which is currently being litigated (the "TOC federal action").        

On November 16, 1998, the Company filed a complaint in the Circuit Court of the 
Second Judicial Circuit in and for Leon County, Florida against TOC, the 15 TOC 
doctors, and the State of Florida, Department of Health, Board of Medicine. The 
complaint alleges that, in violation of their service agreement with the        
Company, TOC and the TOC Doctors diverted the Company's accounts receivable     
receipts into an account controlled by TOC and the TOC Doctors, that TOC and the
TOC Doctors failed to pay the Company's service fees, and that TOC and the TOC  
Doctors failed to provide the necessary records to the Company for the Company  
to effectively perform its management functions. Additionally, the complaint    
alleges that TOC and the TOC Doctors improperly attempted to terminate the      
service agreement, attempted to interfere with the Company's contractual        
relations with other affiliated practices, and violated the confidentiality,    
noncompetition and restrictive covenant provisions of the service agreement.    

TOC and the TOC Doctors answered that complaint on December 7, 1998, and filed a
counterclaim against us alleging breach of service agreement, fraud in the      
inducement, fraud, negligent misrepresentation, conspiracy to commit fraud,     
breach of fiduciary duties, and violations of Florida securities law. The       
counterclaim also named Kerry Hicks, the Company's President and Chief Executive
Officer and Patrick Jaeckle, the Company's Executive Vice President -           
Development, as defendants. The state court action was stayed on January 13,    
1999.                                                                           

On December 1, 1998, while the state court litigation was ongoing, TOC and 10 of
the TOC doctors filed a complaint against the Company in the United States      
District Court for the Northern District of Florida, Tallahassee Division. That 
complaint also named Kerry Hicks and Patrick Jaeckle as defendants. The         
complaint alleges violations of the Securities Exchange Act, breach of contract,
fraud, negligent misrepresentation, and breach of fiduciary duty. These, absent 
the federal securities claim, were essentially the same causes of action        
asserted as a counterclaim against us by the defendants in the earlier state    
court litigation.                                                               

On January 11, 1999, we filed the Company's answer and counterclaim to the      
federal court action. The Company also named four other TOC doctors as          
defendants in its counterclaim. In the Company's answer and counterclaim the    
Company denied all wrongdoing, and asserted claims against TOC and the TOC      
Doctors for merger agreement indemnification, breach of contract, breach of good
faith and fair dealing, tortious interference with contractual relations,       
conversion, and civil theft.                                                    

The Company has, in addition to monetary damages, claimed a right to injunctive 
relief to prohibit dissemination of financial information and to further limit  
tortious interference with contractual relations, and sought an injunction to   
enforce the TOC restrictive covenants. The federal court litigation is ongoing, 
and is presently in the discovery phase.                                        

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Notes to Consolidated Financial Statements (continued)

The Company believes that it has strong legal and factual defenses to these     
claims of TOC and the TOC Doctors, and intend to vigorously defend the          
allegations against the Company while aggressively pursuing its counterclaims.  

3B Litigation                                                                   

On January 22, 1999, 3B Orthopaedics, P.C. ("3B"), one of the Company's         
affiliated practices, Robert E. Booth, Jr., M.D., Arthur Bartolozzi, M.D., and  
Richard A. Balderston, M.D., (collectively, the "Plaintiffs") filed a complaint 
against the Company in the United States District Court for the Eastern District
of Pennsylvania.                                                                

The complaint asserts causes of action under Pennsylvania law for breach of     
contract and seeks unspecified compensatory damages and a declaratory judgment  
terminating any and all applicable agreements between the parties. In essence,  
the Plaintiffs claim that the Company breached its obligations to them under an 
unexecuted service agreement, and any other agreement, by failing to provide the
promised management services and that the Plaintiffs were damaged when they had 
to provide such services themselves. The Plaintiffs seek to invalidate          
restrictive covenants entered into in favor of the Company through the lawsuit. 

