U S PHYSICIANS INC, S-1/A, 1998-01-30

U S PHYSICIANS INC
S-1/A, 1998-01-30
OFFICES & CLINICS OF DOCTORS OF MEDICINE

Previous: BIONUTRICS INC, 10-K/A, 1998-01-30

Next: IMC HOME EQUITY LOAN TRUST 1997-1, 8-K, 1998-01-30

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 30, 1998
REGISTRATION NO. 333-39987

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------

AMENDMENT NO. 1
TO

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------

U.S. PHYSICIANS, INC.
(Exact name of registrant as specified in its charter)
---------------------------

<TABLE>
<S> <C> <C>
PENNSYLVANIA 8011 23-2795906
---------------- ------------------- -------------------
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
</TABLE>

220 COMMERCE DRIVE, FORT WASHINGTON, PA 19034, (215) 542-2170
---------------------------------------------------------------
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)

THOMAS J. KEANE
-----------------------------------------------
Chairman, President and Chief Executive Officer

U.S. PHYSICIANS, INC.
220 Commerce Drive
Fort Washington, PA 19034, (215) 542-2170
---------------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------------

Copy to:

JASON M. SHARGEL, ESQUIRE MARK KESSEL, ESQUIRE
JOHN M. COOGAN, JR., ESQUIRE SHEARMAN & STERLING
WOLF, BLOCK, SCHORR AND SOLIS-COHEN LLP 599 LEXINGTON AVENUE
TWELFTH FLOOR PACKARD BUILDING NEW YORK, NY 10022
111 SOUTH 15TH STREET (212) 848-4000
PHILADELPHIA, PA 19102-2678
(215) 977-2000

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As promptly as practicable after the effective date of this Registration
Statement.

If the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ______________

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _____________

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.

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

<PAGE>

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALES OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED JANUARY 30, 1998

PRELIMINARY PROSPECTUS

___________ SHARES

U.S. PHYSICIANS, INC.

COMMON STOCK

All of the __________ shares of Common Stock, par value $.01 per share (the
"Common Stock"), offered hereby are being sold by U.S. PHYSICIANS, Inc. (the
"Company"). Prior to the Offering, there has been no public market for the
Common Stock. It is currently estimated that the initial public offering price
will be between $ and $ per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. Application has been made to have the Common Stock approved for
quotation on The Nasdaq Stock Market's National Market under the symbol "USPY."

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

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
Per Share.... $ $ $
- --------------------------------------------------------------------------------
Total(3)..... $ $ $
================================================================================

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."

(2) Before deducting estimated expenses of $ payable by the Company.

(3) The Company has granted to the Underwriters a 30-day option to purchase up
to additional shares of Common Stock on the same terms and conditions
as set forth above solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."

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

The Common Stock is offered by the Underwriters, as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made at
the offices of BancAmerica Robertson Stephens, New York, New York, on or about
___________ __, 1998.

BANCAMERICA ROBERTSON STEPHENS

NATIONSBANC MONTGOMERY SECURITIES LLC
PIPER JAFFRAY INC.

THE DATE OF THIS PROSPECTUS IS _________, 1998

<PAGE>

[MAP OF MID-ATLANTIC UNITED STATES AND SURROUNDING STATES IDENTIFYING
AREAS IN WHICH THE COMPANY MANAGES OR HAS AGREEMENTS TO
MANAGE PHYSICIAN PRACTICES]

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION
OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

<PAGE>

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

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

UNTIL ___________ __, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 4
Risk Factors................................................ 8
Use of Proceeds............................................. 16
Dividend Policy............................................. 16
Capitalization.............................................. 17
Dilution.................................................... 18
Selected Financial Data..................................... 19
Unaudited Pro Forma Consolidated Financial Statements....... 21
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 33
Business.................................................... 37
Management.................................................. 53
Certain Transactions........................................ 61
Principal Shareholders...................................... 64
Description of Capital Stock................................ 66
Shares Eligible for Future Sale............................. 68
Underwriting................................................ 69
Legal Matters............................................... 70
Experts..................................................... 70
Additional Information...................................... 71
Index to Financial Statements............................... F-1
</TABLE>

Certain statements contained herein under "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" including, without limitation, those
concerning the Company's strategy and the Company's growth plans, contain
certain forward-looking statements concerning the Company's operations, economic
performance and financial condition. Because such statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause such
differences include, but are not limited to, those discussed under "Risk
Factors."

3
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements of the Company and the
Notes thereto appearing elsewhere in this Prospectus.

Except as otherwise indicated, all information in this Prospectus assumes
that the Underwriters' overallotment option will not be exercised and gives
effect to the following transactions which will occur simultaneously with the
completion of the Offering: (i) the automatic conversion of all outstanding
shares of the Company's Series A Convertible Preferred Stock, $.01 par value
(the "Series A Preferred Stock"), the Company's Series B Convertible Preferred
Stock, $.01 par value (the "Series B Preferred Stock"), and the Company's Series
C Convertible Preferred Stock, $.01 par value (the "Series C Preferred Stock"
and, together with the Series A Preferred Stock and the Series B Preferred
Stock, the "Convertible Preferred Stock"), into 7,109,952 shares of Common Stock
(the "Preferred Stock Conversion"); (ii) the automatic conversion of all
outstanding warrants to purchase 488,890 shares of Series B Preferred Stock
("Series B Warrants") into warrants to purchase shares of Common Stock ("Common
Stock Warrants" and, together with the Series B Warrants, the "Warrants") in a
like amount (the "Series B Warrant Conversion"); and (iii) the issuance of ____
shares of Common Stock issued in connection with Affiliation Transactions (as
defined below). The information in this Prospectus assumes that the Offering
will be completed at an initial public offering price of $____ per share. In
addition, except as otherwise noted, all information in this Prospectus assumes
(i) no exercise of outstanding employee and affiliate stock options (the
"Options") to purchase 2,102,994 shares of Common Stock; (ii) no conversion of
the Company's outstanding convertible notes (the "Convertible Notes") in the
aggregate principal amount of $20.0 million which are convertible into ___
shares of Common Stock; and (iii) no exercise of outstanding Common Stock
Warrants to purchase 1,191,891 shares of Common Stock. See "Management -- Stock
Incentive Plans," "Description of Capital Stock" and "Underwriting."

THE COMPANY

The Company is a multi-specialty physician practice management company that
currently is affiliated with 56 physicians providing care in 37 practice
locations and, upon completion of the Offering, will be affiliated with 97
physicians providing care in 62 practice locations in four states in the
mid-Atlantic region. The Company believes that, as consumers demand higher
quality care and payors focus on overall treatment costs rather than only
physician fees, specialists increasingly will be the patient's point of access
to the health care delivery system and will control, directly or indirectly, a
growing percentage of health care expenditures. The Company targets local
service areas in which its affiliated physician practices can establish
significant market share in multiple specialties to enhance its leverage with
payors, employers and consumers and seeks to affiliate primarily with physicians
in higher dollar volume specialties. The Company's affiliated specialists
currently include orthopedic surgeons, physiatrists, neurologists, oncologists,
urologists, obstetrician/gynecologists, radiologists, ophthalmologists,
otolaryngologists and occupational medicine specialists.

Escalating health care costs have resulted in the growth of managed care,
which frequently involves restricting access by insured parties to providers,
decreasing levels of reimbursement to providers, reducing the number and
duration of hospital inpatient stays and, more recently, transferring risk from
payors to providers. Many payors have also attempted to control costs by
reducing the utilization and reimbursement of specialists through the use of
primary care "gatekeepers." Patients and employers, however, are becoming more
conscious of not only the cost of care, but also of the quality of care and
levels of customer service, and are often demanding greater physician choice and
the option of seeking care directly from specialists.

The Company believes that specialist physicians have a greater
understanding of the treatment and management of complex disease and injury
conditions and can therefore provide more timely, appropriate and, ultimately,
less costly care than that controlled by primary care physicians. As a result,
the Company believes that the market will increasingly demand
specialist-directed provider models and move away from primary care gatekeeper
models for managed care. In addition, consumers of health care will begin to
differentiate among providers based on customer service in areas such as
scheduling, patient follow-up and aftercare and the availability of a variety of
services at the patient's point of access.

The Company's objective is to be a leading source of specialist physician
services in each of its local service areas. Key elements of the Company's
strategy to attain this objective are to: (i) develop integrated

4
<PAGE>

local networks of specialists in service areas surrounding or adjacent to major
population centers in the mid-Atlantic region and surrounding states in which
the Company can achieve significant market share in multiple specialties; (ii)
enhance same practice growth in its affiliated physician practices through the
addition of new physicians and new practice locations, enhancement of payor
contracting, and improvement of practice management and practice marketing;
(iii) increase ancillary and other revenues through, for example, physical and
occupational therapy, diagnostic imaging and participation in clinical trials;
(iv) grow in existing and new service areas through Affiliation Transactions and
the Company's Provider Network (as defined below); (v) capitalize on its
specialists' clinical leadership by establishing, marketing and providing
complex disease and injury management services; and (vi) integrate the Company's
management information systems in its affiliated physician practices.

The Company conducts its operations primarily through affiliation with one
professional corporation ("PC") in each state in which the Company provides
services, which PCs provide specialist physician services and certain other
health care services in their respective states. The Company does not engage in
the practice of medicine. The Company, together with the PCs, establishes and
develops its operations generally by entering into affiliation transactions
("Affiliation Transactions") pursuant to agreements with physicians desiring to
become affiliated with the Company and the PCs ("Affiliated Physicians"). In the
Affiliation Transactions, Affiliated Physicians generally transfer their medical
practices ("Affiliated Practices") to the Company and the relevant PC, with the
Company acquiring all of the non-medical assets such as leases, furniture,
equipment and supplies, and the PC acquiring the medical assets, consisting
primarily of pharmaceuticals and patient records and documentation. In return,
the Affiliated Physicians receive a combination of cash, promissory notes,
convertible notes, shares of Common Stock and/or options in amounts negotiated
between the Company and the respective Affiliated Physicians. In addition, the
Affiliated Physicians generally enter into employment agreements with the
relevant PCs, with terms ranging from five to 15 years, and receive as
compensation a percentage of the net revenues related to their Affiliated
Practice, less certain expenses. See "Business -- Affiliation Transactions."

The Company has entered into management agreements (the "Management
Agreements") with each of the PCs. Pursuant to the Management Agreements, which
have 40-year terms and provide for continuing renewal terms of five years
(unless either party elects not to renew), the Company manages the business
operations and all non-medical aspects of the business of the PCs and employs
and supervises all personnel providing services on behalf of the PCs, except for
the services of physicians and certain other licensed medical personnel required
by state law to be employed directly by the PCs. Physician services and other
health care services are provided to patients by the PCs which employ the
Affiliated Physicians and other health care providers, and the PCs are
compensated for such services by private third party and managed care payors,
Medicare and other governmental payors, and other sources. As compensation for
the Company's services to the PCs under the Management Agreements, the PCs,
other than the PC operating in New York (the "New York PC"), pay to the Company
an amount equal to all billings by the PCs less expenses for physician
compensation and certain other expenses. The New York PC pays the Company an
amount equal to the Company's costs plus a percentage of such costs. See
"Business -- Management and Services Agreement; Control of PCs."

While certain of the Affiliated Practices have operated over extended
periods of time, the Company has had limited operations to date. The Company
consummated its first Affiliation Transactions in January 1997. Each Affiliation
Transaction that has closed to date remains subject to a repurchase right if the
Offering is not completed by a specified date and accordingly is not considered
completed for accounting purposes (the "Conditional Affiliation Transactions").
Pursuant to the Conditional Affiliation Transactions, the Company provides
management services to 18 Affiliated Practices with a total of 56 Affiliated
Physicians. The Company also has entered into agreements with respect to
Affiliation Transactions that are expected to close upon completion of the
Offering that would add 14 Affiliated Practices with a total of 41 Affiliated
Physicians (the "IPO Affiliation Transactions" and, together with the
Conditional Affiliation Transactions, the "Initial Affiliation Transactions").
Also, the Company has acquired in three transactions (the "Completed
Transactions"), the manager of a multi-county physician contracting network, a
provider of physicial therapy services and a billing and collection services
business. In addition, in order to supplement its Affiliated Practices and
Affiliated Physicians and to enhance contracting leverage, the Company is
developing a provider network which includes physicians not affiliated with the
Company (the "Provider Network"). Subject to

5
<PAGE>

certain established parameters agreed upon by the Company and the physicians
participating in the Provider Network, the Company has non-exclusive authority
on behalf of such physicians to contract with managed care organizations,
insurance companies and other third-party payors for managed care contracts and
for agreements establishing rates of payment and reimbursement for services
provided by such participating physicians to the enrollees and beneficiaries of
such payors. The Company currently has over 2,500 physicians who have agreed to
participate in the Provider Network.

The Company was formed as a Pennsylvania corporation in July 1994. The
Company's principal executive office is located in suburban Philadelphia at 220
Commerce Drive, Fort Washington, Pennsylvania 19034, and its telephone number is
(215) 542-2170.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company.......... _________ shares
Common Stock to be outstanding after the
Offering................................... _________ shares
Use of Proceeds.............................. To make required cash payments in connection
with the IPO Affiliation Transactions; to
repay the Convertible Notes; to pay accrued
but unpaid dividends on the Convertible
Preferred Stock; to repay certain
indebtedness of the Company and for working
capital and other general corporate purposes,
including possible future Affiliation
Transactions and acquisitions. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol....... USPY
</TABLE>

RISK FACTORS

An investment in the shares of Common Stock offered hereby involves a high
degree of risk, including, among others, risks related to limited operating
history, integration of operations, growth strategy, limited capital and need
for additional financing, ability to service debt, intangible assets, government
regulation, relationships with third party payors, provision of medical
services, dependence on management information systems, dependence on Affiliated
Physicians, dependence on key personnel, competition in the delivery of health
care services and in affiliating with specialist physician practices, control by
principal shareholders and anti-takeover provisions, shares eligible for future
sale, dilution and lack of a prior public market and potential for volatility of
stock price. See "Risk Factors."

6
<PAGE>

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, 1996 ENDED SEPTEMBER 30,
------------------------- -----------------------------------
1997
PRO FORMA 1996 1997 PRO FORMA
ACTUAL AS ADJUSTED (1) ACTUAL ACTUAL AS ADJUSTED (1)
------- --------------- ------- ------- ---------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................................ $ 70 $60,194 $ 39 $ 2,490 $45,742
Cost of revenues............................ -- 53,351 -- 704 38,990
------- ------- ------- ------- -------
Gross profit................................ 70 6,843 39 1,786 6,752
Operating expenses:
General and administrative................ 2,295 2,295 1,355 3,760 3,760
Depreciation and amortization............. 6 3,672 4 106 2,790
------- ------- ------- ------- -------
Income (loss) from operations............... (2,231) 876 (1,320) (2,080) 202
Interest expense............................ 13 7 751
Other (income) expense, net................. 492 490 (69)
------- ------- ------- ------- -------
Income (loss) before income taxes........... (2,736) (1,817) (2,762)
Income tax provision (benefit).............. -- --
------- ------- ------- ------- -------
Net income (loss)........................... $(2,736) $ $(1,817) $(2,762) $
======= ======= ======= ======= =======
Pro forma net income (loss)
per common share (2)...................... $ $
======= =======
Shares used in computing pro forma net
income (loss) per common share (2)........
======= =======
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA (3) AS ADJUSTED (4)
------- ------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 1,833 $ 8,138 $
Working capital (deficit)................................... (18,177) (33,511)
Total assets (5)............................................ 42,290 103,634
Cash due to Initial Affiliation Transactions................ -- 41,150
Current portion of long-term debt........................... 17,462 7,054
Long-term debt, less current portion........................ 10,237 21,187
Convertible preferred stock securities...................... 6,829 --
Shareholders' equity (deficit).............................. (6,035) 25,944
</TABLE>

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

(1) Adjusted on a pro forma basis to give effect to (i) the three Completed
Transactions, (ii) the 18 Conditional Affiliation Transactions which, for
accounting purposes, will occur simultaneously with the completion of the
Offering, (iii) the 14 IPO Affiliation Transactions which will occur
simultaneously with the completion of the Offering, and (iv) the reduction
in interest expense resulting from the assumed use of the estimated net
proceeds of the Offering made hereby to retire certain long-term debt
obligations, as if all of the foregoing transactions had occurred as of the
beginning of the respective periods. Excludes a charge of $706,000
(estimated at December 31, 1997) for the early extinguishment of certain
long-term debt obligations which will be recorded in the fiscal quarter in
which the Offering is completed and interest expense of $209,000 for the
amortization of original issue discounts related to the issuance in November
1997 and January 1998 of certain debt which will be recorded in the quarter
in which the debt is issued. See "Use of Proceeds." The pro forma statement
of operations data does not purport to represent what the Company's results
of operations would have been had such transactions occurred as of the
beginning of the respective periods or project the Company's results for any
future period. See the Unaudited Pro Forma Consolidated Financial Statements
and Note 8 of the Notes to Consolidated Financial Statements.

(2) For information concerning the computation of pro forma net income (loss)
per common share, see Note 6 of Notes to Unaudited Pro Forma Consolidated
Financial Statements.

(3) Adjusted on a pro forma basis to give effect to (i) the issuance of a demand
note in the principal amount of $0.9 million in November 1997, (ii) the
issuance of a demand note in the principal amount of $0.8 million in January
1998, (iii) the issuance of Series C Preferred Stock with proceeds of $5.6
million in January 1998 a portion of which was utilized to repay the $0.9
million and $0.8 million demand notes, (iv) the 18 Conditional Affiliation
Transactions and the 14 IPO Affiliation Transactions, (v) the Preferred
Stock Conversion, (vi) the Series B Warrant Conversion, and (vii)
elimination of the original issue discount in the amount of $209,000 related
to the issuance of the $0.9 million and $0.8 million demand notes as if all
of the foregoing transactions had occurred on September 30, 1997.

(4) Adjusted on a pro forma as adjusted basis to give effect to (i) the pro
forma adjustments described in Note 3 above and (ii) the sale of the Common
Stock offered hereby (at an assumed initial public offering price of $_____
per share) and the application of the net proceeds therefrom. In connection
with the repayment of certain long-term debt obligations, the Company will
record a charge to its statement of operations in the fiscal quarter in
which the Offering is completed. This charge will expense the unamortized
portion of the discount on certain long-term debt obligations which was
$706,000 at December 31, 1997. See "Use of Proceeds" and the Unaudited Pro
Forma Consolidated Financial Statements.

(5) Includes $127,000 on an actual and $74.7 million on a pro forma and
pro forma as adjusted basis of intangible assets at September 30, 1997.

7
<PAGE>

RISK FACTORS

In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and an
investment in the shares of Common Stock offered by this Prospectus.

LIMITED OPERATING HISTORY; RISKS RELATED TO INTEGRATION OF OPERATIONS

The Company commenced operations in January 1997 upon the completion of its
first Initial Affiliation Transactions. Prior to such time, the Company
conducted no significant operations. The Company has a limited operating history
and is subject to various uncertainties and risks characteristic of companies in
comparable stages of development. As a result of the Conditional Affiliation
Transactions, the Company provides management services to 18 Affiliated
Practices with a total of 56 Affiliated Physicians and has entered into
Affiliation Agreements with respect to IPO Affiliation Transactions that are
expected to close upon completion of the Offering that would add 14 Affiliated
Practices with a total of 41 Affiliated Physicians. The Company is or will be
responsible, upon completion of the Offering, for the management of
substantially all non-medical aspects of the operations of, and for the
employment and supervision of most non-physician personnel providing services
to, these Affiliated Practices. Prior to their affiliation with the Company, the
Affiliated Practices operated as separate entities, and there can be no
assurance that the Company will be able to integrate and manage successfully the
assets, personnel and operations of the Affiliated Practices, including billing
and collections, information systems and human resources or that such
integration will result in profitable operations. In addition, there can be
no assurance that the Initial Affiliation Transactions will not result in a loss
of patients previously associated with the Affiliated Practices or other
unanticipated adverse consequences. Any of such events or conditions could have
a material adverse effect on the Company.

RISKS ASSOCIATED WITH GROWTH STRATEGY

The Company intends to grow through Affiliation Transactions and same
practice growth. Identifying appropriate specialty physician practices,
negotiating affiliation agreements ("Affiliation Agreements") with such
physician practices and consummating economically attractive Affiliation
Transactions with such practices may be a complex, difficult and costly process.
There can be no assurance that suitable affiliation opportunities will be
identified or that Affiliation Transactions will be consummated on terms
favorable to the Company, on a timely basis or at all. In addition, the
Company's ability to achieve same practice growth will be dependent upon its
ability to add physicians to existing Affiliated Practices, add practice
locations, integrate new specialties and sub-specialties into existing
practices, increase local practice marketing, improve contracting with payor
sources, enhance practice management and utilize physicians across multiple
practice locations. The Company's ability to achieve such growth may be limited
by a variety of factors, including shortages of specialist physicians, adverse
changes in local and regional health care industry conditions, regulatory and
economic conditions affecting payor contracting and reimbursement or the failure
to achieve expected efficiencies and economies of scale in the integration of
Affiliated Practices. In addition, there can be no assurance that the Company
will be able to integrate successfully additional Affiliated Practices into its
existing operations, or that such integration and the measures taken to achieve
same practice growth will not result in the loss of a significant number of
patients by the applicable Affiliated Practices after the completion of the
relevant Affiliation Transactions or other unanticipated adverse consequences.
The Company's results will be materially adversely affected if it is unable to
implement its growth strategy successfully or to manage growth effectively.