The Company filed its answer on March 24, 1999, denying all of the material     
allegations of the Plaintiffs' complaint and asserting affirmative defenses and 
various counterclaims. The Company has asserted counterclaims against all       
Plaintiffs for breach of contract, unjust enrichment, conversion, and breach of 
the implied duty of good faith and fair dealing. The Company has also asserted a
counterclaim solely against Dr. Booth for breach of fiduciary duty based upon   
his conduct as a member of the Company's board of directors from approximately  
November 1996 through October 1998. The Company disputes the Plaintiffs' claim  
that the Company failed to provide the promised management services. Among other
remedies, the Company seeks to enforce restrictive covenants entered into by the
physician plaintiffs and to recover, among other things, damages equal to 300%  
of the physician Plaintiffs' professional services' revenue. The Company also   
seeks the return of all cash and all of its common stock, or the proceeds from  
the sale of the stock, given to the physician Plaintiffs pursuant to the        
November 12, 1996, merger between the Plaintiffs' former practice,              
Reconstructive Orthopaedic Associates, P.C. and the Company. Prior to the       
formation of 3B, the defendant physicians practiced with Reconstructive         
Orthopaedic Associates, P.C.                                                    

The Company believes that it has strong legal and factual defenses to           
plaintiffs' claims. We intend to vigorously defend against the lawsuit and      
aggressively pursue the counterclaims.                                          

OTHER 

Subsequent to December 31, 1998, the Company received notices of default under  
the terms of the service agreements between the Company and two of its          
affiliated practices. Additionally, the Company received notice of default with 
respect to a management services agreement entered into with a medical group to 
provide certain limited management services. Management of the Company is       
undertaking steps to determine if any defaults have, in fact occurred, whether  
they are material, and what steps, if any, are necessary in order to cure any   
material defaults.                                                              

14. COMMITMENTS AND CONTINGENCIES                                               

The Company has entered into employment agreements that provide key executives  
and employees with minimum base pay, annual incentive awards and other fringe   
benefits. The Company expenses all costs related to the agreements in the period
that the services are rendered by the employee. In the event of death,          
disability, termination with or without cause, voluntary employee termination,  
change in ownership of the Company, etc., the Company may be partially or wholly
relieved of its financial obligations to such individuals. However, under       
certain circumstances, a change in control of the Company may provide           
significant and immediate enhanced compensation to the employees possessing     
employment contracts. At December 31, 1998, the Company was contractually       
obligated for the following base pay compensation amounts (summarized by years  
ending December 31):                                                            

                                                                [Download Table]
                                        
1999                         $1,053,000 
2000                          1,053,000 
2001                            477,167 
                             -----------
                             $2,583,167 
                             ===========

The Company may become subject to certain pending claims as the result of       
successor liability in connection with the assumption of certain liabilities of 
the Affiliated Practices; nevertheless, the Company believes it is unlikely that
the ultimate resolution of such claims will have material adverse effect on the 
Company.                                                                        

The Company and Reconstructive Orthopaedic Associates II, P.C. (the successor to
Reconstructive Orthopaedic Associates, Inc.) have been advised that the         
Department of Health and Human Services is conducting an inquiry regarding      
Reconstructive Orthopaedic Associates, Inc. and physicians formerly associated  
with that practice, including two of the Company's former directors. The inquiry
appears to be concerned with the submission of claims for Medicare reimbursement
by the practice. The Company has not been contacted by the Department of Health 
and Human Services in connection with the inquiry.                              

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Notes to Consolidated Financial Statements (continued)

15. RELATED PARTY TRANSACTIONS                                                  

Advances to Affiliated Practices aggregating $521,355 and $914,737 at December  
31, 1998 and 1997, respectively, bear interest at various rates and are         
collateralized by 16,807 shares of the Company's common stock owned by the      
individual physicians. Interest income related to advances was $25,438, $102,508
and $7,231 for the years ended December 31, 1998, 1997 and 1996, respectively.  