LIMITED CAPITAL; NEED FOR ADDITIONAL FINANCING

The Company's growth strategy requires a substantial amount of cash to
finance Affiliation Transactions, for working capital and for capital
expenditures. As of September 30, 1997 the Company had cash and a working
capital deficit of $1.8 million and $18.2 million, respectively. The Company
obtained additional financing in the amount of $5.6 million in January 1998
pursuant to the issuance of 1,343,374 shares of Series C Preferred Stock and the
issuance of 371,667 Common Stock Warrants with an exercise price of $4.15 per
share. The Company is currently seeking to obtain a commitment letter from a
bank pursuant to which such

8
<PAGE>

bank would provide line of credit financing upon completion of the Offering and
subject to certain other conditions (the "Line of Credit"). Pursuant to the Line
of Credit, the Company expects to be able to obtain loans outstanding in the
maximum aggregate principal amount of $_____ at any one time. The Company
believes that the net proceeds of this Offering, the Line of Credit, cash
generated from operations and working capital will be sufficient to fund the
Company's requirements for a period of approximately one year from the
completion of the Offering. Subsequent to that time, the Company may require
additional debt and/or equity financing. There is no assurance that the Company
will be able to obtain sufficient subsequent debt or equity financing on
favorable terms or at all. If the Company is unable to secure adequate
financing, its ability to implement its growth strategy will be impaired and its
financial condition and results of operations are likely to be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."

The Consolidated Financial Statements of the Company have been prepared
assuming that the Company will continue as a going concern. As outlined in the
Report of Independent Public Accountants on page F-7 to this Prospectus, the
Company has incurred losses since its inception and, as of September 30, 1997,
had an accumulated deficit of $6.6 million. As indicated above, the Company's
growth strategy will require substantial additional funds to finance
acquisitions, for working capital and for capital expenditures. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. Management plans in regard to these matters are described in Note 2 to
the Consolidated Financial Statements. The Consolidated Financial Statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classifications of liabilities that might
be necessary should the Company be unable to continue as a going concern.

RISKS REGARDING ABILITY TO SERVICE DEBT

Upon completion of the Offering and application of the proceeds as
described under "Use of Proceeds," the Company expects to have outstanding
approximately $21.0 million of indebtedness incurred in connection with or
assumed under Affiliation Transactions and expects to incur additional
indebtedness pursuant to the Line of Credit. As a result, a substantial portion
of the Company's cash flow will be devoted to debt service. In addition, any
future indebtedness which the Company incurs in order to pursue its strategy of
growth through additional Affiliation Transactions will reduce the amount of
cash flow otherwise available to support the Company's existing operations.
There can be no assurance that the Company will be able to generate sufficient
cash flow from operations to cover required debt service payments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

RISKS RELATED TO INTANGIBLE ASSETS

As a result of the Company's various Affiliation Transactions, intangible
assets, net of accumulated amortization, of approximately $74.7 million on a pro
forma basis have been recorded on the Company's pro forma balance sheet as of
September 30, 1997. These intangible assets, which represent approximately 72%
of total pro forma assets at September 30, 1997, are being amortized over
periods of three to 25 years. The Company expects the amount allocable to
intangible assets on its balance sheet to increase in the future in connection
with additional Affiliation Transactions, which will increase the Company's
amortization expense. In the event of any sale or liquidation of the Company or
a portion of its assets, there can be no assurance that the value of the
Company's intangible assets will be realized. In addition, the Company
continually evaluates whether events and circumstances have occurred indicating
that any portion of the remaining balance of the amount allocable to the
Company's intangible assets may not be recoverable. When factors indicate that
the carrying value of the Company's intangible assets may be impaired, the
Company may be required to reduce the carrying value of such assets. Any future
determination requiring the write-off of a significant portion of unamortized
intangible assets could have a material adverse effect on the Company's
business, financial condition and results of operations. See Note 3 of Notes to
Consolidated Financial Statements.

9
<PAGE>

GOVERNMENT REGULATION

Anti-kickback and Anti-referral Laws. The health care industry is highly
regulated at the federal and state levels. Laws regulating the industry include
the fraud and abuse provisions of the Social Security Act, which include the
"anti-kickback" and "anti-referral" (i.e., Stark) laws. The "anti-kickback" laws
prohibit the offering, payment, solicitation or receipt of any direct or
indirect remuneration for the referral of Medicare or Medicaid or other state or
federal health benefit patients or for the ordering or providing of Medicare or
Medicaid or other state or federal health benefit covered services, items or
equipment. The "anti-referral" laws impose restrictions on physicians' referrals
for designated health services to entities with which they have financial
relationships. Violations of these laws may result in recoupment of certain
Medicare payments and substantial civil or criminal penalties for individuals or
entities, including civil monetary penalties and exclusion from participation in
the Medicare and Medicaid programs. Many states, including states in which the
Affiliated Practices are located, have adopted laws similar to the
"anti-kickback" laws and "anti-referral" laws. The laws of many states also
prohibit physicians from splitting fees with non-physicians and prohibit
business corporations from practicing medicine. These laws vary from state to
state and are enforced by the courts and by regulatory authorities with
substantial discretion. A determination of liability under any such laws could
have a material adverse effect on the Company. Although the Company believes it
is in material compliance with applicable federal and state laws, given the
complexity of such laws, there is no assurance that the Company may not be
deemed to be in violation thereof or that in the future it will be able to
remain in material compliance with these laws. Furthermore, many aspects of the
relationship between the Company and the PCs have not been the subject of
judicial or regulatory interpretation. There is no assurance that a review of
the Company's business by courts or by health care, tax, labor or other
regulatory authorities would not result in determinations that could adversely
affect the Company's operations, or that the health care regulatory environment
will not change so as to restrict the Company's existing operations or potential
for expansion. Proposed rules were published under the anti-referral statute on
January 9, 1998 and, following public comment on the proposed rules, final rules
are expected to be promulgated in the near future. If adopted in their current
form, absent further clarification, such proposed rules would likely require
some modification of the compensation arrangements under the employment
agreements between the Company's affiliated PCs and the Affiliated Physicians
("Employment Agreements") pursuant to provisions thereof which generally allow
such modification by the Company to comply with such changes in law. There can
be no assurance that the provisions of such rules as finalized, or any
additional rules, will not have a material adverse effect on the structure or
operations of the Company. Numerous legislative proposals have been introduced
or proposed in the U.S. Congress and in some state legislatures that would
effect major changes in the U.S. health care system nationally or at the state
level. It is not clear at this time what proposals, if any, will be adopted or,
if adopted, what effect, if any, such proposals would have on the Company's
business. Certain proposals, such as reducing Medicare and Medicaid
expenditures, implementing price controls and permitting greater flexibility of
states' administration of Medicaid, could adversely affect the Company. There
can be no assurance that currently proposed or future health care legislation or
other changes in the administration or interpretation of governmental health
care programs will not have a material adverse effect on the Company.

Antitrust. The Company is also subject to certain federal and state
antitrust laws, some of which could prohibit the potential control by the
Company of certain specialist physician services within a relevant market,
which, among other effects, may adversely affect the Company's ability to engage
in Affiliation Transactions. In addition, certain laws which prohibit or
restrict the fixing or setting of prices, the tying of services and other
similar activities may adversely affect the Company's ability to negotiate payor
contracts on behalf of the PCs or the Provider Network if such activities were
deemed to be in violation of such prohibitions or restrictions.

Fee-splitting Laws. Certain New York state regulations prohibit physicians
from sharing or splitting fees with persons not authorized to practice medicine.
This prohibition precludes the Company from receiving fees from its affiliated
PC operating in New York (the "New York PC") which constitute a percentage of or
are otherwise dependent upon the income or receipts of the PC. The Company
believes that the compensation arrangement for services provided to the New York
PC under the relevant Management Agreement, which provides for a fee based on
the Company's costs plus an additional percentage of the Company's costs,
complies with applicable New York state law and regulation. However, there can
be no assurance that certain actions by New York state regulatory authorities
would not result in a judicial or administrative determination with regard to
such compensation structure that could adversely affect the Company's
operations. If the

10
<PAGE>

Company is found to be engaged in a fee splitting arrangement with the New York
PC, the New York PC and its Affiliated Physicians would be subject to charges of
professional misconduct with penalties ranging from censure to reprimand to
revocation of their professional licenses, potentially resulting in the Company
being deprived of its ability to operate its business with, and to collect fees
due and owing from, the New York PC, which would have a material adverse effect
on the Company and its operations.

Corporate Practice of Medicine. Most states prohibit business corporations
from engaging in the practice of medicine. Many states prohibit a business
corporation from employing a physician. Some states interpret the "practice of
medicine" broadly to include activities of corporations such as the Company that
have an indirect impact on the practice of medicine. The Company intends to
operate so as to not exercise any responsibility on behalf of Affiliated
Physicians pursuant to the Management Agreements that could be construed as
constituting or affecting the practice of medicine. However, such laws and legal
doctrines have been subjected to only limited judicial and regulatory
interpretation and there is no assurance that, if challenged, the Company would
be considered to be in compliance with all such laws and doctrines. A
determination in any state that the Company is engaged in the corporate practice
of medicine could render any Management Agreement between the Company and a PC
located in such state unenforceable or subject to modification in a manner
adverse to the Company and subject the Company to other sanctions.

Insurance Laws. Laws in all states regulate the business of insurance and
the operation of HMOs. Many states also regulate the establishment and operation
of networks of health care providers under the auspices of an integrated
delivery system ("IDS"). While these laws do not generally apply to companies
that provide management services to networks of physicians or to physician
practice groups that assume financial risk under a subcapitation agreement with
a managed care organization, there is no assurance that regulatory authorities
of the states in which the Company operates would not apply these laws to
require licensure or some lesser regulation of the Company's operations as an
insurer, as an HMO or as a provider network or IDS. Some states have enacted
statutes or adopted regulations affecting risk assumption in the health care
industry, including statutes and regulations that subject any physician or
physician network engaged in risk-based contracting to applicable insurance laws
and regulations, which may include, among others, laws and regulations providing
for minimum capital requirements and other safety and soundness requirements.
There is no assurance that future interpretations or amendments of insurance and
health care network laws by regulatory authorities in these states or in states
into which the Company may expand will not require licensure or a restructuring
of some or all of the Company's operations. The Company also believes that
additional regulation at the state level will be forthcoming. In addition, state
regulations in this area may be affected or superseded by federal standards for
provider service organizations that are currently being developed through
rulemaking required by the Balanced Budget Act of 1997.

See "Business -- Government Regulation."

RISKS RELATED TO RELATIONSHIPS WITH THIRD PARTY PAYORS

Physician groups typically bill various third party payors, such as
governmental programs (e.g., Medicare and Medicaid), private insurance plans and
managed care plans, for the health care services provided to their patients.
Such third party payors increasingly are negotiating the prices charged for
medical services, pharmaceuticals and other supplies in order to lower
reimbursement and utilization rates. Third party payors can also deny
reimbursement for medical services, pharmaceuticals and other supplies if they
determine that a treatment was not performed in accordance with treatment
protocols established by such payors or for other reasons. Loss of revenue by
the PCs as a result of such payors' cost containment efforts could have a
material adverse effect on the Company. The Company anticipates that the PCs and
the Provider Network will eventually offer their services to payors on a fully
or partially capitated basis (i.e., fixed payments would be made to the
applicable provider based on the number of covered patients for whom the
provider was responsible during a specified time period and actuarial
assumptions related thereto, rather than based on specific services rendered) or
other risk-sharing basis, including certain "case rate" or other similar
arrangements under which payors provide a fixed fee to the Company for managing
and/or providing physician and other medical services rendered in connection
with the treatment of certain injuries, disease states or other episodes of
care. To the extent that patients or enrollees covered by a capitated or other
risk-sharing contract require more frequent or extensive care than is
anticipated by the Company, the revenue to the

11
<PAGE>

Company derived from such contracts may be insufficient to cover the costs of
the services provided. There is no assurance that the PCs or the Provider
Network will be able to enter into such contracts that will generate sufficient
revenues to cover the costs of services provided under such contracts or that
such contracts would be profitable to the PCs and, ultimately, the Company. If
the PCs or the Provider Network enter into capitation or other risk-sharing
arrangements, they may be considered to be in the business of insurance, in
which event they could become subject to various regulatory and licensing
requirements that could have a material adverse effect on the Company.

The federal government has implemented, through the Medicare program, a
resource-based relative value scale ("RBRVS") payment methodology for health
care provider services. RBRVS is a fee schedule that, except for certain
geographical and other adjustments, pays similarly situated health care
providers the same amount for the same services. The RBRVS is adjusted each year
and is subject to increases or decreases at the discretion of Congress. To date,
the implementation of RBRVS has reduced payment rates for certain of the
procedures historically provided by the Affiliated Practices. Further reductions
could significantly affect the PCs, each of which derives a portion of its
revenue from Medicare. RBRVS types of payment systems have also been adopted by
certain private third party payors and may become a predominant payment
methodology. Expanded implementation of such programs would reduce payments from
private third party payors, and could indirectly reduce revenue to the Company.
The Balanced Budget Act of 1997 (the "BBA") includes certain provisions that
over time are designed to limit increases in Medicare payments and that may have
the effect of reducing reimbursement to Affiliated Practices. It is probable
that new and more restrictive Medicare payment rules, procedures and programs
for determining global Medicare capitation fees will be implemented in the
future.

The Company currently provides or intends to provide specialist physician
services and ancillary services to patients on behalf of the workers'
compensation programs in certain states in which the Company operates. There can
be no assurance that reductions in applicable fee schedules, movement by one or
more of such state programs toward managed care models or other regulatory
changes will not have an adverse effect on the revenues received by the PCs for
the provision of such services. See "Business -- Reimbursement for Services" and
"-- Government Regulation."

RISKS INHERENT IN PROVISION OF MEDICAL SERVICES

The PCs, the Affiliated Physicians and physicians who become members of the
Provider Network are involved in the delivery of health care services to the
public, and are exposed to the risk of professional liability claims. Even
though the Company does not directly provide health care services, it is
possible for the Company to be joined as a defendant in any such claim due to
its relationship with the PCs and the Provider Network. Even if the Company is
not a direct party, successful claims against the PC would generally adversely
affect the amount of management fees from the applicable PC to which the Company
is entitled. Claims of this nature, if successful, could result in damage awards
to the claimants in excess of the limits of any applicable insurance coverage.
Insurance against losses related to claims of this type can be expensive and
costs may vary widely from state to state and year to year. The Company and the
PCs maintain liability insurance in amounts and coverages the Company believes
are appropriate. Nevertheless, successful malpractice claims asserted against
the PCs, the Provider Network or the Company could have a material adverse
effect on the Company. See "Business -- Legal Proceedings."

DEPENDENCE ON MANAGEMENT INFORMATION SYSTEMS

The successful execution of the Company's strategy is, in part, dependent
on its ability to integrate practice management information and financial
information systems into the Affiliated Practices as soon as practicable upon
the consummation of each Affiliation Transaction. To date, the Company's
practice management information system has been implemented in six Affiliated
Practices and it is expected to be implemented by the end of 1999 in a majority
of the Affiliated Practices that become affiliated with the Company through the
Initial Affiliation Transactions. In addition, the Company's financial
information system has been implemented in all of the Affiliated Practices that
became affiliated with the Company through the Conditional Affiliation
Transactions. In addition to their integral role in helping the PCs realize
operating efficiencies, such systems are critical to negotiating, pricing and
managing fully or partially capitated managed

12
<PAGE>

care contracts and other risk-sharing arrangements. The Company believes that
its existing practice management information and financial information systems
are adequate for the operation of the Company's business and the successful
implementation of its strategy. However, the Company will need to continue to
invest in, and administer, sophisticated management information systems to
support these activities. The Company may experience unanticipated delays,
complications and expenses in implementing, integrating and operating such
systems. Furthermore, such systems may require modifications, improvements or
replacements as the Company expands and as new technologies become available.
Such modifications, improvements or replacements may require substantial
expenditures and may require interruptions in operations during periods of
implementation. The failure to implement successfully and maintain practice
management information and financial information systems would have a material
adverse effect on the Company. See "Business -- Management Information Systems."

DEPENDENCE ON AFFILIATED PHYSICIANS

Substantially all of the Company's revenue is currently earned by the
Company pursuant to Management Agreements with the PCs. Upon consummation of all
the Initial Affiliation Transactions, the Company's Affiliated Practices will
employ a total of 97 Affiliated Physicians generally pursuant to employment
agreements between the PCs and the Affiliated Physicians (the "Employment
Agreements"). While the Company intends to maintain, through the PCs, its
relationships with the Affiliated Physicians employed by the PCs, the
termination of employment by a sufficient number of Affiliated Physicians or the
significant deterioration of the business or operations of a sufficient number
of the Affiliated Practices could have a material adverse effect on the
applicable PC and the Company. Although Affiliated Physicians generally are
required to pay liquidated damages to the PC in the event that they terminate
their employment prematurely, are subject to certain restrictive covenants
during the terms of their respective Employment Agreements, and are generally
prohibited from becoming employees of or from being managed by other physician
practice entities, hospitals and certain other entities for a period of two
years following employment, such Affiliated Physicians generally will be able to
compete with the Company at the end of their respective employment terms
(generally five to seven years from the date of the applicable Employment
Agreement) by returning to private practice. The loss of the services of and
such competition from former Affiliated Physicians could have a material adverse
effect on the Company's operations and results. In addition, each of the PCs
operates within one state, and a deterioration of economic or other conditions
within such state could have a material adverse impact upon the PC and the
Company. Such results, as well as a deterioration in the financial condition of
a substantial number of the other physicians or physician groups affiliated with
the Company through the Provider Network, could also have a material adverse
effect on the Company. See "Business -- Affiliation Transactions."

DEPENDENCE ON KEY PERSONNEL

The Company is highly dependent on its executive officers, particularly
Thomas J. Keane, the Company's Chairman, President and Chief Executive Officer.
The loss of Mr. Keane or its other executive officers could have a material
adverse effect on the implementation of the Company's strategy and the
operations of the Company. There can be no assurance that the Company will be
successful in retaining its key personnel. The Company's success is also
dependent on its ability to attract and retain additional key personnel which it
requires. The loss of the services of one or more of its key personnel or the
inability to add additional key personnel could have a material adverse effect
on the Company. See "Management."

COMPETITION IN THE DELIVERY OF HEALTH CARE SERVICES AND IN AFFILIATING WITH
SPECIALIST PHYSICIAN PRACTICES

The business of providing health care and related services is intensely
competitive. The Company is potentially in competition with a number of health
care organizations and institutions such as publicly- and privately-owned
physician practice management businesses, hospitals and other institutions and
organizations, managed care organizations, single- and multi-specialty physician
groups and solo practitioners, in two broad areas of competition: competition in
the delivery of health care services and competition in affiliating with
specialist physician practices.

13
<PAGE>

Competition in the delivery of health care services. The Company's success
is highly dependent upon the success of its Affiliated Practices and Affiliated
Physicians in the delivery of health care services to patients and other
consumers, including managed care organizations, insurers, Medicare and other
third-party payors. The Company's Affiliated Practices and Affiliated Physicians
must compete with hospitals and other health care institutions and
organizations, single- and multi-specialty physician groups, some of which are
operated by physician practice management companies, and solo practitioners.
Many of such competitors have substantially greater resources than those of the
Company's Affiliated Practices and Affiliated Physicians.

Competition in affiliating with specialist physician practices. An
important element of the Company's growth strategy is the identification of and
affiliation with additional specialist physician practices. The Company must
compete with other publicly- and privately-owned physician practice management
businesses, hospitals and other health care organizations and institutions which
also seek to acquire or affiliate with such specialist physician practices. Most
of such entities have been in business longer than the Company, and have
substantially greater assets and resources than those of the Company. The
Company believes other health care companies and institutions have also been
investigating forming single- or multi-specialty physician practice management
companies, and still other businesses with substantial resources may decide to
enter the specialist physician practice management business, all of which
entities are potentially in competition with the Company. See "Business --
Competition."

CONTROL BY PRINCIPAL SHAREHOLDERS; ANTI-TAKEOVER PROVISIONS

Mr. Keane, Edison Venture Fund III, L.P. ("Edison"), Dominion Fund IV
("Dominion"), Keystone Venture IV, L.P. ("Keystone"), Capital Ventures
International ("CVI") and NEPA Venture Fund II, L.P. ("NEPA") (collectively, the
"Principal Shareholders") will own, after the Offering, approximately ____% of
the outstanding Common Stock (approximately ____% if all outstanding Options and
Warrants are exercised). As a result, the Principal Shareholders would
effectively be able to control all matters requiring approval by the Company's
shareholders, including the election of directors. See "Principal Shareholders"
and "Shares Eligible for Future Sale." In addition, the Company is subject to
the anti-takeover provisions of Subchapter F of Chapter 25 of the Pennsylvania
Business Corporation Law of 1988, as amended (the "BCL"), which prohibit the
Company from engaging in a "business combination" with an "interested
shareholder" for a period of five years after the date of the transaction as a
result of which such shareholder became an "interested shareholder" unless the
business combination is approved in a prescribed manner. These provisions,
together with other provisions in the Company's Amended and Restated Articles of
Incorporation, as amended (the "Articles"), and By-laws, may discourage
acquisition bids for the Company by persons unrelated to certain existing
shareholders. The effect of the Principal Shareholders' stock ownership and
these provisions may be to limit the price that investors might be willing to
pay in the future for shares of the Common Stock or to prevent or delay a
merger, takeover or other change in control of the Company and thus discourage
attempts to acquire the Company. In addition, the Company's Board of Directors
has the authority to issue up to 5,000,000 shares of Preferred Stock ("Preferred
Stock") and to determine the price, rights, preferences and privileges of those
shares without any further vote or action by the shareholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company. The Company has no present plan
to issue any shares of Preferred Stock. The Company's Articles and By-laws
contain other provisions, such as provisions for a classified Board of
Directors, notice requirements for shareholders' nominations of directors and
limitations on the shareholders' ability to remove directors or to present
proposals to the shareholders for a vote, all of which may have the further
effect of making it more difficult for a third party to gain control of or to
acquire the Company. See "Description of Capital Stock."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of the Common Stock in the public market
following the Offering could adversely affect the market price of the Common
Stock. Upon the completion of the Offering, the Company will have ____ shares of
Common Stock outstanding. Of these shares, the ___ shares of Common Stock sold
in the Offering will be freely tradeable without restriction or further
registration under the Securities Act of

14
<PAGE>

1933, as amended (the "Securities Act"). The remaining 11,061,533 shares of
Common Stock outstanding as of the date of this Prospectus are "restricted
securities" as defined by Rule 144 under the Securities Act ("Rule 144"). Of
these shares, 68.2% have been held by the Principal Shareholders for more than
one year and would be able to be sold in accordance with the provisions of Rule
144 beginning 90 days from the date of this Prospectus. See "Shares Eligible for
Future Sale."

Upon the completion of the Offering, there will be 2,102,994 shares of
Common Stock issuable upon exercise of outstanding Options under the Company's
1997 Stock Incentive Plan (the "Stock Incentive Plan"), 1995 Company Stock
Option Plan (the "1995 Company Option Plan") and 1995 Affiliate Stock Option
Plan (the "1995 Affiliate Option Plan," and, together with the Stock Incentive
Plan and the 1995 Company Option Plan, the "Stock Incentive Plans").
Approximately 351,000 of the Options will be exercisable upon completion of the
Offering and the remainder will vest in various amounts through July 2002. In
addition, 1,179,250 shares will be eligible for issuance upon the exercise of
Options not yet granted under the Stock Incentive Plan. The Company intends to
file a registration statement or statements covering the shares of Common Stock
issuable under the Stock Incentive Plans upon exercise of Options within one
year from the date of this Prospectus. The shares registered under such
registration statement or statements will be available for resale in the open
market upon the exercise of Options, subject to Rule 144 volume limitations
applicable to affiliates. See "Management -- Stock Incentive Plans."

The Company and each executive officer and director and certain other
shareholders of the Company have agreed that, for a period of 180 days after the
date of this Prospectus (the "Lock-up Period"), they will not, without the prior
written consent of BancAmerica Robertson Stephens, issue, offer to sell,
contract to sell or otherwise sell, dispose of, loan, pledge or grant any rights
with respect to any shares of Common Stock, any options or warrants to purchase
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for or that represent the right to receive any shares of Common
Stock or enter into any swap, option, future, forward or other agreement that
transfers, in whole or in part, the economic consequences of ownership of the
Common Stock, except in certain limited circumstances. See "Underwriting."

The Company and certain of its shareholders are parties to agreements under
which such shareholders may cause certain of their shares of Common Stock to be
registered for sale under the Securities Act. See "Certain Transactions."

DILUTION

The initial public offering price is substantially higher than the net
tangible book value per share of the Common Stock. Purchasers of shares of
Common Stock in the Offering will suffer immediate and substantial dilution of
$_____ (assuming an initial public offering price of $____ per share) in the pro
forma net tangible book value per share of Common Stock. See "Dilution."

NO PRIOR PUBLIC MARKET; POTENTIAL VOLATILITY OF STOCK PRICE

Prior to the Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or be sustained after the Offering. The initial public offering price will be
determined through negotiation between the Company and the Representatives of
the Underwriters and may bear no relationship to the price at which the Common
Stock will trade after the Offering. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. The
market price of the Common Stock may be volatile and may be significantly
affected by factors such as actual or anticipated fluctuations in the Company's
operating results, announcements of new areas of business by the Company or its
competitors, developments with respect to conditions and trends in the Company's
business or in the health care industry as a whole, governmental regulation,
changes in estimates by securities analysts of the Company's or its competitors'
future financial performance, general market conditions and other factors, many
of which are beyond the Company's control. In addition, the stock market has
from time to time experienced significant price and volume fluctuations that
have adversely affected the market prices of securities of companies
irrespective of such companies' operating performances.

15
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of shares of Common Stock
offered by the Company hereby are estimated to be $_____ ($_____ if the
Underwriters' over-allotment option is exercised in full), assuming an initial
public offering price of $_____ per share and after deducting the estimated
underwriting discounts and commissions and offering expenses payable by the
Company.

The Company anticipates applying approximately $19.5 million to make
required cash payments in connection with the IPO Affiliation Transactions,
$18.4 million to repay Convertible Notes issued in connection with the
Conditional Affiliation Transactions which bear interest at an annual rate of
6%, $650,000 to pay accrued but unpaid dividends on the Convertible Preferred
Stock, and $4.0 million to repay certain indebtedness of the Company. Such
indebtedness, the proceeds of which were used primarily for working capital,
consists of loans provided by certain investors consisting of a term loan in the
principal amount of $2 million bearing interest at an annual rate of 12% and
term notes in the aggregate principal amount of $2 million bearing interest at
an annual rate of 10%. See "Certain Transactions." In addition, the Company
anticipates applying approximately $1.0 million to repay certain indebtedness
assumed pursuant to various Affiliation Transactions, which indebtedness bears
interest at annual rates ranging from 6.0% to 9.5%. The remainder of the net
proceeds will be used for working capital and other general corporate purposes,
including possible Affiliation Transactions and acquisitions. Pending such uses,
the Company intends to invest the net proceeds from the Offering in investment
grade, interest-bearing instruments.

The Company intends to enter into Affiliation Transactions and possibly to
seek acquisitions of businesses that are complementary to those of the Company,
and a portion of the net proceeds may be used for such purposes. While the
Company engages from time to time in discussions with respect to such
transactions, the Company has no commitments or agreements with respect to any
such transactions as of the date of this Prospectus, other than the Initial
Affiliation Transactions, and there can be no assurance that any such
transactions will be completed.

DIVIDEND POLICY

Prior to the Offering, the Company has not paid cash dividends on its
capital stock. Except for the payment of accrued but unpaid dividends on the
Convertible Preferred Stock described under "Use of Proceeds," the Company
currently expects it will retain its future earnings for use in the operation
and expansion of its business and does not anticipate paying any cash dividends
in the foreseeable future.

16
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
September 30, 1997, (i) on an actual basis; (ii) on a pro forma basis to give
effect to (a) the issuance of a demand note in the principal amount of $0.9
million in November 1997, (b) the issuance of a demand note in the principal
amount of $0.8 million in January 1998, (c) the issuance of Series C Preferred
Stock with proceeds of $5.6 million in January 1998 a portion of which was
utilized to repay the $0.9 million and $0.8 million demand notes, (d) the 18
Conditional Affiliation Transactions which, for accounting purposes, will occur
simultaneously with completion of the Offering, (e) the 14 IPO Affiliation
Transactions which will occur simultaneously with completion of the Offering,
(f) the Preferred Stock Conversion, (g) the Series B Warrant Conversion and (h)
elimination of the original issue discount in the amount of $209,000 related to
the issuance of the $0.9 million and $0.8 million demand notes, as if all of the
foregoing transactions had occurred on September 30, 1997; and (iii) on a pro
forma as adjusted basis to give effect to the pro forma adjustments and to the
sale of ________ shares of Common Stock offered hereby (at an assumed public
offering price of $______ per share) and the application of the net proceeds
therefrom as described in "Use of Proceeds." See the Unaudited Pro Forma
Consolidated Financial Statements. This table should be read in conjunction with
the Consolidated Financial Statements of the Company and the Notes thereto
appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-Term Debt:
Current portion of notes payable on Initial Affiliation
Transactions........................................... $16,729 $ 3,919 $
Current portion of other long-term debt................... 733 3,135
------- -------
Total current portion of long-term debt.............. 17,462 7,054
Pro forma cash due to Initial Affiliation Transactions.... -- 41,150
------- ------- --------
Total short-term debt................................ 17,462 48,204
------- ------- --------
Long-Term Debt:
Notes payable on Initial Affiliation Transactions......... 7,467 16,942
Other long-term debt...................................... 2,770 4,245
------- ------- --------
Total long-term debt................................. 10,237 21,187
------- ------- --------
Series A convertible preferred stock........................ 2,174 --
------- ------- --------
Series B convertible preferred stock........................ 3,792 --
------- ------- --------
Series C convertible preferred stock........................ -- --
------- ------- --------
Series B convertible preferred stock warrants............... 851 --
------- ------- --------
Common Stock to be issued on Conditional Affiliation
Transactions.............................................. 9,643 --
------- ------- --------
Shareholders' Equity (Deficit):
Common Stock, $.01 par value 25,000,000 shares authorized;
3,936,581 shares (actual); _____ shares (pro forma);
______ shares (as adjusted) issued and
outstanding(1)......................................... 39 226
Additional paid-in capital................................ 434 31,003
Common Stock warrants..................................... 96 1,528
Accumulated deficit....................................... (6,604) (6,813)
------- ------- --------
Total shareholders' equity (deficit)................... (6,035) 25,944
------- ------- --------
Total capitalization................................. $38,124 $95,335 $
======= ======= ========
</TABLE>

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

(1) Excludes (i) 3,282,244 shares of Common Stock reserved for issuance under
the Company Stock Option Plans of which 2,186,244 shares were issuable at
September 30, 1997 upon the exercise of outstanding Options, and (ii)
738,096 shares of Common Stock issuable upon exercise of Warrants
outstanding as of September 30, 1997. For the period October 1, 1997 through
January 28, 1998: 15,000 shares of Common Stock were issued upon exercise of
outstanding Options; Options for 139,000 shares of Common Stock were
canceled; and Warrants to purchase 453,795 shares of Common Stock were
issued. See "Management -- Stock Incentive Plans" and "Certain
Transactions."

17
<PAGE>

DILUTION

As of September 30, 1997, the Company had a net tangible book value
(deficit) of approximately $(9.0 million) or $(2.30) per share. Net tangible
book value (deficit) per share represents the total assets of the Company, less
(i) identifiable intangible assets and (ii) total liabilities (including
Convertible Preferred Stock and Series B Warrants), divided by the number of
shares of Common Stock outstanding at that date. The increase in pro forma net
tangible book value (deficit) per share of $_________ reflected in the following
table is attributable to the Completed Transaction which closed after September
30, 1997, the 18 Conditional Affiliation Transactions that, for accounting
purposes, will occur simultaneously with the completion of this Offering and the
14 IPO Affiliation Transactions which will occur simultaneously with the
Offering. The increase in pro forma net tangible book value (deficit) per share
of $________ reflected in the following table is attributable to the Preferred
Stock Conversion and the Series B Warrant Conversion. After giving effect to the
sale of ______ shares offered by the Company hereby (at an assumed initial
public offering price of $_______ per share) and the application of the net
proceeds therefrom, the pro forma as adjusted net tangible book value (deficit)
of the Company at September 30, 1997 would have been approximately $__________
million or $______ per share. This represents an immediate increase in
historical net tangible book value of $______ per share to existing shareholders
and an immediate dilution of $_____ per share to new investors. The following
table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $
Net tangible book value (deficit) per share at September
30, 1997............................................... $
Increase per share attributable to the:
Initial Affiliation Transactions and Completed
Transaction closed after September 30, 1997.......
Preferred Stock Conversion and
Series B Warrant Conversion.......................
-------
Pro forma net tangible book value (deficit) per share
before the Offering..................................
Increase per share attributable to new investors.......
-------
Pro forma as adjusted net tangible book value per share
after the Offering........................................
-------
Dilution per share to new investors......................... $
=======
</TABLE>

The following table summarizes, on a pro forma basis as of September 30,
1997, the difference among existing common shareholders, shareholders who will
receive shares as a result of the Initial Affiliation Transactions, shareholders
who will receive shares as a result of the Preferred Stock Conversion and new
investors with respect to the number of shares of Common Stock purchased from
the Company, the total consideration paid and the average price paid per share
(based upon, in the case of new investors, an assumed public offering price of
$_____ per share):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- --------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing common shareholders.............. $ $
Initial Affiliation Transaction
shareholders............................
Preferred shareholders....................
--------- --- -------- --- ------
New investors.............................
--------- --- -------- --- ------
Total................................... 100% $ 100%
========= === ======== === ======
</TABLE>

The foregoing computations assume as of January 28, 1998 (i) no exercise of
outstanding Options to purchase 2,032,244 shares of Common Stock at a weighted
average exercise price of $2.56 and (ii) no exercise of outstanding Warrants to
purchase 1,191,891 shares of Common Stock at exercise prices of $4.15 per share
(as to 410,222 shares), $3.15 per share (as to 682,540 shares), $___ per share
(at an assumed initial public offering price of $____ per share) (as to 55,556
shares) and $0.01 per share (as to 43,573 shares). To the extent these Options
and Warrants are exercised, there will be further dilution to new investors. See
"Description of Capital Stock," "Underwriting," and "Management -- Stock
Incentive Plans."

18
<PAGE>

SELECTED FINANCIAL DATA

The selected historical financial data of the Company as of and for the
period from inception (July 14, 1994) to December 31, 1994 and for the years
ended December 31, 1995 and 1996, and the nine months ended September 30, 1997
have been derived from the audited Consolidated Financial Statements of the
Company included elsewhere in this Prospectus. The selected historical financial
data of the Company for the nine months ended September 30, 1996 are derived
from the unaudited Consolidated Financial Statements of the Company and, in the
opinion of management, include all adjustments (consisting only of normal
recurring adjustments) that the Company considers necessary for a fair
presentation of the financial position and results of operations for such
periods. The selected historical financial data of the Company should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Notes thereto appearing elsewhere in this Prospectus. The selected pro forma
financial data set forth below as of September 30, 1997, and for the year ended
December 31, 1996 and the nine months ended September 30, 1997, have been
derived from the Unaudited Pro Forma Consolidated Financial Statements of the
Company. The pro forma selected financial data are not necessarily indicative of
the actual results of operations or financial position that would have been
achieved had the Completed Transactions, Initial Affiliation Transactions and
the Offering been completed as of January 1, 1996, nor are the statements
necessarily indicative of the Company's future results of operations or
financial position. See the Unaudited Pro Forma Consolidated Financial
Statements.

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FROM INCEPTION YEAR ENDED DECEMBER 31, SEPTEMBER 30, 1997
(JULY 14, 1994) ---------------------------------- NINE MONTHS ----------------------
TO 1996 ENDED PRO FORMA
DECEMBER 31, 1994 1995 1996 PRO FORMA SEPTEMBER 30, AS
ACTUAL ACTUAL ACTUAL AS ADJUSTED (1) 1996 ACTUAL ADJUSTED (1)
----------------- ------ ------- --------------- ------------- ------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.................... $ -- $ -- $ 70 $60,194 $ 39 $ 2,490 $45,742
Cost of revenues................ -- -- -- 53,351 -- 704 38,990
----- ----- ------- ------- ------- ------- -------
Gross profit.................... -- -- 70 6,843 39 1,786 6,752
Operating expenses:
General and administrative.... 321 692 2,295 2,295 1,355 3,760 3,760
Depreciation and
amortization................ -- 2 6 3,672 4 106 2,790
----- ----- ------- ------- ------- ------- -------
Income (loss) from operations... (321) (694) (2,231) 876 (1,320) (2,080) 202
Interest expense................ -- 11 13 7 751
Other (income) expense, net..... -- (25) 492 490 (69)
----- ----- ------- ------- ------- ------- -------
Income (loss) before income
taxes......................... (321) (680) (2,736) (1,817) (2,762)
Income tax provision
(benefit)..................... -- -- -- -- --
----- ----- ------- ------- ------- ------- -------
Net income (loss)............... $(321) $(680) $(2,736) $ $(1,817) $(2,762) $
===== ===== ======= ======= ======= ======= =======
Pro forma net income (loss) per
common share (2).............. $
======= =======
Shares used in computing pro
forma net income (loss) per
common share (2)..............
======= =======
</TABLE>

19
<PAGE>

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1997
------------------------- -----------------------------------------
PRO FORMA
1994 1995 1996 ACTUAL PRO FORMA (3) AS ADJUSTED (4)
----- ------- ------- ------- ------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............. $ -- $ 1,395 $ 2,066 $ 1,833 $ 8,138 $
Working capital (deficit)............. (25) 1,225 697 (18,177) (33,511)
Total assets(5)....................... -- 1,492 2,632 42,290 103,634
Cash due to Initial Affiliation
Transactions........................ -- -- -- -- 41,150
Current portion of long-term debt..... -- -- -- 17,462 7,054
Long-term debt, less current
portion............................. 262 172 172 10,237 21,187
Convertible preferred stock
securities.......................... -- 2,159 4,087 6,829 --
Shareholders' equity (deficit)........ (287) (1,028) (3,353) (6,035) 25,944
</TABLE>

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

(1) Adjusted on a pro forma basis to give effect to (i) the three Completed
Transactions, (ii) the 18 Conditional Affiliation Transactions which, for
accounting purposes, will occur simultaneously with the completion of the
Offering, (iii) the 14 IPO Affiliation Transactions which will occur
simultaneously with the completion of the Offering and (iv) the reduction in
interest expense resulting from the assumed use of the estimated net
proceeds of the Offering made hereby to retire certain long-term debt
obligations, as if all of the foregoing transactions had occurred as of the
beginning of the respective periods. Excludes a charge of $706,000
(estimated at December 31, 1997) for the early extinguishment of certain
long-term debt obligations which will be taken in the fiscal quarter in
which the Offering is completed and interest expense of $209,000 for the
amortization of original issue discounts related to the issuance in November
1997 and January 1998 of demand notes which will be recorded in the quarter
in which the debt is issued. See "Use of Proceeds." The pro forma statement
of operations data does not purport to represent what the Company's results
of operations would have been had such transactions occurred as of the
beginning of the respective periods or project the Company's results for any
future period. See the Unaudited Pro Forma Consolidated Financial Statements
and Note 8 of the Notes to Consolidated Financial Statements.

(2) For information concerning the computation of pro forma net income (loss)
per common share see Note 6 of Notes to Unaudited Pro Forma Consolidated
Financial Statements.

(3) Adjusted on a pro forma basis to give effect to (i) the issuance of a demand
note in the principal amount of $0.9 million in November 1997, (ii) the
issuance of a demand note in the principal amount of $0.8 million in January
1998, (iii) the issuance of Series C Preferred Stock with proceeds of $5.6
million in January 1998 a portion of which was utilized to repay the $0.9
million and $0.8 million demand notes, (iv) the 18 Conditional Affiliation
Transactions, the 14 IPO Affiliation Transactions and the Completed
Transaction closed after September 30, 1997, (v) the Preferred Stock
Conversion, (vi) the Series B Warrant Conversion and (vii) elimination of
the original issue discount in the amount of $209,000 related to the
issuance of the $0.9 million and $0.8 million demand notes, as if all of the
foregoing transactions had occurred on September 30, 1997.

(5) Includes $127,000 on an actual and $74.7 million on a pro forma and pro
forma as adjusted basis of intangible assets at September 30, 1997.

<PAGE>

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION

Except as indicated below, the following unaudited pro forma consolidated
statements of operations for the nine months ended September 30, 1997 and the
year ended December 31, 1996 and the unaudited pro forma consolidated balance
sheet as of September 30, 1997 are based on the historical Consolidated
Financial Statements of the Company, adjusted to give effect to the 18
Conditional Affiliation Transactions which, for accounting purposes, will occur
simultaneously with the completion of an initial public offering by the Company
(the "IPO"), the 14 IPO Affiliation Transactions that will occur upon completion
of the Offering and the Completed Transactions. A list of the practices
affiliated with the Company pursuant to the Conditional Affiliation Transactions
and the IPO Affiliation Transactions is set forth under "Business -- Development
and Operations."

The unaudited pro forma consolidated statements of operations have been
prepared assuming the above transactions occurred on January 1, 1996. The
unaudited pro forma consolidated balance sheet has been prepared assuming that
the Initial Affiliation Transactions and the Completed Transaction which closed
after September 30, 1997 had occurred on September 30, 1997 and also reflects
the IPO, the issuance of a demand note in the principal amount of $0.9 million
in November 1997, the issuance of a demand note in the principal amount of $0.8
million in January 1998, the issuance of Series C Preferred Stock with proceeds
of $5.6 million in January 1998 a portion of which was utilized to repay the
$0.9 million and $0.8 million demand notes, the Preferred Stock Conversion and
the Series B Warrant Conversion, as if such transactions had occurred on
September 30, 1997. The transactions and the related adjustments are described
in the notes hereto.

The unaudited pro forma consolidated statements of operations also give
effect to the reduction in interest expense resulting from the assumed use, as
of the beginning of the respective periods, of the estimated net proceeds of the
Offering to retire certain long-term obligations, together with accrued
interest. The unaudited pro forma consolidated statements of operations exclude
a charge of $706,000 (estimated at December 31, 1997) for the early
extinguishment of certain long-term debt obligations which will be taken in the
fiscal quarter in which the IPO is completed, as described under "Use of
Proceeds." In addition, the unaudited pro forma consolidated statements of
operations exclude interest expense of $209,000 for the amortization of original
issue discounts related to the issuance of the $0.9 million and $0.8 million
demand notes which will be recorded in the quarter in which the debt is issued.

The pro forma adjustments are based on estimates, available information and
certain assumptions and may be revised, as additional information becomes
available. The pro forma financial information does not purport to represent
what the Company's results of operations or financial position would have been
had the acquisitions in fact occurred on those dates, or to project the
Company's results of operations or financial position for any future period or
date, nor does it give effect to any matters other than those described in the
notes thereto. The pro forma financial information should be read in conjunction
with the Consolidated Financial Statements of the Company and the Financial
Statements of certain of the parties to the above transactions appearing
elsewhere in this Prospectus. See "Risk Factors."