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Notes to Consolidated Financial Statements (continued)

16. EARNINGS PER SHARE                                                          

The following table sets forth the computation of basic and diluted earnings per
share for the years ended December 31, 1998, 1997 and 1996.                     

                                                        [Enlarge/Download Table]

                                                     1998           1997          1996     
                                                 ------------   ------------  ------------ 
                                                                                           
Numerator for both basic and diluted earnings                                              
    per share:                                                                             
     Net (loss) income                           $(61,786,086)  $  5,870,398  $ (1,771,383)
                                                 ============   ============  ============ 
Denominator:                                                                               
  Weighted average shares outstanding              18,237,827     15,559,368     1,450,138 
  Cheap stock shares:                                                                      
     Conversion of convertible debentures                                                  
       and interest thereon                              --             --       2,020,900 
     Dividends paid to promoters                         --             --         192,234 
     November 12, 1996 affiliation transactions                                            
       assumed to be outstanding since                                                     
       January 1, 1996                                   --             --       7,659,115 
     Employee stock options                              --          118,761          --   
     Shares issued to one of the Affiliated                                                
       Practices                                         --             --         100,000 
                                                 ------------   ------------  ------------ 
                                                   18,237,827     15,678,129    11,422,387 
  Denominator for basic net (loss) income per                                              
     common share--weighted average shares                                                 
  Effect of dilutive securities:                                                           
     Employee stock options                              --          393,024     1,032,090 
                                                 ------------   ------------  ------------ 

  Denominator for diluted net (loss) income per                                            
     common share--adjusted weighted average                                               
     shares and assumed conversion                 18,237,827     16,071,153    12,454,477 
                                                 ============   ============  ============ 

Net (loss) income per common share (basic)       $      (3.39)  $       0.38  $      (0.16)
                                                 ============   ============  ============ 
Net (loss) income per common share (diluted)     $      (3.39)  $       0.37  $      (0.14)
                                                 ============   ============  ============ 

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Notes to Consolidated Financial Statements (continued)

16. EARNINGS PER SHARE (CONTINUED)                                              

For additional disclosures regarding employee stock options, puts and warrants, 
see Notes 7, 8 and 11.                                                          

Outstanding warrants and options were not included in the computation of diluted
earnings per share for the year ended December 31, 1998 because their effect    
would be antidilutive.                                                          

Options to purchase 419,887 shares of common stock at $13.25 were outstanding   
during 1997 but were not included in the computation of diluted earnings per    
common share for 1997 because the options' exercise price was greater than the  
average market price of the common shares and, therefore, the effect would be   
antidilutive. Options to purchase 44,936 shares of common stock at $11.25 were  
outstanding during 1997 but were not included in the computation of diluted     
earnings per share because the warrants' exercise price was greater than the    
average market price of the common shares and, therefore, the effect would be   
antidilutive.                                                                   

Warrants to purchase 544,681 shares of common stock at $14.69 were outstanding  
during 1997 but were not included in the computation of diluted earnings per    
share because the warrants' exercise price was greater than the average market  
price of the common shares and, therefore, the effect would be antidilutive.    

See Note 11 for discussion of the contingent shares issuable as additional      
consideration for one of the Company's practice acquisitions. These shares were 
not included in the computation of diluted earnings per share because the       
necessary conditions for issuance had not been satisfied.                       

Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83 
("SAB No. 83") and staff policy, common and common share equivalents issued     
prior to the Company's initial public offering for nominal consideration are    
presumed to have been issued in contemplation of the public offering, even if   
antidilutive, and have been included in the calculations of net income (loss)   
per common share as if these common and common equivalent shares were           
outstanding for the period immediately preceding the Company's initial public   
offering of common stock. Pursuant to Securities and Exchange Commission Staff  
Accounting Bulletin No. 98, which modifies certain of the provisions of SAB No. 
83, the treasury stock method for measuring the dilutive effect related to      
nominal issuances of stock options and warrants is no longer permitted.         
Accordingly, the above calculations assume that common shares are outstanding   
from the                                                                        

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Notes to Consolidated Financial Statements (continued)

16. EARNINGS PER SHARE (CONTINUED)                                              

date of the stock option grant to the date of the Company's initial public      
offering, if the corresponding option strike price is deemed to be nominal      
consideration.                                                                  

The Company used a portion of the proceeds from the initial public offering of  
its common stock to repay borrowings under the Company's Credit Facility        
Agreement. If shares issued to repay amounts outstanding under the Company's    
Credit Facility Agreement were outstanding for the years ended December 31, 1997
and 1996, the net income (loss) per common share would not have changed from the
amount reported.                                                                

17. EMPLOYEE BENEFIT PLAN                                                       

Effective May 1, 1997, the Company adopted a defined contribution employee      
benefit plan covering substantially all employees of the Company, most          
affiliated physicians and other employees of the affiliated practices.          
Participants must have attained age 21 and completed one year of service with   
either the Company or one of the Affiliated Practices in order to participate in
the plan. The plan is designed to qualify under Section 401(k) of the Internal  
Revenue Code of 1986, as amended. The plan includes a matching contribution     
equal to up to 4% of eligible employee salaries and a discretionary defined     
contribution (5.5% in 1998 and 1997). The 1998 contribution percentage remains  
subject to final approval of the Company's Board of Directors. Expense under    
this plan, including the discretionary defined contributions, aggregated        
approximately $1,611,000 and $711,000 for 1998 and 1997, respectively, of which 
approximately $1,445,000 and $654,000 was charged directly to the Affiliated    
Practices as clinic expenses.                                                   

18. SUBSEQUENT EVENT                                                            

On March 26, 1999, the Company entered into an agreement with an Affiliated     
Practice to sell 67% of its interest in SCN of Maryland, LLC, a limited         
liability corporation established in 1998 to develop and operate an ambulatory  
surgery center in Baltimore, Maryland, for consideration of $360,505.           

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MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS           

Since February 7, 1997, our Common Stock has been quoted on the Nasdaq Stock    
Market under the symbol "SCNI." The following table sets forth the high and low 
sales prices for the Common Stock for the quarters indicated as reported on the 
Nasdaq Stock Market.                                                            

                                                                [Download Table]

                                            HIGH       LOW    
                                         ---------  --------- 
                                                              
Year Ended December 31, 1998                                  
    First Quarter.....................   $  13 3/8  $  11 1/8 
    Second Quarter....................      12 1/2      5 3/4 
    Third Quarter.....................       6 5/8      1 1/32
    Fourth Quarter....................       2 7/32       3/4 

Year Ended December 31, 1997                                  
    First Quarter (1).................   $  10 5/8  $   8     
    Second Quarter....................      12 1/2      7 5/8 
    Third Quarter.....................      13 3/4     10 7/8 
    Fourth Quarter....................      14         10 3/4 

(1) Represents trading of the Common Stock from February 7, 1997 through
March 31, 1997.                                                                 

The Company has never paid or declared any cash dividends and does not  
   anticipate paying any cash dividends in the foreseeable future. The Company
    currently intends to retain any future earnings for use in its business. The
    Company's credit facility with a bank syndicate prohibits the payment of any
dividends without written approval from the bank syndicate.             

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 OTHER MATTERS

On the date this proxy statement went to press, management did not know of any  
other matters to be brought before the special meeting other than those         
described in this proxy statement. If any matters properly come before the      
special meeting that are not specifically set forth on the proxy card and in    
this proxy statement, the persons appointed as proxies will vote on those       
matters in accordance with their best judgment.                                 