The unaudited pro forma consolidated statements of operations do not give
effect to one Conditional Affiliation Transaction and one IPO Affiliation
Transaction, both of which pertain to practices operated by the New York P.C. As
described more fully in "Business -- Management and Services Agreements; Control
of PCs," the fee received by the Company for its services to the New York PC is
based on the Company's cost of providing such services plus an additional amount
equal to a percentage of such costs. Because the Company has not previously
managed these two practicies, the Company's fees are not factually determinable
or reasonably estimatable and thus are excluded from the pro forma statements of
operations.

<PAGE>

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)

HISTORICAL FINANCIAL STATEMENTS (NOTE 1)
---------------------------------------- TRANSACTION OFFERING
U.S. PHYSICIANS, INC. PRO FORMA PRO FORMA
AND SUBSIDIARIES TRANSACTIONS ADJUSTMENTS PRO FORMA ADJUSTMENTS
--------------------- ------------ ----------- ---------- -----------
(NOTE 2) (NOTE 3) (NOTE 3)
<S> <C> <C> <C> <C> <C>
Net revenues:
Net patient revenues...................... $ 208 $ 43,993 $ -- $ 44,201 $
Management fees from Conditional
Affiliation Transactions................ 2,000 -- (1,497) 503
Management fees........................... 95 1,954 (1,347) 702
Other revenues............................ 187 149 -- 336
------- -------- ------- -------- -------
Total net revenues...................... 2,490 46,096 (2,844) 45,742
Cost of revenues........................... 704 43,423 (5,137) 38,990
------- -------- ------- -------- -------
Gross profit............................... 1,786 2,673 2,293 6,752
Operating expenses:
General and administrative................ 3,760 -- -- 3,760
Depreciation and amortization............. 106 569 2,115 2,790
------- -------- ------- -------- -------
Income (loss) from operations.............. (2,080) 2,104 178 202
Other (income) expense..................... -- (113) -- (113)
Interest income............................ (69) (9) -- (78)
Interest expense........................... 751 195 1,025 1,971
------- -------- ------- -------- -------
Income (loss) before income taxes.......... (2,762) 2,031 (847) (1,578)
Income tax provision (benefit)............. -- 274 (423) (149)
------- -------- ------- -------- -------
Net income (loss).......................... $(2,762) $ 1,757 $ (424) $ (1,429) $
------- -------- ------- -------- -------
------- -------- ------- -------- -------
Pro forma net income (loss) per common
share (Note 6)............................ $
--------
--------
Shares used in computing pro forma net
income (loss) per common share (Note 6)...
--------
--------

PRO FORMA
AS ADJUSTED
-----------

<S> <C>
Net revenues:
Net patient revenues...................... $
Management fees from Conditional
Affiliation Transactions................
Management fees...........................
Other revenues............................
-------
Total net revenues......................
Cost of revenues...........................
-------
Gross profit...............................
Operating expenses:
General and administrative................
Depreciation and amortization.............
-------
Income (loss) from operations..............
Other (income) expense.....................
Interest income............................
Interest expense...........................
-------
Income (loss) before income taxes..........
Income tax provision (benefit).............
-------
Net income (loss).......................... $
-------
-------
Pro forma net income (loss) per common
share (Note 6)............................ $
-------
-------
Shares used in computing pro forma net
income (loss) per common share (Note 6)...
-------
-------
</TABLE>

See accompanying notes to unaudited pro forma consolidated financial statements.

<PAGE>

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)

HISTORICAL FINANCIAL STATEMENTS (NOTE 1)
---------------------------------------- TRANSACTION OFFERING
U.S. PHYSICIANS, INC. PRO FORMA PRO FORMA
AND SUBSIDIARIES TRANSACTIONS ADJUSTMENTS PRO FORMA ADJUSTMENTS
--------------------- ------------ ----------- --------- -----------
(NOTE 2) (NOTE 4) (NOTE 4)
<S> <C> <C> <C> <C> <C>
Net revenues:
Net patient revenues........................ $ -- $ 58,498 $ -- $58,498 $
Management fees from Conditional Affiliation
Transactions.............................. -- -- -- --
Management fees............................. -- 2,357 (1,574) 783
Other revenues.............................. 70 843 -- 913
------- -------- ------- ------- -------
Total net revenues........................ 70 61,698 (1,574) 60,194
Cost of revenues............................. -- 59,059 (5,708) 53,351
------- -------- ------- ------- -------
Gross profit................................. 70 2,639 4,134 6,843
Operating expenses:
General and administrative.................. 2,295 -- -- 2,295
Depreciation and amortization............... 6 847 2,819 3,672
------- -------- ------- ------- -------
Income (loss) from operations................ (2,231) 1,792 1,315 876
Loss in terminated joint venture............. 529 -- -- 529
Other (income) expense....................... -- (147) -- (147)
Interest income.............................. (37) (7) -- (44)
Interest expense............................. 13 312 2,077 2,402
------- -------- ------- ------- -------
Income (loss) before income taxes............ (2,736) 1,634 (762) (1,864)
Income tax provision (benefit)............... -- 312 (415) (103)
------- -------- ------- ------- -------
Net income (loss)............................ $(2,736) $ 1,322 $ (347) $(1,761) $
------- -------- ------- ------- -------
------- -------- ------- ------- -------
Pro forma net income (loss) per common share
(Note 6).................................... $
-------
-------
Shares used in computing pro forma net income
(loss) per common share (Note 6)............
-------
-------

PRO FORMA
AS ADJUSTED
-----------

<S> <C>
Net revenues:
Net patient revenues........................ $
Management fees from Conditional Affiliation
Transactions..............................
Management fees.............................
Other revenues..............................
-------
Total net revenues........................
Cost of revenues.............................
-------
Gross profit.................................
Operating expenses:
General and administrative..................
Depreciation and amortization...............
-------
Income (loss) from operations................
Loss in terminated joint venture.............
Other (income) expense.......................
Interest income..............................
Interest expense.............................
-------
Income (loss) before income taxes............
Income tax provision (benefit)...............
-------
Net income (loss)............................ $
-------
-------
Pro forma net income (loss) per common share
(Note 6).................................... $
-------
-------
Shares used in computing pro forma net income
(loss) per common share (Note 6)............
-------
-------
</TABLE>

See accompanying notes to unaudited pro forma consolidated financial statements.

<PAGE>

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)

HISTORICAL FINANCIAL STATEMENTS (NOTE 1)
---------------------------------------- TRANSACTION OFFERING
U.S. PHYSICIANS, INC. PRO FORMA PRO FORMA
AND SUBSIDIARIES TRANSACTIONS ADJUSTMENTS PRO FORMA ADJUSTMENTS
ASSETS --------------------- ------------ ----------- --------- -----------
(NOTE 2) (NOTE 5) (NOTE 5)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................... $ 1,833 $ 1,140 $ 5,165 $ 8,138 $
Accounts receivable......................... 217 16,900 (4,966) 12,151
Due from Conditional Affiliation
Transactions.............................. 484 571 (1,055) --
Prepaid expenses and other.................. 657 1,028 770 2,455
Deferred income taxes....................... -- -- -- --
------- -------- --------- --------- -------
Total current assets.................. 3,191 19,639 (86) 22,744
Property and equipment, net.................. 1,539 3,600 -- 5,139
Investment in Conditional Affiliation
Transactions................................ 36,873 -- (36,873) --
Intangible assets, net....................... 127 -- 74,549 74,676
Deffered offering costs...................... 209 -- -- 209
Deferred income taxes........................ -- 127 366 493
Other assets................................. 351 414 (392) 373
------- -------- --------- --------- -------
$42,290 $ 23,780 $ 37,564 $103,634 $
------- -------- --------- --------- -------
------- -------- --------- --------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabiltiies:
Current portion of notes payable on Initial
Affiliation Transactions.................. $16,729 $ -- $ (12,810) $ 3,919 $
Current portion of other long-term debt..... 733 2,831 (429) 3,135
Accounts payable............................ 538 1,822 (639) 1,721
Accrued expenses............................ 2,797 3,612 (931) 5,478
Deferred income taxes....................... -- 1,685 (833) 852
Pro forma cash due to Initial Affiliation
Transactions.............................. -- -- 41,150 41,150
Due to Conditional Affiliation
Transactions.............................. 571 484 (1,055) --
------- -------- --------- --------- -------
Total current liabilities............. 21,368 10,434 24,453 56,255
------- -------- --------- --------- -------
Notes payable on Initial Affiliation
Transactions................................ 7,467 -- 9,475 16,942
------- -------- --------- --------- -------
Other long-term debt......................... 2,770 1,557 (82) 4,245
------- -------- --------- --------- -------
Other long-term liabilities.................. 248 130 (130) 248
------- -------- --------- --------- -------
Deferred income taxes........................ -- 60 (60) --
------- -------- --------- --------- -------
Convertible preferred stock securities....... 6,829 -- (6,829) --
------- -------- --------- --------- -------
Common Stock to be issued on Conditional
Affiliation Transactions.................... 9,643 -- (9,643) --
------- -------- --------- --------- -------
Shareholders' equity (deficit):
Common Stock................................ 39 249 (62) 226
Additional paid-in capital.................. 434 43 30,526 31,003
Common stock warrants....................... 96 -- 1,432 1,528
Accumulated deficit......................... (6,604) 11,307 (11,516) (6,813)
------- -------- --------- --------- -------
Total shareholders' equity
(deficit)........................... (6,035) 11,599 20,380 25,944
------- -------- --------- --------- -------
$42,290 $ 23,780 $ 37,564 $103,634 $
------- -------- --------- --------- -------
------- -------- --------- --------- -------

PRO FORMA
AS ADJUSTED
-----------

<S> <C>
Current assets:
Cash and cash equivalents................... $
Accounts receivable.........................
Due from Conditional Affiliation
Transactions..............................
Prepaid expenses and other..................
Deferred income taxes.......................
-------
Total current assets..................
Property and equipment, net..................
Investment in Conditional Affiliation
Transactions................................
Intangible assets, net.......................
Deffered offering costs......................
Deferred income taxes........................
Other assets.................................
-------
$
-------
-------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT
Current liabiltiies:
Current portion of notes payable on Initial
Affiliation Transactions.................. $
Current portion of other long-term debt.....
Accounts payable............................
Accrued expenses............................
Deferred income taxes.......................
Pro forma cash due to Initial Affiliation
Transactions..............................
Due to Conditional Affiliation
Transactions..............................
-------
Total current liabilities.............
-------
Notes payable on Initial Affiliation
Transactions................................
-------
Other long-term debt.........................
-------
Other long-term liabilities..................
-------
Deferred income taxes........................
-------
Convertible preferred stock securities.......
-------
Common Stock to be issued on Conditional
Affiliation Transactions....................
-------
Shareholders' equity (deficit):
Common Stock................................
Additional paid-in capital..................
Common stock warrants.......................
Accumulated deficit.........................
-------
Total shareholders' equity
(deficit)...........................
-------
$
-------
-------
</TABLE>

See accompanying notes to unaudited pro forma consolidated financial statements.

<PAGE>

NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL AND BASIS OF PRESENTATION:

U.S. PHYSICIANS, Inc. (the "Company") is a multi-specialty physician
practice management company that, upon completion of the Initial Affiliation
Transactions (as defined below), will include 97 physicians providing care in 62
practice locations in four states in the mid-Atlantic region.

Since January 1, 1997, the Company and its affiliated professional
corporations ("PCs") have acquired either the stock or the majority of the
assets of 18 physician practices (the "Conditional Affiliation Transactions").
However, because each of the Affiliation Agreements relating to the Conditional
Affiliation Transactions contains a repurchase provision that allows the selling
owners, in the event that an IPO has not been completed by the Company by a
specified date, to repurchase their practice, the Conditional Affiliation
Transactions are not considered effective for applying purchase accounting until
the completion of an IPO. For the period of time between the closing of the
Conditional Affiliation Transactions and the completion of the IPO, the Company
is generally entitled to a management fee equal to the income earned by each
practice and is responsible for centrally managing the cash of each practice.

In addition to the Conditional Affiliation Transactions discussed above,
since January 1, 1997, the Company has entered into Affiliation Agreements to
purchase 14 physician practices which will close upon completion of the IPO (the
"IPO Affiliation Transactions" and, together with the Conditional Affiliation
Transactions, the "Initial Affiliation Transactions"). There is no interim
management agreement in place between the Company and the practices that are
parties to the IPO Affiliation Transactions.

Also, since January 1, 1997, the Company has acquired three related health
care businesses (the "Completed Transactions"). The repurchase provision
previously applicable to one of these Completed Transactions lapsed in January
1998 and as a result that Completed Transaction is treated for accounting
purposes as closed in January 1998.

The Company conducts its operations primarily through Management Agreements
with one PC in each state to which the Company provides services. Pursuant to
the Management Agreements, which have 40-year terms and provide for continuing
renewal terms of five years (unless either party elects not to renew), the
Company manages the business operations and all non-medical aspects of the
business of the PCs and employs and supervises all personnel providing services
on behalf of the PCs, except for the services of physicians and certain other
licensed medical personnel required by state law to be employed directly by the
PCs. In addition, each PC (except the PC operating in New York, the "New York
PC"), the officers and directors of which are generally officers of the Company,
has the contractual right to designate, in its sole discretion, at any time, the
licensed doctor who is the owner of the capital stock of the PC ("nominee
arrangements"). Physician services and other health care services are provided
to patients by the PCs which employ the Affiliated Physicians and other health
care providers, and the PCs are compensated for such services by private third
party and managed care payors, Medicare and other governmental payors, and other
sources. As compensation for the Company's services thereunder, the PCs, other
than the New York PC, pay to the Company an amount equal to all billings by the
PCs less expenses for physician compensation and certain other expenses, and the
New York PC pays the Company an amount equal to the Company's costs plus a
percentage of such costs. As a result of the Management Agreements and the
nominee arrangements, the Company has established an other-than-temporary
controlling financial interest in each PC (except with respect to the New York
PC) and accordingly each PC (except the New York PC) is consolidated with the
financial statements of the Company. All significant intercompany accounts and
transactions have been eliminated.

The historical balance sheet data for the Affiliated Practices as of
September 30, 1997 represents the combined September 30, 1997 balance sheets for
the Conditional Affiliation Transactions and the Conditional Transaction, all of
which will be considered effective, for purposes of purchase accounting,
simultaneously with completion of the IPO and the IPO Affiliation Transactions
that will be effective simultaneously with the completion of the IPO. The
historical statement of operations data for the transactions for the year ended

25
<PAGE>

NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1. GENERAL AND BASIS OF PRESENTATION: -- (CONTINUED)

December 31, 1996 represents the results of operations of the Completed
Transactions, the Conditional Transaction and the Initial Affiliation
Transactions for the entire year. The historical statement of operations data
for the nine months ended September 30, 1997 represents the results of
operations of the Completed Transactions from January 1, 1997 to their
respective dates of acquisition and for the Completed Transaction which closed
after September 30, 1997 and the Initial Affiliation Transactions for the entire
period. See the Consolidated Financial Statements of the Company and the
Financial Statements of certain of entities party to the above transactions
appearing elsewhere in this Prospectus.

2. AFFILIATION TRANSACTIONS:

Simultaneously with the completion of the IPO, the Company's Conditional
Affiliation Transactions will, for accounting purposes, be considered effective
and the Company and its affiliated PCs will purchase all of the outstanding
capital stock or substantially all of the net assets of the parties to the IPO
Affiliation Transactions. The Initial Affiliation Transactions will be accounted
for using the purchase method of accounting, with the Company treated as the
accounting acquirer.

The following table sets forth the consideration to be paid (assuming the
Initial Affiliation Transactions occurred on September 30, 1997) in cash, notes,
convertible notes and shares of Common Stock to each of the applicable
affiliated practices or their owners. The Affiliation Agreements relating to the
Conditional Affiliation Transactions require the Company to issue additional
shares if the IPO price is less than $10 per share. The Affiliation Agreements
relating to the IPO Affiliation Transactions require the Company to issue Common
Stock at the IPO price for a guaranteed amount. The Common Stock to be issued
has been recorded at the guaranteed value to the selling owners, net of a 15%
discount. The 15% discount is warranted due to the restrictions on the sale and
transferability of the shares issued. If a 10% discount were used, annual pro
forma goodwill amortization would increase by approximately $46,000. The total
estimated purchase price of $85.4 million, including $1.4 million of transaction
costs, for the Initial Affiliation Transactions is based upon preliminary
estimates, subject to certain purchase price adjustments at and following
closing.

<TABLE>
<CAPTION>
ESTIMATED
CONVERTIBLE SHARES OF FAIR VALUE
CASH NOTES NOTES COMMON STOCK OF SHARES
---- ----- ----- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Conditional Affiliation Transactions entered
into prior to September 30, 1997........... $ 2,055 $ 9,557 $16,642 $ 9,716
Conditional Affiliation Transactions entered
into after September 30, 1997.............. 2,042 2,154 3,081 2,058
Completed Transaction closed after September
30, 1997................................... -- 250 275 -- --
IPO Affiliation Transactions................. 19,474 8,903 -- 7,800
------- ------- ------- ------- -------
$23,571 $20,864 $19,998 $19,574
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>

26
<PAGE>

NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. AFFILIATION TRANSACTIONS: -- (CONTINUED)

The following tables set forth selected financial data related to the
historical financial statements for the Affiliation Transactions:

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997

<TABLE>
<CAPTION>
CONDITIONAL IPO
COMPLETED AFFILIATION AFFILIATION TOTAL
TRANSACTIONS TRANSACTIONS TRANSACTIONS TRANSACTIONS
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Total net revenues................................ $ 367 $24,602 $21,127 $46,096
------- ------- ------- -------
------- ------- ------- -------
Gross profit...................................... $ (337) $ 942 $ 2,068 $ 2,673
------- ------- ------- -------
------- ------- ------- -------
Income (loss) from operations..................... $ (341) $ 673 $ 1,772 $ 2,104
------- ------- ------- -------
------- ------- ------- -------
Net income (loss)................................. $ (346) $ 627 $ 1,476 $ 1,757
------- ------- ------- -------
------- ------- ------- -------
</TABLE>

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
CONDITIONAL IPO
COMPLETED AFFILIATION AFFILIATION TOTAL
TRANSACTIONS TRANSACTIONS TRANSACTIONS TRANSACTIONS
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Total net revenues................................ $ 1,304 $33,386 $27,008 $61,698
------- ------- ------- -------
------- ------- ------- -------
Gross profit...................................... $ (426) $ 1,114 $ 1,951 $ 2,639
------- ------- ------- -------
------- ------- ------- -------
Income (loss) from operations..................... $ (465) $ 689 $ 1,568 $ 1,792
------- ------- ------- -------
------- ------- ------- -------
Net income (loss)................................. $ (472) $ 584 $ 1,210 $ 1,322
------- ------- ------- -------
------- ------- ------- -------
</TABLE>

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997

<TABLE>
<CAPTION>
CONDITIONAL IPO
COMPLETED AFFILIATION AFFILIATION TOTAL
TRANSACTIONS TRANSACTIONS TRANSACTIONS TRANSACTIONS
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Total current assets.............................. $ 13 $ 8,806 $10,820 $19,639
------- ------- ------- -------
------- ------- ------- -------
Total long-term assets............................ $ 54 $ 2,641 $ 1,446 $ 4,141
------- ------- ------- -------
------- ------- ------- -------
Total assets...................................... $ 67 $11,447 $12,266 $23,780
------- ------- ------- -------
------- ------- ------- -------
Total current liabilities......................... $ 685 $ 4,252 $ 5,497 $10,434
------- ------- ------- -------
------- ------- ------- -------
Total long-term liabilities....................... $ -- $ 727 $ 1,020 $ 1,747
------- ------- ------- -------
------- ------- ------- -------
Total shareholders' equity (deficit).............. $ (618) $ 6,468 $ 5,749 $11,599
------- ------- ------- -------
------- ------- ------- -------
</TABLE>

27
<PAGE>

NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS ADJUSTMENTS -- NINE
MONTHS ENDED SEPTEMBER 30, 1997:

The following table summarizes the unaudited pro forma consolidated
statement of operations adjustments for the nine months ended September 30, 1997
(in thousands):

<TABLE>
<CAPTION>
OFFERING
TOTAL PRO FORMA TOTAL
TRANSACTION PRO FORMA ADJUSTMENTS TRANSACTION ADJUSTMENTS OFFERING
----------------------------------------------------------- PRO FORMA ----------- PRO FORMA
(a) (b) (c) (d) (e) (f) ADJUSTMENTS (g) ADJUSTMENTS
--- --- --- --- --- --- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Net patient revenues..... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ $
Management fees from
Conditional Affiliation
Transactions........... (1,497) -- -- -- -- -- (1,497)
Management fees.......... -- -- -- -- -- (1,347) (1,347)
Other revenues........... -- -- -- -- -- -- --
------ -------- -------- -------- ------ -------- -------- -------- --------
Total net revenues..... (1,497) -- -- -- -- (1,347) (2,844)
Cost of revenues.......... (1,497) (2,293) -- -- -- (1,347) (5,137)
------ -------- -------- -------- ------ -------- -------- -------- --------
Gross profit.............. -- 2,293 -- -- -- -- 2,293
Operating expenses:
General and
administrative......... -- -- -- -- -- -- --
Depreciation and
amortization........... -- -- 2,115 -- -- -- 2,115
------ -------- -------- -------- ------ -------- -------- -------- --------
Income (loss) from
operations............... -- 2,293 (2,115) -- -- -- 178
Other (income) expense.... -- -- -- -- -- -- --
Interest income........... -- -- -- -- -- -- --
Interest expense.......... -- -- -- 1,025 -- -- 1,025
------ -------- -------- -------- ------ -------- -------- -------- --------
Income (loss) before
income taxes............. -- 2,293 (2,115) (1,025) -- -- (847)
Income tax provision
(benefit)................ -- -- -- -- (423) -- (423)
------ -------- -------- -------- ------ -------- -------- -------- --------
Net income (loss)......... $ -- $ 2,293 $ (2,115) $ (1,025) $ 423 $ -- $ (424) $ $
------ -------- -------- -------- ------ -------- -------- -------- --------
------ -------- -------- -------- ------ -------- -------- -------- --------
</TABLE>

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

(a) Reflects the elimination of intercompany activity among the Company and the
parties to the Conditional Affiliation Transactions and the Completed
Transaction closed after September 30, 1997.

(b) Reflects the reduction in salaries, bonuses and benefits to the physicians.
These reductions represent the difference between the actual salaries,
bonuses and benefits paid to physicians as compared to the amounts
calculated by applying the provisions of the written employment agreements,
entered into pursuant to the Initial Affiliation Transactions, to the
historical statement of operations data. Such employment agreements are for
terms ranging from 5 to 15 years, contain restrictions related to
competition and provide for liquidated damages if the physician terminates
the employment agreement or is terminated for cause.

(c) Reflects the amortization of intangible assets based upon the Company's
preliminary allocation of purchase price for the Initial Affiliation
Transactions and the Completed Transaction closed after September 30, 1997.
The intangible assets include the following: goodwill of $73.4 million which
is being amortized over a period of 25 years, and other intangibles of $1.1
million which are being amortized over a period of 3 to 7 years. No
amortization expense has been included for the 2 New York PC Affiliation
Transactions ($10.0 million of intangible assets) since as discussed in
"Basis of Presentation" these practices are excluded from the Pro Forma
Statements of Operations.

(d) Reflects the additional interest expense related to the convertible notes
and the notes issued in connection with the Initial Affiliation Transactions
and the Completed Transaction closed after September 30, 1997.

(e) Reflects the incremental provision (benefit) for federal and state income
taxes based on the effective tax rate that would have resulted on a C
Corporation basis assuming consolidated tax filing status.

(f) Reflects the elimination of management fee revenue and management fee
expense between two related Affiliation Transactions.

(g) Reflects the elimination of interest expense resulting from the repayment of
certain long-term debt obligations. Excludes a charge of $706,000 (estimated
at December 31, 1997) for the early extinguishment of certain long-term debt
obligations which will be recorded in the fiscal quarter in which the IPO is
completed and interest expense of $209,000 for the amortization of original
issue discounts related to the issuance in November 1997 and January 1998 of
certain debt which will be recorded in the quarter in which the debt is
issued.

28
<PAGE>

NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS ADJUSTMENTS -- YEAR
ENDED DECEMBER 31, 1996:

The following table summarizes the unaudited pro forma consolidated
statement of operations adjustments for the year ended December 31, 1996 (in
thousands):

<TABLE>
<CAPTION>
OFFERING
TOTAL PRO FORMA TOTAL
TRANSACTION PRO FORMA ADJUSTMENTS TRANSACTION ADJUSTMENTS OFFERING
-------------------------------------------------- PRO FORMA ----------- PRO FORMA
(a) (b) (c) (d) (e) ADJUSTMENTS (g) ADJUSTMENTS
--- --- --- --- --- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Net patient revenues........... $ -- $ -- $ -- $ -- $ -- $ -- $ $
Management fees from
Conditional Affiliation
Transactions................. -- -- -- -- -- --
Management fees................ -- -- -- -- (1,574) (1,574)
Other revenues................. -- -- -- -- -- --
-------- -------- -------- ------ -------- -------- -------- --------
Total net revenues........... -- -- -- -- (1,574) (1,574)
Cost of revenues................ (4,134) -- -- -- (1,574) (5,708)
-------- -------- -------- ------ -------- -------- -------- --------
Gross profit.................... 4,134 -- -- -- -- 4,134
Operating expenses:
General and
administrative............... -- -- -- -- -- --
Depreciation and
amortization................. -- 2,819 -- -- -- 2,819
-------- -------- -------- ------ -------- -------- -------- --------
Income (loss) from operations... 4,134 (2,819) -- -- -- 1,315
Other (income) expense.......... -- -- -- -- -- --
Interest income................. -- -- -- -- -- --
Interest expense................ -- -- 2,077 -- -- 2,077
-------- -------- -------- ------ -------- -------- -------- --------
Income (loss) before income
taxes.......................... 4,134 (2,819) (2,077) -- -- (762)
Income tax provision
(benefit)...................... -- -- -- (415) -- (415)
-------- -------- -------- ------ -------- -------- -------- --------
Net income (loss)............... $ 4,134 $ (2,819) $ (2,077) $ 415 $ -- $ (347) $ $
-------- -------- -------- ------ -------- -------- -------- --------
-------- -------- -------- ------ -------- -------- -------- --------
</TABLE>

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

(a) Reflects the reduction in salaries, bonuses and benefits to the physicians.
These reductions represent the difference between the actual salaries,
bonuses and benefits paid to physicians as compared to the amounts
calculated by applying the provisions of the written employment agreements,
entered into pursuant to the Initial Affiliation Transactions, to the
historical statement of operations data. Such employment agreements are for
terms ranging from 5 to 15 years, contain restrictions related to
competition and provide for liquidated damages if the physician terminates
the employment agreement or is terminated for cause.

(b) Reflects the amortization of intangible assets based upon the Company's
preliminary allocation of purchase price for the Initial Affiliation
Transactions. The intangible assets include the following: goodwill of $73.4
million which is being amortized over a period of 25 years and other
intangibles of $1.1 million which are being amortized over a period of 3 to
7 years. No amortization expense has been included for the 2 New York PC
Affiliation Transactions ($10.0 million of intangible assets) since as
discussed in "Basis of Presentation" these practices are excluded from the
Pro Forma Statements of Operations.

(c) Reflects the additional interest expense related to the convertible notes
and the notes issued in connection with the Initial Affiliation
Transactions.

(d) Reflects the incremental provision (benefit) for federal and state income
taxes based on the effective tax rate that would have resulted on a C
Corporation basis assuming consolidated tax filing status.

(e) Reflects the elimination of management fee revenue and management fee
expense between two related affiliation transactions.

(f) Reflects the elimination of interest expense resulting from the repayment of
certain long-term debt obligations. Excludes a charge of $706,000 (estimated
at December 31, 1997) for the early extinguishment of certain long-term debt
obligations which will be taken in the fiscal quarter in which the IPO is
completed and interest expense of $209,000 for the amortization of original
issue discounts related to the issuance in November 1997 and January 1998 of
certain debt which will be recorded in the quarter in which the debt is
issued.

29
<PAGE>

NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET ADJUSTMENTS --
SEPTEMBER 30, 1997:

The following table summarizes the unaudited pro forma consolidated balance
sheet adjustments as of September 30, 1997 (in thousands):

<TABLE>
<CAPTION>
TOTAL OFFERING PRO FORMA TOTAL
TRANSACTION PRO FORMA ADJUSTMENTS TRANSACTION ADJUSTMENTS OFFERING
------------------------------------------ PRO FORMA ------------------ PRO FORMA
(a) (b) (c) (d) ADJUSTMENTS (e) (f) (g) ADJUSTMENTS
--- --- --- --- ----------- --- --- --- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS

Current assets:
Cash and cash
equivalents.............. $ -- $ -- $ (411) $ 5,576 $ 5,165 $ $ $ $
Accounts receivable........ -- -- (4,966) -- (4,966)
Due from Conditional
Affiliation
Transactions............. (1,055) -- -- -- (1,055)
Prepaid expenses and
other.................... -- -- 770 -- 770
Deferred income taxes...... -- (20) 20 -- --
-------- --------- -------- -------- --------- -------- ------ ------ --------
Total current
assets............. (1,055) (20) (4,587) 5,576 (86)
Property and equipment,
net........................ -- -- -- --
Investment in Conditional
Affiliation Transactions... -- (36,873) -- -- (36,873)
Intangible assets, net...... -- 71,648 2,901 -- 74,549
Deferred offering costs..... -- -- -- -- --
Deferred income taxes....... -- 65 301 -- 366
Other assets................ -- -- (392) -- (392)
-------- --------- -------- -------- --------- -------- ------ ------ --------
$ (1,055) $ 34,820 $ (1,777) $ 5,576 $ 37,564 $ $ $ $
-------- --------- -------- -------- --------- -------- ------ ------ --------
-------- --------- -------- -------- --------- -------- ------ ------ --------

LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)

Current liabilities:
Current portion of notes
payable on Initial
Affiliation
Transactions............. $ -- $ (12,810) $ -- $ -- $ (12,810) $ $ $ $
Current portion of other
long-term debt........... -- -- (429) -- (429)
Accounts payable........... -- -- (639) -- (639)
Accrued expenses........... -- 738 (1,669) -- (931)
Deferred income taxes...... -- (1,725) 892 -- (833)
Pro forma cash due to
Initial Affiliation
Transactions............. -- 41,150 -- -- 41,150
Due to Conditional
Affiliation
Transactions............. (1,055) -- -- -- (1,055)
-------- --------- -------- -------- --------- -------- ------ ------ --------
Total current
liabilities........ (1,055) 27,353 (1,845) -- 24,453
-------- --------- -------- -------- --------- -------- ------ ------ --------
Notes payable on Initial
Affiliation Transactions... -- 9,475 -- -- 9,475
-------- --------- -------- -------- --------- -------- ------ ------ --------
Other long-term debt........ -- -- (82) -- (82)
-------- --------- -------- -------- --------- -------- ------ ------ --------
Other long-term
liabilities................ -- -- (130) -- (130)
-------- --------- -------- -------- --------- -------- ------ ------ --------
Deferred income taxes....... -- (340) 280 -- (60)
-------- --------- -------- -------- --------- -------- ------ ------ --------
Convertible preferred stock
securities................. -- -- -- (6,829) (6,829)
-------- --------- -------- -------- --------- -------- ------ ------ --------
Common Stock to be Issued on
Conditional Affiliation
Transactions............... -- (9,643) -- -- (9,643)
-------- --------- -------- -------- --------- -------- ------ ------ --------
Shareholders' equity
(deficit):
Common Stock............... -- (224) -- 162 (62)
Additional paid-in
capital.................. -- 19,506 -- 11,020 30,526
Common stock warrants...... -- -- -- 1,432 1,432
Accumulated deficit........ -- (11,307) -- (209) (11,516)
-------- --------- -------- -------- --------- -------- ------ ------ --------
Total shareholders'
equity (deficit)... -- 7,975 -- 12,405 20,380
-------- --------- -------- -------- --------- -------- ------ ------ --------
$ (1,055) $ 34,820 $ (1,777) $ 5,576 $ 37,564 $ $ $ $
-------- --------- -------- -------- --------- -------- ------ ------ --------
-------- --------- -------- -------- --------- -------- ------ ------ --------
</TABLE>

30
<PAGE>

NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET ADJUSTMENTS --
SEPTEMBER 30, 1997: -- (CONTINUED)

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

(a) Reflects the elimination of the intercompany accounts among the Company and
the parties to the Conditional Affiliation Transactions and the Completed
Transaction closed after September 30, 1997.

(b) Reflects the Initial Affiliation Transactions and the Completed Transaction
closed after September 30, 1997 and the allocation of the purchase price
using the purchase method of accounting. The purchase price is estimated at
$85.4 million, consisting of (i) $23.6 million in cash, (ii) $20.9 million
in notes, (iii) $20.0 million in convertible notes, (iv) shares of
Common Stock valued at $ per share (or $19.5 million) and (v) estimated
transaction costs of $1.4 million (see Note 2). As of September 30, 1997,
the Company had recorded $36.7 million of the purchase price for the
Conditional Affiliation Transactions and the Completed Transaction closed
after September 30, 1997.

A summary of the total purchase price and applicable allocation thereof for
the Initial Affiliation Transactions and the Completed Transaction closed
after September 30, 1997 is as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Total purchase price........................................ $85,357
Less: Assets acquired....................................... (23,780)
Plus: Liabilities assumed................................... 12,181
Less: Deferred tax adjustment............................... (2,110)
-------
Excess of purchase price over fair value of tangible assets
acquired................................................... 71,648
Plus: Purchase accounting adjustments (See (c) below)....... 2,901
-------
Net adjustment for excess of cost over fair value of
tangible assets acquired................................... $74,549
-------
-------
</TABLE>

The net adjustment for excess of cost over fair value of tangible assets
acquired is comprised of the following:

<TABLE>
<CAPTION>
AMORTIZATION
AMOUNT PERIOD
------- --------------
<S> <C> <C>
Goodwill.................................................... $73,423 25 years
Other intangibles........................................... 1,126 3 to 7 years
-------
$74,549
-------
-------
</TABLE>

(c) Reflects assets and liabilities excluded from net assets in certain Initial
Affiliation Transactions and the Completed Transaction closed after
September 30, 1997, including specific cash balances.

(d) Reflects (i) the issuance of a demand note in the principal amount of $0.9
million in November 1997 and the related issuance of warrants to purchase
43,573 shares of Common Stock valued at $127,000, (ii) the issuance of a
demand note in the principal amount of $0.8 million in January 1998 and the
related issuance of warrants to purchase 38,555 shares of Common Stock
valued at $82,000, (iii) the issuance of Series C Preferred Stock with
proceeds of $5.6 million in January 1998 a portion of which was utilized to
repay the $0.9 million and $0.8 million demand notes, (iv) the Preferred
Stock Conversion, (v) the Series B Warrant Conversion and (vi) elimination
of the original issue discount in the amount of $209,000 related to the
issuance in November 1997 and January 1998 of the $0.9 million and $0.8
million demand notes.

(e) Reflects the net cash of $ million from the sale of shares of
Common Stock, net of estimated offering costs of $ million (based on an
assumed IPO price of $ per share). Offering costs primarily consist of
underwriting discounts and commissions, accounting fees, legal fees and
printing expenses paid upon completion of the IPO.

(f) Reflects the payment of the cash consideration for the Initial Affiliation
Transactions and the Completed Transaction closed after September 30, 1997,
including estimated transaction costs.

(g) Reflects the use of a portion of the net proceeds of the IPO to repay
certain long-term debt obligations. In connection with the repayment of
certain long-term debt obligations, the Company will take a charge in the
fiscal quarter in which the IPO is completed. This charge will expense the
unamortizated portion of the discount on certain long-term debt obligations
which was $706,000 at December 31, 1997.

31
<PAGE>

NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. PRO FORMA NET INCOME (LOSS) PER COMMON SHARE:

The shares used in computing pro forma net income (loss) per common share
includes the following:

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Weighted average shares of Common Stock...................
Dilutive effect of Common Stock Options...................
Shares issued in connection with Initial Affiliation
Transactions............................................
Incremental number of shares related to Convertible
Preferred Stock, Common Stock issuances, Options and
Warrants granted within twelve months of the IPO
-- Convertible Preferred Stock..........................
-- Common Stock.........................................
-- Options and Warrants.................................
Preferred Stock Conversion................................
-------- --------
Pro forma shares.....................................
Shares issued in the IPO necessary to pay the cash portion
of the Initial Affiliation Transactions consideration
(including expenses)....................................
Shares issued in the IPO necessary to repay certain
long-term obligations...................................
-------- --------
Pro forma as adjusted shares.........................
-------- --------
-------- --------
</TABLE>

The remaining shares to be sold in the IPO have been excluded.

32
<PAGE>

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

The following discussion and analysis of the results of operations and
financial condition of the Company should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes thereto included
elsewhere in this Prospectus. This Prospectus contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Such forward-looking statements may be found in the
material set forth below, in "Prospectus Summary" and "Business," as well as
elsewhere in this Prospectus. Prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties. Actual events or results may differ materially from
those in the forward-looking statements as a result of various factors,
including, without limitation, the risk factors set forth under "Risk Factors"
and the matters set forth elsewhere in this Prospectus.

OVERVIEW

The Company is a multi-specialty physician practice management company
that, upon completion of the Initial Affiliation Transactions, will have 97
Affiliated Physicians providing care in 62 practice locations in four states in
the mid-Atlantic region. The Company believes that, as consumers demand higher
quality care and payors focus on overall treatment costs rather than only
physician fees, specialists increasingly will be the patient's point of access
to the health care delivery system and will control, directly or indirectly, a
growing percentage of health care expenditures. The Company targets local
service areas in which it can establish significant market share in multiple
specialties to enhance its leverage with payors, employers and consumers and
seeks to affiliate primarily with physicians in higher dollar volume
specialties. The Company's affiliated specialists currently include orthopedic
surgeons, physiatrists, neurologists, oncologists, urologists,
obstetrician/gynecologists, radiologists, ophthalmologists, otolaryngologists
and occupational medicine specialists.

The Company had no significant operations prior to entering into its first
Initial Affiliation Transactions in January 1997. Since January 1, 1997, the
Company has entered into Conditional Affiliation Transactions with 18 practices
comprising 56 physicians. In addition to the Conditional Affiliation
Transactions, since January 1, 1997, the Company has entered into agreements
with respect to IPO Affiliation Transactions with 14 physician practices
comprising 41 physicians, which will close upon completion of the Offering. The
Company has also entered into the three Completed Transactions.

The Company conducts its operations primarily through the Management
Agreement with the PC in each state to which the Company provides services.
Pursuant to the Management Agreements, which have 40-year terms and provide for
continuing renewal terms of five years (unless either party elects not to
renew), the Company manages the business operations and all non-medical aspects
of the business of the PCs and employs and supervises all personnel providing
services on behalf of the PCs, except for the services of physicians and certain
other licensed medical personnel required by state law to be employed directly
by the PCs. Physician services and other health care services are provided to
patients by the PCs which employ the Affiliated Physicians and other health care
providers, and the PCs are compensated for such services by private third party
and managed care payors, Medicare and other governmental payors, and other
sources. As compensation for the Company's services to the PCs under the
Management Agreements, the PCs, other than the New York PC, pay to the Company
an amount equal to all billings by the PCs less expenses for physician
compensation and certain other expenses, and the New York PC pays the Company an
amount equal to the Company's costs plus a percentage of such costs. See
"Business -- Management and Services Agreements; Control of PCs."

Because of laws restricting the corporate practice of medicine in the
states in which the Company operates, the Company does not own the Affiliated
Practices, but instead enters into exclusive long-term Management Agreements
with PCs that operate the Affiliated Practices. The Management Agreements give
the Company broad decision-making authority over all major operations of the
affiliated PC, except for the provision of physician and other medical services
as required by state law. With the exception of the New York PC, each PC, the
officers and directors of which are generally officers of the Company, has the
contractual right to designate at any time, in its sole discretion, the
physician who is the owner of the capital stock of the PC at a nominal cost
("nominee arrangements"). Through the Management Agreements and the nominee
arrangements, the Company has significant long-term financial interests in the
PCs, which interests are

33
<PAGE>

unilaterally saleable and transferable by the Company and fluctuate based upon
the actual performance of the operations of the PCs.

HISTORICAL FINANCIAL DATA

Basis of Presentation

The Company's historical financial data included in "Selected Financial
Data" include the results of operations of the parties to the Conditional
Affiliation Transactions and the Completed Transactions. The Conditional
Affiliation Transactions contain a repurchase provision that allows the selling
owners, in the event that an initial public offering has not been completed by
the Company by a specified date (the "Repurchase Date"), to repurchase the
applicable stock or net assets for a defined period of time (the "Repurchase
Period") by returning all of the consideration received, excluding certain cash
payments made to the selling owners at the closing of the Conditional
Affiliation Transactions. If the selling owners exercise their rights to
repurchase their practices, the aggregate amount of consideration that would be
retained by the selling owners is $2.1 million. If the selling owners do not
exercise their rights to repurchase their practice by the end of the Repurchase
Period, the repurchase provision terminates. Pursuant to the three Completed
Transactions, the Company acquired the manager of a multi-county physician
contracting network and a provider of physical therapy services and a billing
and collection services business.

In accordance with Accounting Principles Board Opinion No. 16, "Accounting
for Business Combinations," the Conditional Affiliation Transactions are not
considered effective for purposes of applying purchase accounting until either
the date that the Company completes an initial public offering or the repurchase
provision terminates (the "Final Closing Date"). Accordingly, the Conditional
Affiliation Transactions (except with respect to the New York physician
practices), for the period from the Initial Closing Date to September 30, 1997,
are accounted for as management agreements, as opposed to Affiliation
Transactions accounted for under the purchase method of accounting and
consolidated with those of the Company. As a result, for the period of time
between the closing of the Conditional Affiliation Transactions (the "Initial
Closing Date") and the Final Closing Date, the Company is entitled to all of the
residual net income or loss (after deducting physicians' compensation) pursuant
to the Management Agreements. This net income or loss is non-refundable even if
the repurchase right is exercised. Management fees from the New York Conditional
Affiliation Transactions represent the amount of non-medical costs paid by the
Company on behalf of the practices plus a percentage of such costs. Net revenues
included in historical results of operations represent net management fees
earned under the Management Agreements entered into pursuant to the Conditional
Affiliation Transactions and net revenues from the Completed Transactions.
Effective with the completion of the Offering, net revenues attributable to
practices which are parties to the Conditional Affiliation Transactions will be
presented using a different basis of accounting (see "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Pro Forma
Financial Data"). As a result, subsequent to the Offering, net revenues
attributable to practices which are parties to Conditional Affiliation
Transactions will not be comparable to historical net revenues of such practices
prior to the Offering.