 ADVANCE NOTICE PROCEDURES

Our By-Laws provide that any stockholder wishing to make a nomination for       
director or propose business to be considered by the stockholders at an annual  
meeting must give us notice. Such notice generally must be given at least 60 but
no more than 90 days before the first anniversary of the preceding year's annual
meeting, which was held on June 5, 1998. The notice also must meet certain      
requirements set forth in the By-Laws. These requirements do not affect the     
deadline for submitting stockholder proposals for inclusion in the Proxy        
Statement, nor do they apply to questions a stockholder may wish to ask at the  
meeting. You may request a copy of the By-Law provisions discussed above from   
the Secretary, Specialty Care Network, Inc., 44 Union Boulevard, Suite 600,     
Lakewood, Colorado 80228.                                                       

 STOCKHOLDER PROPOSALS

   We currently anticipate that our next annual meeting of stockholders will
be held in _____________ 1999. Proposals of stockholders intended for inclusion 
in the proxy statement for the Annual Meeting of Stockholders in 1999 must be   
received by the Company at its principal office in Lakewood, Colorado, no later 
than ____________, 1999 in order to be considered for inclusion in the Company's
proxy statement and form of proxy relating to that meeting.                     

The above Notice and Proxy Statement are sent by order of the Board of
Directors.                                                                      

                  Patrick M. Jaeckle
                        Executive Vice President
                           of  Development/Finance
                 and Secretary

Dated:   __, 1999                                                               

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                                                                      APPENDIX A

STRICTLY CONFIDENTIAL                                                           

March 19, 1999                                                                  

Special Committee of the Board of Directors                                     
Specialty Care Network, Inc.                                                    
44 Union Boulevard, Suite 600                                                   
Lakewood, Colorado  80228                                                       

Gentlemen:                                                                      

We understand that Specialty Care Network, Inc. (the "Company") is effectuating 
a restructuring transaction, (the "Restructuring Transaction") involving ten of 
the Company's presently affiliated physician practices (the "Affiliated         
Practices"). Under the terms of the restructure agreements and management       
services agreements (the "Restructuring Transaction Agreements") entered into by
the Company and the Affiliated Practices, and in exchange for consideration from
the Affiliated Practices in the form of cash and shares of the Company's common 
stock, the Company will (i) sell certain practice assets, primarily accounts    
receivable, to the Affiliated Practices, (ii) amend the existing management     
service agreements with the Affiliated Practices to restate the terms from 40 to
five years, (iii) reduce the amount and scope of management services provided by
the Company and (iv) reduce the corresponding service fees paid by the          
Affiliated Practices to the Company.                                            

You have requested that SunTrust Equitable Securities Corporation ("STES")      
render an opinion to the Special Committee of the Board of Directors of the     
Company as to the fairness, from a financial point of view, of the Restructuring
Transaction to the Company and to those stockholders of the Company not         
participating in the Restructuring Transaction. In connection with our opinion, 
we have made such reviews, analyses and inquiries as we have deemed necessary   
and appropriate under the circumstances. Among other things, we have (i)        
reviewed the Restructuring Transaction Agreements; (ii) reviewed certain        
publicly available business and financial information relating to the Company;  
(iii) reviewed certain other information, including financial forecasts and     
related assumptions, and other internal financial analyses, provided to us by   
the Company; (iv) met with senior management of the Company to discuss the      
business prospects of the Company based on its present organizational structure 
and assuming the Restructuring Transaction; (v) reviewed the macro trends and   
general market conditions in the physician practice management industry; (vi)   
reviewed the reported price and trading activity for the common stock of the    
Company since the initial public offering; (vii) reviewed the historical        
operating performance of the Company; (viii) reviewed the circumstances of      
certain comparable companies in the physician practice management industry that 
have undertaken restructurings; (ix) analyzed certain financial and stock market
valuation information for the Company and certain other comparable companies    
whose securities are publicly traded; and (x) performed such other studies and  
analyses as we considered appropriate.                                          