Cost of revenues included in the historical financial data represents labor
and overhead attributable to the businesses acquired pursuant to the Completed
Transactions and costs incurred in advance of revenues from the Provider
Network.

Results of Operations

The Company was formed in July 1994. Prior to entering into its first
Initial Affiliation Transactions in January 1997, the Company's operations
consisted primarily of a physical rehabilitation facility, operated as a joint
venture with a hospital, that commenced in 1995 and was terminated in 1996. As a
result, comparisons of 1997 results of operations with prior periods are not
meaningful.

Net revenues for the nine months ended September 30, 1997 comprise
primarily management fees earned under the Management Agreements. Net revenues
for the period also include net patient revenues from amounts billed to
third-party payors and patients for services rendered by a physical therapy and
rehabilitation practice acquired by the Company in May 1997. Other revenues
represent revenues for billing and collection services performed for
unaffiliated physician practices.

34
<PAGE>

General and administrative expenses for the nine months ended September 30,
1997 and prior periods presented represent primarily (i) compensation, occupancy
and overhead costs relating to the Company's headquarters and (ii) legal,
accounting and other professional fees.

Interest expense for the nine months ended September 30, 1997 represents
primarily interest on long-term debt, including approximately $24.5 million of
notes payable and convertible notes payable issued in connection with
Conditional Affiliation Transactions completed during the period from January 1,
1997 through September 30, 1997.

Other income and expense for the year ended December 31, 1996 includes a
charge of $459,053 relating to the termination of the Company's joint venture
with a hospital. In connection with the joint venture termination, the Company
assumed 100% of certain lease obligations totaling $401,550 and recorded certain
other charges totaling $57,503.

PRO FORMA FINANCIAL DATA

Effective with the completion of the Offering, the Conditional Affiliation
Transactions will be considered effective for purposes of applying the purchase
method of accounting. The Pro Forma Financial Data reflects the results of
operations of the Company assuming the Conditional Affiliation Transactions and
the IPO Affiliation Transactions had occurred as of the beginning of the periods
presented and such transactions were accounted for under the purchase method of
accounting as of such date. The Pro Forma Financial Data also reflect the fact
that, because of significant long-term interests in the Affiliated Practices
effective with the Offering, the Pro Forma Financial Data include the
consolidated accounts of the Company and all wholly-owned and beneficially-owned
subsidiaries (which for accounting purposes includes the PCs). All significant
intercompany accounts and transactions have been eliminated.

The Pro Forma Financial Data reflect net patient revenues on a consolidated
basis, unlike certain other physician practice management companies, which
record management fee revenues. Company net patient revenues represent amounts
billed by the Affiliated Practices to third-party payors and patients for
services rendered. Such amounts also include any monthly capitation payments
received from third-party payors pursuant to managed care contracts.

Cost of revenues consists primarily of physician and non-physician practice
labor and labor-related costs, practice occupancy costs, professional liability
insurance and practice materials and supplies. Under employment agreements with
the Company's affiliated PCs, physician base salaries are generally based upon a
specific percentage of the net revenues attributable to the physicians in each
practice. The average percentage of pro forma net revenues paid to physicians as
base compensation is approximately 40%.

LIQUIDITY AND CAPITAL RESOURCES

To date, the Company's operations have been financed primarily through the
sale of Convertible Preferred Stock and term loans from shareholders of the
Company. See "Certain Transactions."

The non-contingent consideration paid for the Conditional Affiliation
Transactions includes an aggregate of approximately $4.1 million of cash, $11.9
million of notes, $20.0 million of Convertible Notes and rights to receive
______ shares of Common Stock.

Consideration to be paid at the Offering for the IPO Affiliation
Transactions includes an aggregate of approximately $19.5 million of cash, $8.9
million of notes and rights to receive _____ shares of Common Stock.

In addition, in connection with certain Affiliation Transactions, the
Company is obligated to pay additional consideration in cash or Common Stock
("Contingent Consideration") to sellers of practices contingent upon achievement
of certain net revenues and pre-tax earnings criteria primarily over periods of
one to three years from the date of the applicable Affiliation Transactions.
Payment under these Contingent Consideration arrangements will be accounted for
as adjustments to the purchase price of the Affiliated Practices, with a
corresponding increase in goodwill and the related amount of amortization
thereof in periods following the payment. The amount of Contingent Consideration
to be issued cannot be determined until the Contingent Consideration periods
terminate. If the Affiliated Practices attain, but do not exceed, specified net
revenue and profitability criteria, the Company would be obligated to make
aggregate payments of Contingent

35
<PAGE>

Consideration equal to $5.9 million. No amounts would be paid if the minimum net
revenue and profitability objectives are not met. If the Affiliated Practices
achieve the maximum net revenue and profitability criteria, the Company would be
obligated to make payments of Contingent Consideration equal to $14.8 million.

The Company intends to continue to grow through both Affiliation
Transactions and internal growth. See "Business -- Strategy." Management
presently intends to maintain the rate of Affiliation Transactions in the
foreseeable future at a rate at least equal to the rate experienced during the
period from January 1, 1997 through September 30, 1997. Management anticipates
that the terms of payment in connection with future Affiliation Transactions
will continue to be a combination of cash, notes and shares of Common Stock. For
certain Affiliation Transactions, a portion of the purchase price will be paid
at closing and a portion will be contingent upon achievement of contingent
payment criteria. It is anticipated that funds required for future Affiliation
Transactions and the integration of Affiliated Practices into the Company will
be provided from the proceeds of the Offering, proceeds of future borrowings
under the Line of Credit and internally generated funds. However, there can be
no assurance that the Company will identify suitable candidates for Affiliation
Transactions in the future, can obtain suitable financing or that any such
Affiliation Transactions will occur. See "Risk Factors -- Risks Associated with
Growth Strategy."

As of September 30, 1997, the Company had a working capital deficit of
approximately $18.2 million and cash and cash equivalents of approximately $1.8
million. The Company has incurred losses since its inception and is subject to
those risks associated with companies in the early stages of development. These
conditions have raised substantial doubt about the Company's ability to continue
as a going concern.

In January 1998, the Company completed the issuance of 1,343,374 shares of
its Series C Preferred Stock and Warrants to purchase 371,667 shares of Common
Stock at an exercise price of $4.15 for an aggregate purchase price of $5.6
million.

The Company is currently seeking to obtain a commitment letter with respect
to a $__ Line of Credit with a bank to fund future working capital needs and
Affiliation Transactions.

The Company expects that the proceeds from the sale of Series C Preferred
Stock and the Offering, borrowings on the Line of Credit and cash generated from
operations will be adequate to fund the Company's cash requirements for
approximately the next year. Subsequent to that time, the Company is likely to
require additional debt and/or equity financing. There is no assurance that the
Company will be able to obtain such subsequent financing.

36
<PAGE>

BUSINESS

GENERAL

The Company is a multi-specialty physician practice management company that
currently is affiliated with 56 physicians providing care in 37 practice
locations and, upon completion of the Offering, will be affiliated with 97
Affiliated Physicians providing care in 62 practice locations in four states in
the mid-Atlantic region. The Company believes that, as consumers demand higher
quality care and payors focus on overall treatment costs rather than only
physician fees, specialists increasingly will be the patient's point of access
to the health care delivery system and will control, directly or indirectly, a
growing percentage of health care expenditures. The Company targets local
service areas in which its Affiliated Practices can establish significant market
share in multiple specialties to enhance its leverage with payors, employers and
consumers and seeks to affiliate primarily with physicians in higher dollar
volume specialties. The Company's affiliated specialists currently include
orthopedic surgeons, physiatrists, neurologists, oncologists, urologists,
obstetrician/gynecologists, radiologists, ophthalmologists, otolaryngologists
and occupational medicine specialists.

INDUSTRY OVERVIEW

The health care delivery system in the United States has been undergoing
substantial change, largely in response to the escalating cost of health care.
According to the Congressional Budget Office, national expenditures for health
care have grown from an estimated $27 billion, or 5.1% of the gross domestic
product ("GDP"), in 1960 to an estimated $1 trillion, or 13.6% of GDP, in 1996,
and are projected by the Congressional Budget Office to increase to more than $2
trillion, or 16.2% of GDP, by 2007. In 1995, approximately 85% of health care
expenditures were attributable to services provided by physicians and/or
provided under physician direction.

Escalating health care costs have resulted in an increasing emphasis on
cost containment by third party payors and government programs. Cost containment
efforts have generally taken the form of managed care, which frequently involves
restricting access by insured parties to providers, decreasing levels of
reimbursement to providers, reducing the number and duration of hospital
inpatient stays and, more recently, transferring risk from payors to providers
through capitation and other risk-sharing arrangements.

Many payors have attempted to reduce overall health care expenditures in
large part by reducing the utilization and reimbursement of specialists, who
typically charge higher fees per office visit than primary care physicians.
These payors have reduced specialist utilization by providing reimbursement only
to patients who seek services from specialists who are part of such payor's
panel of contracted physicians, by designating primary care physicians as
"gatekeepers" who are required to pre-approve the access of patients to
specialists and by providing to such primary care physicians various financial
incentives designed to limit specialist referrals. Recently, however, consumers
of physician services, including both patients and employers, are becoming more
conscious of not only the cost of care, but also the quality of care and levels
of customer service. The Company believes that specialist physicians have a
greater understanding of the treatment and management of complex disease and
injury conditions and therefore provide complex disease and injury care which
may be more efficient, and ultimately less costly, than that controlled by
primary care physicians. As a result of these factors, the Company believes
there will be a continued, gradual movement toward specialist-directed provider
models and away from primary care gatekeeper models for managed care. The
Company also believes that a growing number of health care consumers place an
increased emphasis on customer service, including factors such as more flexible
physician office hours, scheduling efficiency to reduce patient waiting time,
the provision of patient follow-up and aftercare and the availability of a
greater variety of services at more convenient locations.

In addition to restricting access to specialists, payors have attempted to
reduce the variability of provider-related expenses through an increasing
variety and volume of risk-sharing arrangements involving physicians, including
fully or partially capitated and episode of care or "case rate" arrangements.
The Company believes that the prudent sharing of risk by physicians can only
occur when physicians are organized in sufficient critical mass in local service
areas to reasonably bear risk and have access to the quantity and quality of
clinical information that is essential to managing risk pools effectively.

37
<PAGE>

Physician Practice Management Industry. The trends in the health care
market described above, among other factors, have placed many small and
mid-sized physician groups at a competitive disadvantage and precipitated
significant changes in the manner in which physicians organize themselves.
Physicians are increasingly abandoning traditional private practice in favor of
affiliations with larger organizations which have a more significant market
presence and which can provide management expertise, capital and information
systems that enhance the quality, efficiency and competitiveness of physician
practices. Despite this trend toward affiliation, physician practices remain
largely fragmented, with only about one-third of the 700,000 non-federal
physicians (i.e., physicians who do not provide services directly through
Veterans Administration, public health or other federal programs) in the U.S.
belonging to a group practice and fewer than 21,000 physicians in the U.S.
practicing in affiliation with publicly-held physician practice management
companies in 1996.

Specialist Physician Services; Complex Disease and Injury Management. It is
estimated that approximately 490,000, or 70%, of the physicians in the U.S. are
specialists. In 1995, average annual revenue per specialist in the U.S. was
$215,932 as compared to $133,322 for primary care physicians. Reimbursement of
specialists is predominately on a "fee for service" as opposed to a "capitated"
or other risk-sharing basis. Fully capitated risk-sharing arrangements, under
which providers undertake to provide a specified range of services for a
predetermined fixed fee per managed care enrollee, have been far more prevalent
among primary care physicians.

The Company believes that for most insured populations a majority of health
care dollars are spent on a relatively small percentage of such populations. The
conditions typically requiring the most extensive treatment include cancer,
heart disease, musculoskeletal injury or disease, diabetes and infectious
diseases. The management of such complex diseases and injuries generally
requires the services of one or more specialist physicians for certain aspects
of patient care, including diagnosis, restorative and palliative treatment
(which includes both invasive surgery and non-invasive drug therapies),
rehabilitation and aftercare, all of which frequently involve the coordination
of other specialist physicians, ancillary services and pharmaceutical treatment.
The Company believes that its Affiliated Physicians who engage in complex
disease and injury management will benefit from their familiarity with and
enhanced access to other Affiliated Physicians who are leading practitioners in
other specialties, as well as their access to ancillary services provided by the
PCs.

The Company initially is focusing primarily on developing integrated local
service area networks of specialists involved in the treatment of
musculoskeletal injury and disease, cancer, women's health and other areas of
complex disease and injury management. The Company has generally entered local
service areas by affiliating first with a "pedestal" practice in such area that
specializes in musculoskeletal care and is distinguished by its market share,
clinical quality and leadership, historical profitability and potential for
growth. Orthopedic surgeons are the primary providers of musculoskeletal care.
In addition to orthopedic surgeons, musculoskeletal care is also provided by
physiatrists, neurosurgeons, neurologists, rheumatologists, podiatrists,
occupational medicine specialists and rehabilitative therapists. The American
Academy of Orthopedic Surgeons (the "AAOS") estimates that in 1995 there were
approximately 23,000 orthopedic surgeons, 5,500 physiatrists, 4,900
neurosurgeons, 11,400 neurologists, 3,500 rheumatologists, and 3,000
occupational medicine specialists in the U.S. The AAOS estimates that in 1995
less than five percent of all orthopedic practices were affiliated with
physician practice management companies. According to the AAOS, the market for
musculoskeletal care in the U.S. grew from approximately $60 billion in 1988 to
$72 billion in 1992. This increase is attributable to several factors, including
advancements in medical technology and the aging of the overall population. In
1992, the 65-and-over age group represented approximately 12% of the U.S.
population, but accounted for over half of all expenditures for musculoskeletal
care. Recent trends in musculoskeletal care include an increasing number of
procedures performed on an outpatient basis and consolidation of surgical and
non-surgical specialists. The Company believes these trends are largely
attributable to advancements in less invasive surgical techniques, less frequent
and shorter hospital inpatient stays, inherently lower costs of the outpatient
environment and increased consumer demand for outpatient settings and fully
integrated services, including ancillary services such as physical therapy and
diagnostic imaging.

In addition to practices specializing in the treatment of musculoskeletal
injury and disease, the Company has completed Affiliation Transactions with
Affiliated Practices specializing in cancer, women's health and addiction. The
Company believes that such areas are subject to certain trends similar to those
found in

38
<PAGE>

musculoskeletal care, including advancements in less invasive surgical
techniques, less frequent and shorter hospital stays mandated by payors,
inherently lower costs of the outpatient environment and consumer demand for
direct access to specialists, outpatient settings and more fully integrated
services.

Mid-Atlantic Market. The Company's overall target market is the
mid-Atlantic region, which includes Pennsylvania, New Jersey, New York, Maryland
and Delaware, and the Company may extend its overall target market to include
the states surrounding this region. The mid-Atlantic region and surrounding
states account for approximately one-third of the U.S. population. The physician
services market in this region is particularly fragmented, with an average
private practice size of approximately four physicians.

STRATEGY

The Company's objective is to be a leading source of specialist physician
services in each of its local service areas. In so doing, the Company believes
it will enable its Affiliated Physicians to have greater control over patient
care and access to premium dollars in the health care delivery system.

The key elements of the Company's strategy to attain this objective are to:

Develop integrated local networks of specialists in the mid-Atlantic
region. Health care is generally provided and contracted for in local service
areas. The Company believes that consumers of health care services generally
seek care in the immediate vicinity of their home or workplace. The Company
seeks to be a leading source of specialist physician services in terms of market
share, demonstrated quality, clinical leadership and cost-effectiveness of its
health care services in each of its local service areas. To achieve this
leadership position, the Company targets markets surrounding or adjacent to
major population centers in which it can achieve significant market share in
multiple specialties. The Company believes that obtaining a leadership position
in each of its markets will enhance its attractiveness to payors, employers and
consumers. In addition, the establishment of local market multi-specialty
networks is expected to increase revenues from referrals among Affiliated
Practices and from ancillary services provided by the PCs within such networks.

Focus on same practice growth. The Company expects to enhance same
practice revenue and margin growth for each of its Affiliated Practices by (i)
adding same-speciality physicians to existing practices, (ii) adding new
practice locations, (iii) integrating new specialties and sub-specialties into
existing practices, (iv) increasing local practice marketing, (v) improving
payor contracting in order to achieve greater patient volume and enhanced
reimbursement, (vi) enhancing practice management, including billing and
collection procedures, patient scheduling and flow, quality assurance, customer
service and utilization management and (vii) utilizing physicians across
multiple practice locations. The Company is currently implementing one or more
of these measures in each of its Affiliated Practices, including, to date, the
addition of same specialty physicians to four Affiliated Practices, the
integration of new specialties or sub-specialties into three Affiliated
Practices and the addition of new practice locations to one Affiliated Practice.
In addition, in order to enhance same practice revenue growth, Affiliated
Physicians are compensated based directly on the productivity of their
practices. The Company believes that same practice revenue growth, as well as
expected cost-reduction opportunities arising from economies of scale, such as
group purchasing and the centralization of management, billing and collection
and accounting functions, will enhance the profitability of each of its
Affiliated Practices.

Increase ancillary and other revenues. The Company intends, either
directly or through the PCs, to establish one or more of the following ancillary
and other services in each of its local service areas: physical and occupational
therapy, diagnostic imaging and participation in clinical trials. Complementing
its regional focus, the Company believes its relationships with Affiliated
Physicians will enable it to facilitate intra-network referrals and capture an
increased volume and variety of ancillary service revenues in a manner that
comports with applicable law. The Company is focusing initially on adding
ancillary and other services based on the following criteria: (i) ability to
complement the type of specialists in its networks, (ii) management experience
in operating the particular ancillary services and (iii) relatively low barriers
to entry in the relevant market. To date, the Company has opened or acquired,
either directly or through the PCs, eight physical therapy rehabilitation
centers in three service areas as part of its efforts to deliver integrated
musculoskeletal care. The Company intends to develop additional types of
ancillary services, as well as additional locations for the provision of
ancillary services, and, when appropriate, to identify and pursue related
acquisition opportunities.

39
<PAGE>

The Company believes that its concentration of specialist Affiliated
Physicians (and, eventually, their ability to share data on a common clinical
information system) will be attractive to clinical research organizations
("CROs") and pharmaceutical and medical device companies desiring to conduct
clinical trials utilizing practicing physicians outside the hospital setting,
and that participation in such clinical trials may be a source of the Company's
revenue growth in the future. The Company has also initiated its first
pharmaceutical clinical trial utilizing its Affiliated Physicians.

Grow through Affiliation Transactions and Provider Network. The Company
believes it can realize substantial operating and payor contracting leverage by
completing additional Affiliation Transactions and further developing the
Provider Network. The Company's goal is to develop each local service area
network of Affiliated Practices into a leading provider of specialist physician
and related ancillary services in such service area. The Company generally seeks
to enter a new local service area by affiliating with a pedestal practice that
is highly visible and has a reputation for quality health care. Additional
practices will be added in local service areas based on a number of criteria,
including type of specialty or sub-specialty, reputation of practice and
physicians, historical financial performance, growth potential, geographic
location and potential for development of related ancillary services. The
Company believes that its attractiveness to payors and to physicians who may
wish to affiliate with the Company and the PCs will be enhanced by growth in the
Company's size, scope and geographic coverage of its specialist physician
services and related ancillary services.

The Company is supplementing its Affiliated Practices by developing its
Provider Network, thereby expanding the Company's geographic coverage for
contracting purposes and, as a result, its leverage in negotiations with third
party payors. The Company has non-exclusive contracting authority for the
physicians and other providers in its Provider Network, subject to the
successful negotiation with payors of specified minimum levels of reimbursement
and certain other contractual provisions. The Company expects to receive fees
from certain payors based upon the number of individuals who are insured by such
payors and have access to the Provider Network. In addition, the Company also
intends to generate revenues based on its ability to negotiate payor contracts
for the Provider Network at reimbursement levels in excess of specified levels
of reimbursement. The Provider Network also enables the Company to establish
relationships with physicians who may wish to affiliate with the Company and the
PCs in the future. See "-- Provider Network."

Provide disease and injury management services. Specialist physicians
manage the treatment of complex disease and injury conditions commencing with
diagnosis and continuing through the implementation of restorative and
palliative care (both invasive and non-invasive), the selected involvement of
other specialist physicians and ancillary service providers, the prescription of
rehabilitation, pharmaceutical and other therapies and the provision of
follow-up services and aftercare. The Company intends to utilize its integrated
multi-specialty networks to deliver a variety of disease and injury management
services to patients, payors and employers. The Company plans to enter into
relationships, including certain risk-sharing arrangements, with managed care
organizations, health insurers and employers, under which the Company will be a
preferred or exclusive source of disease and injury management services in areas
such as sports medicine, workers' compensation, cancer care, addiction,
incontinence and women's health.

Implement practice management information system. The Company believes
that practice management information is critical to the growth of integrated
health care delivery and that the availability of detailed practice management
and clinical data is fundamental to improving the quality of care, reducing the
cost of care, and, ultimately, competing effectively for the health care premium
dollar. The Company believes that its practice management information system
will allow its Affiliated Physicians to engage more efficiently in complex
disease and injury management, particularly in those cases requiring care by
various Affiliated Physicians across specialty lines and involving physician
coordination and sharing of clinical data. The Company also is developing
additional clinical information components to its practice management
information system that will provide a platform for applying clinical pathways,
measuring outcomes and enhancing medical management. In addition, the Company
believes this system will be attractive to CROs and pharmaceutical and medical
device companies engaging in clinical trials.

40
<PAGE>

DEVELOPMENT AND OPERATIONS

The Company targets local service areas in the mid-Atlantic region of the
United States. To date, the Company's primary focus has been local service areas
surrounding or adjacent to major population centers, with its Affiliated
Practices currently located in Pennsylvania, New Jersey, Delaware and New York.

The Company completed its first Initial Affiliation Transactions in January
1997. Including both the Conditional Affiliation Transactions and the IPO
Affiliation Transactions, the Company has entered into Affiliation Agreements
with 32 Affiliated Practices, comprising 97 Affiliated Physicians (including
eight physicians added to Affiliated Practices subsequent to the respective
Affiliation Transactions). A list of the Affiliated Practices and related health
care businesses acquired in the Company's 18 Conditional Affiliation
Transactions, 14 IPO Affiliation Transactions and three Completed Transactions
is set forth below.

CONDITIONAL AFFILIATION TRANSACTIONS

Alan I. Snyder, M.D. Associates, Inc.
Bone and Joint Specialists of Western Pennsylvania, PC
Bryn Mawr Urology Associates, Inc.
Center for Women's Healthcare, PC and Corazon G. Gemil, M.D., PC
Cesare, Metzger, Coyle and Henzes, Inc.
Craig D. Morgan, M.D.
Elizabeth Wende Breast Clinic
Family Care of Lancaster, Inc.
Lehigh Valley Orthopedics, Inc.
Main Line Joint Replacement, PC
Orthopaedic and Sports Medicine Specialists of the Main Line, Inc.
Orthopaedic Surgery and Sports Medicine, Inc.
RJK Medical Associates, Ltd.
South Shore Orthopedics, PA
Sports Medicine and Rehabilitation Center, Inc. and Related Companies
Steel Valley Orthopedic Association, Inc.
Valley Forge Facial Plastic Surgery/Ear, Nose & Throat Associates, Ltd.
Vermeire Orthopaedic Surgeons, Inc.

IPO AFFILIATION TRANSACTIONS

Associates in Urology, PC
Curamed, LLC
Dennis James Bonner, M.D., Ltd.
Karl J. Marchenese, M.D., PC
Neil Chesen, M.D., PC
North Coast Orthopedics, Inc.
Northern Ophthalmic Associates, Inc.
Northwest Orthopedic Associates, PC
Oncology and Hemotology Associates, PA
Orthopedic Associates of Pittsburgh, Inc.
Philadelphia Uro-Gynecologic Associates, PC
Primary Care & Rehabilitation, PC and Medical Consultants, PC
Victor R. Kalman, D.O.
Vineland Obstetrical and Gynecological, PA

COMPLETED TRANSACTIONS

Network Medical, Inc.
RRI Corp.
Sports Medicine and Back Center, Inc.

41
<PAGE>

The Company's Affiliated Physicians provide services in seven geographic
markets, as set forth below:

<TABLE>
<CAPTION>
NUMBER OF ANCILLARY AND
GEOGRAPHIC MARKETS PHYSICIANS SPECIALTIES OTHER SERVICES
------------------ ---------- ----------- --------------
<S> <C> <C> <C>
Southeastern Pennsylvania 33 Orthopedics, Physiatry, Physical therapy/
(Bucks, Chester, Delaware and Urology, Otolaryngology, rehabilitation; clinical
Montgomery Counties) Obstetrics/Gynecology, trials
Ophthalmology, Addiction

Northwestern Pennsylvania 18 Orthopedics, Occupational Physical therapy/
(Clarion, Crawford, Mercer, Medicine rehabilitation
Venango and Allegheny
Counties)

Southern/Coastal New Jersey 16 Orthopedics, Neurology, Physical therapy/
(Atlantic, Burlington, Physiatry, rehabilitation
Camden, Cape May and Ocean Obstetrics/Gynecology, Oncology
Counties)

Northwestern New York (Monroe 14 Breast Cancer Diagnosis,
County) Ophthalmology

Central Pennsylvania (Lehigh, 9 Orthopedics, Occupational
Berks and Lancaster Counties) Medicine, Internal Medicine

Northeastern Pennsylvania 4 Orthopedics
(Lackawanna County)

Delaware (New Castle County) 3 Orthopedics, Internal Medicine
</TABLE>

Upon completion of the Initial Affiliation Transactions, the Company's
Affiliated Physicians will comprise 51 physicians specializing in
musculoskeletal injury and disease, seven physicians specializing in cancer
care, 33 physicians specializing in areas such as gynecology/obstetrics,
urology, ophthalmology and otolaryngology and six primary care/internal medicine
physicians. The Company has focused initially on the above specialties because
of (i) the Company's expertise and history of relationships with specialist
physicians in these areas; (ii) the degree to which these specialties lend
themselves to ancillary service development; and (iii) the high dollar volume of
reimbursement for services in these specialties.

Each of the geographic markets outlined above comprises one or more service
areas. Each service area is distinguished by its distinct consumer/patient
demographics, major health care institutions and payors. The Company manages its
operations on a service area basis, assigning management responsibility to area
managers responsible for one or more service areas. Each Affiliated Practice
(which may have one or more locations) is managed by a practice manager, who is
responsible for the daily operations of all non-medical aspects of the business
of such Affiliated Practice and the supervision of non-medical personnel
providing services to such Affiliated Practice. The Affiliated Practices in a
service area are supported and managed by one of the Company's area managers,
who assist the practice managers in the integration of the Affiliated Practice,
in accessing the Company's various resources to assist in the operation of the
Affiliated Practice, in the enhancement of synergies across Affiliated Practices
in such service area and in the assessment and implementation of growth
opportunities for such Affiliated Practices, including the pursuit of additional
practices with which the Company may seek to complete an Affiliation
Transaction. The area managers and the practice managers are supported by the
Company's centralized functions at its Fort Washington, Pennsylvania
headquarters, including billing and collections, human resources, sales and
marketing, contracting, finance and accounting, reimbursement, provider
relations, legal and management information systems.

Substantially all of the personnel providing non-medical services to the
Affiliated Practices are employed by the Company, while the Affiliated
Physicians, other physicians and certain other licensed medical personnel (to
the extent required by law) are generally employed by the applicable PCs. The
Company's employees manage all non-medical aspects of the operations of the
Affiliated Practices, including billing and collections,

42
<PAGE>

human resources, sales and marketing, contracting, finance and accounting,
reimbursement, provider relations, legal and management information systems. The
Affiliated Practices generally operate in facilities leased and maintained by
the Company and utilize supplies, equipment and furniture provided by the
Company. Certain management personnel at the Affiliated Practice level,
including practice managers, are eligible to receive incentive compensation
based upon the profitability levels of the applicable Affiliated Practice.

The Company intends to provide one or more of the following ancillary and
other services in each of its markets, generally through its affiliated PCs:
physical and occupational therapy, diagnostic imaging and the implementation of
clinical trials. The Company intends to develop additional ancillary services,
as well as additional locations for the provision of ancillary services, and,
when appropriate, to identify and pursue related acquisition opportunities. The
Company presently provides physical therapy at eight locations and has commenced
participation in its first pharmaceutical clinical trial.

The Company has formed committees of physicians to develop clinical
pathways that will provide treatment guidelines for the delivery of medical
services associated with specific episodes of care. The Company believes such
guidelines will assist its Affiliated Physicians in establishing medical service
patterns that demonstrate the highest quality of care. The Company intends to
assess the effectiveness of these guidelines in the achievement of clinical
outcomes in patient care by Affiliated Practices. The Company expects these
measures to enhance its ability to provide disease and injury management
services to payors, employers and consumers.

REIMBURSEMENT FOR SERVICES

The Company's Affiliated Practices derive their revenues from a variety of
payors, including private third party payors and managed care providers,
Medicare and workers' compensation insurance programs. Of the revenues for
September 1997 of the Affiliated Practices which affiliated with the Company in
the Conditional Affiliation Transactions, approximately 70% are attributable to
private third party payors, managed care and workers' compensation providers and
approximately 25% and 5% are attributable to Medicare/Medicaid and self pay,
respectively.

Private third party and managed care payors. Rates paid by private third
party payors (such as Blue Cross/Blue Shield and other indemnity health
insurance providers) are based on established health care provider charges.
Specialist physician services generally are reimbursed by such payors on a
fee-for-service basis, based on the physician's usual and customary charge for
the type and amount of services provided, or on a discounted fee-for-service
basis, which involves negotiated rates for specified procedures and services.
Recently, case rate payments, in which providers receive fixed payments for all
treatment provided to a patient based on the patient's classification of illness
or injury, have been adopted by certain private third party payors and may
become a predominant payment methodology in the future. Wider implementation of
such programs could reduce or limit increases in payments from private third
party payors and could indirectly reduce the revenues of the Company. An
increasing portion of the Company's revenues is expected to be derived from
managed care payors (primarily health maintenance organizations ("HMOs") and
insurance companies) that make payments under discounted fee-for-service, case
rate and capitation arrangements. Although rates paid by managed care payors are
generally lower than commercial indemnity rates, managed care payors can provide
access to large volumes of patients. Under capitated arrangements with such
managed care payors, providers deliver health care services to managed care
enrollees for payments based on the number of enrollees and typically bear
(subject to stop-loss insurance coverage) all or a portion of the risk that the
cost of such services may exceed these capitated payments.

Medicare. The federal government has implemented, through the Medicare
program, the resource-based relative value scale ("RBRVS") payment methodology
for health care provider services. RBRVS is a fee schedule that, except for
geographic and other adjustments, pays similarly situated health care providers
the same amount for the same services. The RBRVS is subject to annual increases
or decreases at the discretion of Congress or the Health Care Financing
Administration ("HCFA"). To date, the implementation of RBRVS has reduced
payment rates for certain of the procedures provided by the Affiliated
Practices. Furthermore, in implementation of the Balanced Budget Act of 1997
(the "BBA"), it is expected that, during a four-year period beginning in 1999,
HCFA will phase in adjustments to certain components of the RBRVS that will
generally decrease reimbursement to physicians for services rendered in a
hospital setting, and potentially increase

43
<PAGE>

reimbursement to physicians for services rendered in a non-institutional
setting. The BBA also contains various measures that over time are designed to
limit increases in Medicare payments and that may have the effect of reducing
reimbursement to Affiliated Practices.

Workers' compensation. Workers' compensation is a state-mandated,
comprehensive insurance program that requires employers to fund medical
expenses, lost wages and other costs resulting from work-related injuries and
illnesses. Provider reimbursement methods vary on a state-by-state basis. Most
states, including Pennsylvania and New York, have adopted fee schedules (that
vary from state to state) that prescribe the maximum amount of reimbursement
that a health care provider can receive, while in states without fee schedules,
health care providers are generally reimbursed based on usual, customary and
reasonable fees charged in the state in which the services are provided.

PROVIDER NETWORK

The Company is supplementing its Affiliated Practices by developing its
Provider Network, which enhances the Company's geographic coverage for
contracting purposes and, as a result, its leverage in negotiations with third
party payors. The Company has non-exclusive authority on behalf of the
physicians and other providers in the Provider Network to contract with managed
care organizations, insurance companies and other third-party payors for managed
care contracts and for agreements establishing rates of payment and
reimbursement for services provided by such participating physicians to the
enrollees and beneficiaries of such payors, provided that the Company is able to
successfully negotiate with such payors for specified minimum levels of
reimbursement and certain other contractual provisions. The Company intends to
receive fees from certain payors based upon the number of individuals who are
insured by such payors and have access to the Provider Network. In addition, the
Company also intends to generate revenues based on its ability to negotiate
payor contracts for the Provider Network at reimbursement levels in excess of
specified levels of reimbursement. The Provider Network also enables the Company
to establish relationships with physicians who may wish to affiliate with the
Company and the PCs in the future. The Company currently has over 2,500
physicians under contract in the Provider Network, including approximately 370
primary care physicians. The Company has not generated any material revenues to
date from the operation of the Provider Network.

MARKETING

The marketing of specialist physician services has historically been
limited. The Company believes that specialist physician services can be marketed
effectively to payors, employers and consumers by emphasizing the availability
of direct access to specialist physicians and the nature of the complex disease
and injury management services they provide. There are two core elements of the
Company's marketing strategy:

Local practice and service area marketing. Local marketing consists
primarily of targeted practice and/or service area marketing of Affiliated
Practices and Affiliated Physicians. The Company employs marketing
representatives whose primary goals are (i) to attract new sources of referrals
to the Company's Affiliated Practices and (ii) to ensure that physicians and
others who currently refer patients to the Company's Affiliated Practices and
providers of the Company's ancillary and other services are satisfied with
clinical outcomes and customer service provided by such Affiliated Physicians
and other providers. Other marketing programs include conducting patient
education seminars, distributing brochures, press releases and newsletters,
developing relationships with local employers and educational institutions and
systems and utilizing direct mail and yellow page advertising programs.

Marketing of specific disease and injury management services. The Company
is currently marketing and expects to significantly increase its marketing of
specific disease and injury management services to payors and consumers. Such
marketing typically might include one or more of patient education seminars,
direct mail and print or radio advertising. Disease and injury management
services currently being marketed include the treatment of osteoporosis,
incontinence, sports injuries and breast cancer.

MANAGEMENT INFORMATION SYSTEMS

The Company believes that integrated practice management information and
financial information systems are essential to the development of integrated
health care delivery capabilities and fundamental to improving the quality of
care, reducing the cost of care and enhancing the Company's attractiveness to
payors.

44
<PAGE>

The Company has selected a third-party practice management information
system that it is implementing in each of its Affiliated Practices. This
practice management information system links all of the Company's Affiliated
Practice locations via a frame relay network to the Company's Fort Washington,
Pennsylvania headquarters, and gives the Company the ability to monitor the
operations of its Affiliated Practices on a real-time basis. To date, the
Company has implemented this system in six Affiliated Practices and expects to
have implemented this practice management information system by the end of 1999
in a majority of the Affiliated Practices that become affiliated with the
Company through the Initial Affiliation Transactions. The Company believes that
utilizing a common practice management information system will enhance its
ability to cost-effectively monitor, manage and generate management data
regarding the operations of its Affiliated Practices. The system currently
provides management with uniform practice information including patient
scheduling, procedure histories, billing and collection and other relevant data.
The system also has the potential to interface with an electronic patient
medical record system and to incorporate proprietary clinical pathways currently
being developed by the Company.

The Company's financial information system is centralized in its Fort
Washington, Pennsylvania headquarters. All Affiliated Practices are integrated
with this system as soon as practicable upon the Company's consummation of an
Affiliation Transaction with such Affiliated Practice, typically within one
week.

Data from both the practice management information and financial
information systems is captured and maintained in a common relational database.
The Company believes that this database of practice management and financial
information will facilitate quantitative analysis of outcomes, quality and cost,
which analysis will in turn enhance the Company's ability to contract with
payors and to control costs and will assist in the continued development of
proprietary clinical pathways.

The Company's financial information system will not require any
modification to be year 2000 compliant. The third-party vendor of the Company's
practice management information system has agreed to bear all costs relating to
making that system year 2000 compliant.

AFFILIATION TRANSACTIONS

The Company and the PCs enter into affiliation transactions ("Affiliation
Transactions") pursuant to agreements ("Affiliation Agreements") with physicians
desiring to become affiliated with the Company and the PCs ("Affiliated
Physicians"). Pursuant to Affiliation Agreements, the physicians or, in certain
cases, professional corporations or partnerships owned by such physicians,
generally transfer the assets of their practices or the equity of such
professional corporations or partnerships to the Company and the relevant PC.
The Company acquires the non-medical assets, such as leases, furniture,
equipment and supplies, and the medical assets, consisting primarily of
pharmaceuticals and patient records and documentation, are transferred to the
relevant PC. In consideration for such sale, the Affiliated Physicians receive a
combination of cash, promissory notes, Convertible Notes, shares of Common Stock
and/or Options in amounts negotiated between the Company and the Affiliated
Physicians involved in such Affiliation Transaction. The Affiliation Agreements
generally contain restrictive covenants pursuant to which the Affiliated
Physicians may not compete with the Company within a relevant market area for a
period of five years following the closing date of the Affiliation Transaction.
In addition, generally each Affiliated Physician executes an employment
agreement ("Employment Agreement") with the relevant PC pursuant to which the
Affiliated Physician generally receives as compensation for physician services a
percentage of the revenues of the PC related to their Affiliated Practice (less
compensation paid to certain other licensed providers in the relevant Affiliated
Practice and certain other expenses), as well as a bonus based on the Affiliated
Physician's personal productivity. Since the level of physician reimbursement is
related to the physician's personal productivity, the Company believes that this
structure provides an effective incentive to increase productivity and
profitability. If the Affiliated Physician voluntarily elects to terminate the
Employment Agreement during its term or is terminated by the PC for cause, the
Affiliated Physician is required to pay to the PC liquidated damages in amounts
generally ranging from one-half to twice the amount of the Affiliated
Physician's annual salary, bonus and pension contributions, with the specific
level of liquidated damages depending upon the number of years remaining in the
employment term at the time of termination. In most cases, no liquidated damages
would be paid if employment is so terminated after a term of five to seven
years. In addition, the Affiliated Physician is subject to a restrictive
covenant under the Employment Agreement which generally prevents the Affiliated
Physician from competing with the PC within a relevant market area during the
term of his or her

45
<PAGE>

Employment Agreement, and for a period of two years thereafter. However, if an
Affiliated Physician does not terminate his or her employment prior to the end
of the employment term, and has not been discharged by the PC for cause, the
Affiliated Physician may, immediately after the employment term, return to
private practice, alone or with former partners in the applicable Affiliated
Practice (and/or in most cases with one additional physician), subject, during
the two years following the end of the employment term, to certain limitations
on affiliation with certain health care organizations and providers, such as
other physician practice management entities, HMOs or other third party
insurers, hospitals or hospital systems, or any integrated delivery systems or
similar or comparable entities. An Affiliated Physician's obligations under the
restrictive covenant are not relieved or limited by a required payment to the PC
of liquidated damages by such Affiliated Physician who prematurely terminates
his or her employment with the PC or is terminated by the PC for cause.

In November and December 1997, three former Affiliated Practices with a
total of 15 physicians with which the Company had previously completed
Affiliation Transactions terminated their affiliation with the Company pursuant
to repurchase rights which became exercisable when the Company did not complete
an initial public offering by December 1997, thereby, subject to certain terms
and conditions, effectively terminating such Affiliation Transactions.

Although the Company intends that future Affiliation Transactions will be
entered into on terms similar to those described above, the terms of future
Affiliation Transactions may be materially different as a result of regulatory,
financial, operational and other considerations.

MANAGEMENT AND SERVICES AGREEMENTS; CONTROL OF PCS

The Company has entered into Management and Services Agreements (the
"Management Agreements") with each of the Company's affiliated PCs. The
Management Agreements each have a term of 40 years and, unless either party
elects not to renew, automatically renew for additional five-year terms. Neither
party may terminate the Management Agreement, provided that the Company may
terminate, in the event of a breach of a material provision by the PC or if the
PC materially breaches its obligations to obtain medical licenses and
participation agreements from all physicians employed by it or under contract to
it or fails to maintain malpractice insurance and, in the case of the Management
Agreement with the PC operating in New York (the "New York PC"), upon 120 days
prior written notice; and the PC may terminate, in the event the Company files a
voluntary petition in bankruptcy or any bankruptcy proceeding is filed against
the Company which in either case remains undismissed for a period of 360 days.
Under the Management Agreements, the PCs are responsible for the hiring and
supervision of all physicians as well as nurses, therapists, technicians and
other licensed health care providers (collectively, "Professionals") who provide
services incidental to physician services and are responsible for the payment of
all compensation to such Professionals, except to the extent that Professionals
other than physicians become employees of the Company. In addition, the PC is
responsible for the appointment of medical directors, the monitoring of the
quality of medical services provided and the adoption of peer review/quality
assessment programs, the maintenance of medical records, the establishment and
revision (after consultation with the Company) of fee schedules and certain
other duties as may be required by law. The Company remains solely responsible
for the business operation of the PCs and for the management of all non-medical
aspects of the PCs, including the leasing of office locations, the provision of
medical equipment and furnishings, the employment of all necessary clerical,
secretarial and bookkeeping personnel and the payment of salaries of such
personnel, assistance in the negotiation of employment agreements with nursing
staff, technicians and other allied and ancillary health care personnel, the
management of payroll and personnel related activities, the supervision of all
employees (other than Professionals), the procurement of all medical supplies
(to the extent permitted by law), the provision of insurance (provided that the
PCs have the exclusive responsibility for maintaining malpractice liability
insurance for Professionals), the maintenance of all books and records, the
provision of all billing services, the provision of marketing services and
certain other services. The Company either arranges financing for the PCs or, as
necessary, advances funds to the PCs, with such advanced funds to be repaid to
the Company together with interest accruing at the rate from time to time
charged to the Company by its primary lender (or, if there is no such lender,
the prime rate plus 2%).

As compensation for the Company's services under the Management Agreements
(other than in New York), the PCs pay to the Company an amount equal to all
receipts, including without limitation receipts from billings for medical
services and for the services of Professionals other than physicians, for
medical supplies,

46
<PAGE>

for ancillary medical services and for facility and equipment charges ("Gross
Collected Revenues"), less all compensation expenses to be paid in accordance
with the PC's employment agreements with physicians, insurance costs, legal and
accounting fees, taxes and certain other incidental expenses which are paid by
the PC but otherwise would be the obligation of the Company ("Permitted
Expenses"), and less the amounts of any advances repaid to the Company and any
accrued interest thereon. The PC's Permitted Expenses may not exceed 20% of the
Gross Collected Revenues on an annual basis, provided that the PC is not subject
to any limit with respect to the payment of amounts due to physicians under
employment agreements. In New York, the Company receives a fee for its services
based on the Company's costs of providing such services plus an additional
amount equal to a percentage of such costs. The Company retains a security
interest in all of the PC's accounts receivable, cash, bank accounts, medical
supplies and the proceeds thereof. The PC is also subject to certain covenants
of exclusivity, non-competition and non-disclosure.