We have assumed and relied upon, without independent verification, the accuracy 
and completeness of the information reviewed by us for the purposes of this     
opinion. With respect to the pro forma financial statements and financial       
forecasts and projections provided to us by the Company, we have assumed that   
they have been reasonably prepared on the bases reflecting the best currently   
available estimates and judgments of the senior management of the Company as to 
the financial impact on the Company of the Restructuring Transaction and the    
likely future financial performance of the Company. In addition, we have not    
made an independent valuation or appraisal of the assets of the Company or any  
of the Affiliated Practices. Our opinion is necessarily based on business,      
market, economic, and other conditions as they exist and can be evaluated by us 
as of the date of this letter. It should be                                     

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Special Committee of the Board of Directors                                     
Specialty Care Network, Inc.                                                    
Page 2                                                                          
March 19, 1999                                                                  

understood that subsequent developments may affect this opinion and that we do  
not have any obligation to revise or reaffirm this opinion.                     

STES has received a fee for rendering this opinion; however, our fee for        
rendering this opinion was not contingent upon the consummation of the          
Restructuring Transaction. STES served as a co-managing underwriter in          
connection with the sale of common stock by the Company in February 1997, and   
STES has provided certain additional investment banking services for the Company
in the past and has received customary compensation. In the normal course of    
business, STES publishes research reports regarding the Company and actively    
trades the equity securities of the Company for its own account and for the     
accounts of its customers. Accordingly, STES may at any time hold a long or     
short position in such securities.                                              

It is understood that this letter is for the information of the Special         
Committee of the Board of Directors of the Company only and may not be relied   
upon by any other person or used for any other purpose, reproduced,             
disseminated, quoted from or referred to, in whole or in part, without our      
written consent; provided, however, that we hereby consent to the inclusion of  
this opinion in any proxy statement used in connection with the Restructuring   
Transaction, so long as the opinion is quoted in full in such proxy statement.  
In addition, we express no recommendation or opinion as to how the stockholders 
of the Company should vote at the stockholders meeting held in connection with  
the Restructuring Transaction.                                                  

Based upon and subject to the foregoing, it is our opinion that, as of the date 
hereof, the Restructuring Transaction is fair, from a financial point of view,  
to the Company and to those stockholders of the Company not participating in the
Restructuring Transaction.                                                      

Very truly yours,                                                               

/s/ SUNTRUST EQUITABLE SECURITIES CORPORATION                                   

SUNTRUST EQUITABLE SECURITIES CORPORATION                                       

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SPECIALTY CARE NETWORK, INC.  

SPECIAL MEETING OF STOCKHOLDERS - ________, 1999

 This Proxy is solicited on behalf of the Board of Directors

    The undersigned hereby appoints KERRY R. HICKS and PATRICK M. JAECKLE with
full power of substitution, proxies of the undersigned to represent the         
undersigned and to vote all shares of Common Stock of Specialty Care Network,   
Inc. which the undersigned would be entitled to vote if personally present at   
the special meeting of stockholders of Specialty Care Network, Inc. to be held  
at _______________, at _:00 A.M. ________ Daylight Time on __________, 1999 and 
at any adjournment thereof, subject to the directions indicated on the reverse. 

(Continued and to be signed on reverse side)

(reverse)                                                                       

A.   [X]  Please mark your votes as in this example                             

1.   Proposal to approve the          FOR   AGAINST  ABSTAIN                    
restructuring transaction        [ ]     [ ]      [ ]                 

2.   To vote on such other matters that may properly come before the            
meeting.                                                              

Note: THIS PROXY MUST BE SIGNED AND DATED ON THE REVERSE SIDE.                  

IF NO DIRECTIONS ARE GIVEN, THE SHARES WILL BE VOTED FOR THE                    
PROPOSAL TO APPROVE THE RESTRUCTURING TRANSACTION. THIS PROXY                   
ALSO DELEGATES DISCRETIONARY AUTHORITY TO VOTE WITH RESPECT TO                  
ANY OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE MEETING OR                  
ANY ADJOURNMENT OR POSTPONEMENT THEREOF.                                        

THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT                                     
OF THE NOTICE OF SPECIAL MEETING AND PROXY                                      
STATEMENT OF SPECIALTY CARE NETWORK, INC.                                       

SIGNATURE:                   Signature:                    Date:              
           ----------------             ------------------        ------------

Note:  Please sign this proxy exactly as name(s) appear hereon.  When signing as
    attorney-in-fact, executor, administrator, trustee or guardian, please
      add your title as such, and if signed as a corporation, please sign with
      full corporate name by duly authorized officer or officers and affix the
       corporate seal. Where stock is issued in the name of two or more persons,
all such persons should sign.                                     

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘PRES14A’ Filing		Date		First		Last			Other Filings
		10/14/06		122
		9/10/02		4		35
		9/1/02		35
		8/29/02		35
		6/30/02		35					10-Q
		6/10/02		35
		3/31/02		35					10-Q
		3/3/02		35
		2/28/02		35
		11/1/01		35
		3/15/01		90
		12/31/00		45					10-K,  10-K/A,  NT 10-K
		1/1/00		114
		12/31/99		45		108			10-K,  10-K405,  10-K405/A,  8-K,  NT 10-K
		9/30/99		118					10-Q,  10-Q/A
		6/30/99		94					10-Q,  10-Q/A,  8-K
		6/15/99		30		136
		4/30/99		92
		4/26/99		138
Filed on / For Period End:		4/16/99
		4/14/99		1
		4/13/99		92
		4/12/99		92
		4/8/99		92
		4/5/99		56
		4/1/99		35		136
		3/31/99		48		83			10-Q,  NT 10-K,  NT 10-Q
		3/26/99		97		143
		3/24/99		93		139
		3/19/99		26		147
		3/18/99		94
		3/12/99		91		137
		3/8/99		26		38
		3/5/99		44
		1/31/99		24		26
		1/22/99		26		139
		1/13/99		92		138
		1/12/99		91		137
		1/11/99		92		138
		1/4/99		94
		1/1/99		60		125
		12/31/98		23		144			10-K,  10-K/A,  8-K,  NT 10-K
		12/29/98		25
		12/21/98		24
		12/18/98		91		137
		12/9/98		23		37
		12/7/98		92		138
		12/1/98		92		138
		11/16/98		22		138			10-Q
		11/13/98		23		137
		11/12/98		129
		11/6/98		23
		10/30/98		21
		10/2/98		77
		10/1/98		118
		6/30/98		131					10-Q
		6/5/98		145					DEF 14A
		6/1/98		109
		4/15/98		74
		3/31/98		18		132			10-K,  10-Q
		3/5/98		46
		1/9/98		75
		1/2/98		44
		1/1/98		53
		12/31/97		58		144			10-K
		12/30/97		44
		11/14/97		131					10-Q
		10/31/97		118
		9/10/97		131		132			8-K
		9/1/97		131					8-K,  8-K/A
		8/29/97		130		131
		7/16/97		130					8-K,  8-K/A
		7/7/97		130					10-K/A,  10-Q/A
		7/3/97		130
		7/1/97		120		130			8-K,  8-K/A
		6/9/97		129
		5/1/97		143
		4/4/97		130					8-K,  8-K/A
		3/31/97		144					10-Q,  10-Q/A
		2/7/97		122		144			POS AM
		2/6/97		120					S-1/A
		1/10/97		121
		12/31/96		58		143			10-K,  10-K/A,  NT 10-K
		11/12/96		63		141
		11/1/96		63		118
		10/31/96		63
		10/15/96		121
		3/22/96		121
		1/1/96		63		141
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