Under the Management Agreements, PCs indemnify and hold harmless the
Company against all liabilities as a result of the performance of medical
services or ancillary services or any other acts or omissions of the PC or its
shareholders, agents, employees or subcontractors (other than the Company). The
Company indemnifies and holds harmless each PC and its officers, directors,
shareholders and employees from liabilities resulting as a consequence of the
Company's gross negligence or wilful misconduct in its performance under the
Management Agreement. In addition, each Management Agreement provides that, in
the event that Medicare or Medicaid, any other payor or any other federal, state
or local government or agency establishes laws, regulations or policies
materially affecting the method or amounts of payment from the PCs to the
Company under the Management Agreement or which otherwise materially affect
either party's rights or obligations thereunder, either party may amend the
Management Agreement to reflect such event, provided that no such amendment may
alter the basic economic status of the parties under the Management Agreement.

All of the voting capital stock of each PC is owned by a single physician
who has entered into a shareholder agreement with the PC pursuant to which such
physician shareholder's ability to transfer the capital stock of the PC is
subject to a right of first refusal in favor of the PC or its designated
transferee, and pursuant to which the PC may remove such physician as a
shareholder of the PC with or without cause and require such physician to sell
the shares of the PC (except that the physician shareholder of the New York PC
may be removed, and required to sell, for cause only) to the PC or a designee of
the PC legally qualified to own such shares. The physician shareholder of each
PC has agreed to elect to the board of directors of the PC persons selected by
the Company. The boards of directors of the PCs operating in Pennsylvania and
New Jersey are classified into classes of directors who serve for multi-year
terms and consists solely of officers of the Company (and, where required by
law, the physician shareholder), who may be removed by the physician shareholder
only for cause. The bylaws of the PCs (other than the New York PC) provide that
directors must at all times be either a licensed physician or an officer of the
Company. The agreements with respect to the New York PC and the PC operating in
Delaware contain various provisions which restrict the ability of the directors
and officers of the PC to alter each such PC's relationship with the Company
under the relevant Management Agreement. The Company believes that the ownership
and management structure of the PCs is highly favorable to the maintenance of
the relationship of the Company and the PCs under the respective Management
Agreements.

Although the Company intends that future agreements with PCs will be
similar to those described above, the terms of future agreements may be
materially different as a result of regulatory, financial, operational and other
considerations.

As a result of an Affiliation Transaction, the Company also provides
management services to two Affiliated Practices in New Jersey with a total of
four Affiliated Physicians. Such Affiliated Practices and Affiliated Physicians
are not affiliated with any of the Company's affiliated PCs, but instead are
operated under professional corporations owned by such Affiliated Physicians.
The Company provides management services to such professional corporations
pursuant to management agreements and receives a percentage of the revenues of
such professional corporations as payment for such services.

47
<PAGE>

GOVERNMENT REGULATION

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 pertain primarily to the
Medicare program and the Medicaid program, each of which 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. Recent laws, including the Health Insurance Portability
and Accountability Act ("HIPAA") and the BBA, have expanded the coverage of such
regulation to other federally funded health care programs.

The Company believes its operations are in material compliance with
applicable laws; however, the Company has not received or applied for a legal
opinion from counsel or an advisory opinion from any federal or state judicial
or regulatory authority to this effect, and many aspects of the Company's
business operations have not been the subject of state or federal regulatory
interpretation. The laws applicable to the Company are subject to amendment and
to evolving interpretations, and therefore there is no assurance that a review
of the Company or the Affiliated Practices by a court or law enforcement or
regulatory authority would not result in a determination that could have a
material adverse effect on the Company. Furthermore, there is no assurance that
the laws applicable to the Company and the Affiliated Practices will not be
amended in a manner that could have a material adverse effect on the Company.
See "Risk Factors -- Government Regulation."

Federal Law

The federal health care laws apply in any case in which a PC is providing
an item or service that is reimbursable under Medicare, Medicaid or other
federally funded health care program or in which the Company is claiming
reimbursement from Medicare, Medicaid or other federally funded health care
programs on behalf of Affiliated Physicians or physicians who are participating
in the Provider Network. The principal federal laws include those that prohibit
the filing of false or improper claims with the Medicare or Medicaid programs,
those that prohibit unlawful inducements for the referral of business
reimbursable under Medicare or Medicaid and those that prohibit the provision of
certain designated services by a health care provider to a patient if the
patient was referred by a physician with which the provider has certain types of
financial relationships.

False and Other Improper Claims. The federal government is authorized to
seek criminal, civil and administrative penalties with respect to any health
care provider that files a false claim for reimbursement from Medicare, Medicaid
or other federally funded health care program. Criminal penalties are also
available in the case of claims filed with private insurers if the government
can show that the claims constitute mail fraud or wire fraud, or a violation
under state law which separately covers health care fraud under criminal
statutes. While the criminal statutes are generally reserved for instances
evincing requisite fraudulent intent as defined by statute, the criminal and
administrative penalty statutes are being applied by the government in an
increasingly broad range of circumstances. The government has taken the
position, for example, that a pattern of claiming reimbursement for unnecessary
services violates these statutes if the claimant should have known that the
services were unnecessary. The government has also taken the position that
claiming reimbursement for services that are of substandard quality is a
violation of the false claims statutes if the claimant should have known that
the services were substandard.

The Company believes that its billing activities on behalf of the PCs and
the Provider Network are in material compliance with such laws, but there is no
assurance that the Company's activities will not be challenged or scrutinized by
governmental authorities. A determination that the Company has violated such
laws could have a material adverse impact on the Company.

Anti-Kickback Law. A federal law commonly known as the "Anti-kickback Law"
(as amended) prohibits the offer, solicitation, payment or receipt of anything
of value (direct or indirect, overt or covert, in cash or in kind) which is
intended to induce the referral of Medicare, Medicaid or other federally funded
health care program patients, or the ordering of items or services reimbursable
under those programs. The law also prohibits remuneration that is intended to
induce the recommendation of, or the arranging for, the provision of items or
services reimbursable under Medicare, Medicaid or other federally funded health
care programs. The law has been broadly interpreted by a number of courts to
prohibit remuneration that is offered or paid for otherwise legitimate purposes
if the circumstances show that one purpose of the arrangement is to induce

48
<PAGE>

referrals. Even bona fide investment interests in a health care provider may be
questioned under the Anti-kickback Law if the government concludes that the
opportunity to invest was offered with the intent to induce prohibited
referrals. The penalties for violations of this law include criminal sanctions,
civil monetary penalties and exclusion from the Medicare and Medicaid programs.

In part to address concerns regarding the implementation of the
Anti-kickback Law, the federal government in 1991 published regulations that
provide exceptions, or "safe harbors," for certain transactions that will not be
deemed to violate the Anti-kickback Law. Among the safe harbors included in the
regulations were provisions relating to the sale of physician practices,
management and personal services agreements and employee relationships.
Subsequently, regulations were proposed 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. If any of the proposed regulations are
ultimately adopted, they would result in substantive changes to existing
regulations. 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 per se.

There are several aspects of the Company's relationships with physicians to
which the Anti-kickback Law may be relevant. In some instances, for example, the
government may construe some of the marketing and managed care contracting
activities of, or exclusive dealing arrangements required by, the Company as
arranging for the referral of patients to the Affiliated Physicians or
physicians with whom the Company has a relationship through the Provider
Network.

Although neither the investments in the Company by physicians nor the
Management Agreements between the Company and the PCs necessarily qualify for
protection under the safe harbor regulations, the Company does not believe that
these activities constitute the type of activities the Anti-kickback Law is
intended to prohibit. A determination that the Company had violated the
Anti-kickback Law could have a material adverse effect on the Company.

Anti-referral Law. The "anti-referral" (i.e. Stark) laws prohibit a
physician from referring a patient to a health care provider for certain
designated health services reimbursable by Medicare or Medicaid if the physician
has a financial relationship with that provider, including an investment
interest, a loan or debt relationship or a compensation relationship. 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 (i) a refund of
any Medicare or Medicaid payments for services that resulted from an unlawful
referral, (ii) civil fines and (iii) exclusion from the Medicare and Medicaid
programs.

The Company does not currently provide any designated health service under
the anti-referral laws, but rather provides management services to affiliated
PCs that may themselves provide designated services and which are structured to
fall within the group medical practice exception to the anti-referral laws.
However, because the Company will provide management services related to
designated health services provided by Affiliated Physicians, there is no
assurance that the Company will not be deemed the provider of those services for
purposes of the anti-referral laws and, accordingly, the recipient of referrals
from Affiliated Physicians. In that event, such referrals will be permissible
only if (i) the financial arrangements under the Management Agreements with the
PCs meet certain exceptions in the anti-referral laws and (ii) the ownership of
shares of Common Stock of the Company by the referring physicians meets certain
investment exceptions under the anti-referral laws. The Company believes that
the financial arrangements under the Management Agreements qualify for
applicable exceptions under the anti-referral laws; however, there is no
assurance that a review by courts or regulatory authorities would not result in
a contrary determination. In addition, the Company will not meet the
anti-referral law exception related to investment interests until the Company's
stockholders' equity exceeds $75 million. Proposed rules were published under
the anti-referral statute on January 9, 1998, and following public comment on
the proposed rules, final rules are expected to be promulgated in the near
future. If adopted in their current form, absent further clarification such
proposed rules would likely require some modification of the compensation
arrangements under the Employment Agreements with the Company's Affiliated
Physicians pursuant to provisions thereof which generally allow such
modification by the Company to comply with such changes in law. There can be no
assurance that the provisions of such rules as finalized, or any additional
rules, will not have a material adverse effect on the structure or operations of
the Company.

49
<PAGE>

State Law

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. However, 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 judicial administrative
interpretations of the Anti-kickback Law, the Company believes that these laws
prohibit payments to referral sources where a purpose for payment is for
referrals. However, the laws in most states regarding kickbacks have been
subjected to limited judicial and regulatory interpretation, and therefore there
is no assurance that the Company's activities will be found to be in compliance
therewith. Noncompliance with such laws could have an adverse effect upon the
Company and subject it and Affiliated Physicians to penalties and sanctions.

State Self-Referral Laws. A number of states have enacted self-referral
laws that are similar in purpose to the Stark Law, but which impose different
restrictions. Some states, for example, only prohibit referrals when the
physician's financial relationship with a health care provider is based upon an
investment interest of a certain magnitude. Other state laws apply only to a
limited number of designated health services. Some states do not prohibit
referrals to owned or related entities, but require that a patient be informed
of the financial relationship when a referral is made. Although the Company
believes that its operations are in material compliance with the self-referral
law of the states in which the PCs are located, there is no assurance that the
Company's activities will be found in compliance therewith. Noncompliance with
such laws could have an adverse effect upon the Company and subject it and
Affiliated Physicians to penalties and sanctions.

Fee-Splitting Laws. Many states prohibit a physician from splitting with a
referral source the fees generated from physician services. Other 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, it is not
considered to be fee-splitting when the payment made by the physician is
reasonable reimbursement for services rendered on the physician's behalf.

The compensation provisions of the Company's Management Agreements with the
PCs have been designed in a manner which the Company believes complies with
applicable state laws relating to fee-splitting. There can be no certainty,
however, that, if challenged, the Company and the PCs will be found to be in
compliance with each state's fee-splitting laws. A determination in any state
that the Company is engaged in any unlawful fee-splitting arrangement could
render a Management Agreement or any other management and services agreement
between the Company and a PC located in such state unenforceable or subject to
modification in a manner adverse to the Company and subject the Company to other
sanctions.

Certain New York state regulations prohibit a physician from sharing or
splitting fees with persons not authorized to practice medicine. This
prohibition precludes the Company from receiving fees from its affiliated New
York PC which constitute a percentage of or are otherwise dependent upon the
income or receipts of the New York PC. The Company believes that the
compensation arrangement for services provided to the New York PC under the
relevant Management Agreement, which provides for a fee based on the Company's
costs plus an additional percentage of the Company's costs, complies with
applicable New York state law and regulation. However, there is no assurance
that certain actions by New York state regulatory authorities would not result
in a judicial or administrative determination with regard to such compensation
structure that could adversely affect the Company's operations. If the Company
is found to be engaged in a fee-splitting arrangement with the New York PC, the
New York PC and its Affiliated Physicians would be subject to charges of
professional misconduct and penalties ranging from censure to reprimand to
revocation of their professional licenses, and the Company could be deprived of
its ability to operate its business with, and to collect fees due and owing
from, the New York PC, which would have a material adverse effect on the Company
and its operations.

50
<PAGE>

Corporate Practice of Medicine. Most states prohibit business corporations
from engaging in the practice of medicine. Many states prohibit a business
corporation from employing a physician. States differ, however, with respect to
the extent to which a licensed physician can affiliate with corporate entities
for the delivery of medical services. Some states interpret the "practice of
medicine" broadly to include activities of corporations such as the Company that
have an indirect impact on the practice of medicine, even where 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.

The Company intends not to exercise any responsibility on behalf of
Affiliated Physicians pursuant to the Management Agreements that could be viewed
as comprising the practice of medicine. Accordingly, the Company believes that
its operations do not violate applicable state laws relating to the corporate
practice of medicine. Such laws and legal doctrines have been subjected to only
limited judicial and regulatory interpretation and there is no assurance that,
if challenged, the Company would be considered to be in compliance with all such
laws and doctrines. A determination in any state that the Company is engaged in
the corporate practice of medicine could render any Management Agreement between
the Company and a PC located in such state unenforceable or subject to
modification in a manner adverse to the Company and subject the Company to other
sanctions.

Insurance Laws. Laws in all states regulate the business of insurance and
the operation of HMOs. Many states also regulate the establishment and operation
of networks of health care providers under the auspices of an integrated
delivery system ("IDS"). While these laws do not generally apply to companies
that provide management services to networks of physicians or to physician
practice groups that assume financial risk under a subcapitation agreement with
a managed care organization, there is no assurance that regulatory authorities
of the states in which the Company operates would not apply these laws to
require licensure or some lesser regulation of the Company's operations as an
insurer, as an HMO or as a provider network or IDS. Other states have enacted
statutes or adopted regulations affecting risk assumption in the health care
industry, including statutes and regulations that subject any physician or
physician network engaged in risk-based contracting to applicable insurance laws
and regulations, which may include, among others, laws and regulations providing
for minimum capital requirements and other safety and soundness requirements.
The Company believes that its current and proposed operations are in compliance
with these laws in the states in which it currently does business, but there is
no assurance that future interpretations or amendments of insurance and health
care network laws by regulatory authorities in these states or in the states
into which the Company may expand will not require licensure or a restructuring
of some or all of the Company's operations.

The National Association of Insurance Commissioners ("NAIC") in 1995
endorsed a policy proposing the state regulation of risk assumption by
physicians. The policy proposes prohibiting physicians from entering into
capitated payment or other risk sharing contracts except through HMOs or
insurance companies. Several states have adopted regulations implementing the
NAIC policy in some form. In states where such regulations have been adopted,
PCs will be precluded from entering into capitated contracts directly with
employers, individuals and benefit plans unless they qualify to do business as
HMOs or insurance companies. In addition, in December 1996, the NAIC issued a
white paper entitled "Regulation of Health Risk Bearing Entities," which sets
forth issues to be considered by state insurance regulators when considering new
regulations and encourages that a uniform body of regulation be adopted by the
states. The Company believes that additional regulation at the state level will
be forthcoming in response to the NAIC initiatives. In addition, state
regulations in this area may be affected or superseded by federal standards for
provider service organizations that are currently being developed through
rulemaking required by the BBA.

COMPETITION IN THE DELIVERY OF HEALTH CARE SERVICES AND IN AFFILIATING WITH
SPECIALIST PHYSICIAN PRACTICES

51
<PAGE>

INSURANCE

The provision of medical services entails an inherent risk of professional
malpractice and other similar claims. However, the Company does not influence or
control the practice of medicine by physicians or have responsibility for
compliance with certain regulatory and other requirements directly applicable to
the rendering of professional services by physicians, physician groups or other
health care providers. As a result of the relationship between the Company and
the PCs, the Company may become subject to medical malpractice actions under
various theories, including successor liability and certain theories relating to
the power to control or direct care. There can be no assurance that claims,
suits or complaints relating to services and products provided by the PCs will
not be asserted against the Company in the future. The Company's medical
professional liability insurance provides coverage of up to $1 million per
occurrence, with maximum coverage of $3 million per year. The Company's general
liability insurance provides coverage of up to $3 million per occurrence, with
maximum coverage of $3 million per year.

The physicians employed by the PCs are required to maintain medical
malpractice liability insurance in amounts which are mandated by the state in
which they practice. While the Company believes such insurance policies are
appropriate in amount and coverage for its current operations, there is no
assurance that the coverage maintained by the PCs and the Company will be
sufficient to cover all future claims or will continue to be available in
adequate amounts or at a reasonable cost.

EMPLOYEES

As of December 31, 1997, the Company had a total of 317 employees and the
PCs had a total of 134 employees. None of the employees of the Company or the
PCs is represented by a labor union. The Company believes that its and the PCs'
relations with their respective employees are good.

PROPERTIES

The Company's headquarters are located in 13,423 square feet of leased
office space in Fort Washington, Pennsylvania, pursuant to leases which expire
in June and October 2002 and contain one-year renewal options. The Company
believes that these facilities are adequate for the foreseeable future. The
Affiliated Practices operate in offices leased by the Company with widely
varying terms.

LEGAL PROCEEDINGS

The Company is not a party to any pending legal proceedings. The Company's
Affiliated Physicians and the PCs are from time to time subject to medical
malpractice claims. Such claims, if successful, could result in substantial
damage awards that may exceed the limits of insurance coverage. No such claims
are presently pending, other than claims which arose against certain Affiliated
Physicians and Affiliated Practices prior to their respective Affiliation
Transactions, which claims the Company believes are adequately covered by
insurance.

<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Thomas J. Keane................... 41 Chairman, President and Chief Executive
Officer
Martin G. Chilek.................. 47 Senior Vice President--Administration and
Secretary
Edward R. Miersch................. 41 Senior Vice President and Chief Operating
Officer
Warren D. Barratt................. 37 Senior Vice President, Treasurer and Chief
Financial Officer
John M. Hogan..................... 37 Vice President and General Counsel
Linda F. Larson................... 50 Vice President--Management Information
Systems
Constance M. Phillips-Jones....... 42 Vice President--Network Development
Lewis S. Sharps, M.D.............. 48 Chief of Medical Operations
James M. McCrossin................ 40 Vice President--Operations
Mark G. Hardin.................... 46 Vice President and Controller
Kerry J. Dale..................... 41 Director
William P. Ferretti............... 54 Director
Gustav H. Koven, III.............. 55 Director
Daniel Promislo................... 65 Director
</TABLE>

Thomas J. Keane has served as the Chairman, President and Chief Executive
Officer of the Company since its inception in July 1994. From 1989 to 1993, Mr.
Keane was President and CEO of WorkHab, Inc., which, as the managing partner of
a series of entities, provided workers' compensation services for work-related
injuries through managed care agreements with businesses and physician referral
sources and was sold to Medifit of America in 1993. From 1988 to 1989, Mr. Keane
was Vice President--Marketing at Cellcor Therapies, a startup company in the
immunotherapy business. From 1981 to 1988, Mr. Keane was Vice President of Fox
Chase Cancer Center ("Fox Chase") and held the position of Executive Director
for a variety of entities affiliated with Fox Chase. Prior to Fox Chase, Mr.
Keane was a senior consultant within the emerging business practice group of
Coopers & Lybrand.

Martin G. Chilek has been Senior Vice President--Administration and
Secretary of the Company since July 1997 and prior to such time served as Vice
President and Secretary of the Company since joining the Company in December
1995. From January 1992 until joining the Company, he was a general partner of
the Edison Venture Fund specializing in health care investments. From 1979 to
1992, Mr. Chilek served in various capacities with the Humana Inc., including
serving as Director of Acquisitions and Development from 1985 to 1988 and
Director of Humana Venture Capital, the equity investment affiliate of Humana
Inc., from 1988 until 1992.

Edward R. Miersch has been Senior Vice President and Chief Operating
Officer of the Company since July 1997 and prior to such time served as Vice
President--Operations of the Company since joining the Company in July 1996.
From April 1994 until joining the Company, Mr. Miersch served as Eastern Region
President of the Outpatient Rehabilitation Division of NovaCare, Inc.
("NovaCare"), a provider of physical therapy and rehabilitation services. He
served as President of Pat Croce's Sports Physical Therapists, Inc. from 1980
until September 1993, at which time that company was acquired by RehabClinics,
Inc., which was acquired by NovaCare in early 1994. Mr. Miersch also served as
Director of Physical Therapy and Sports Medicine at Haverford Community Hospital
from 1980 to 1986.

Warren D. Barratt has been Senior Vice President, Treasurer and Chief
Financial Officer of the Company since July 1997 and prior to such time served
as Vice President, Treasurer and Chief Financial Officer since joining the
Company in September 1996. From June 1994 until joining the Company, Mr. Barratt
served as Chief Financial Officer of The Pet Practice, Inc. ("The Pet
Practice"), a provider of

53
<PAGE>

veterinary care, until its merger with Veterinary Centers of America, Inc. in
July 1996. From 1982 to June 1994, Mr. Barratt held various positions with Price
Waterhouse LLP.

John M. Hogan has been Vice President and General Counsel of the Company
since joining the Company in October 1996. From February 1995 until joining the
Company, Mr. Hogan served as Assistant General Counsel of NovaCare, with primary
responsibility for representation of the NovaCare Outpatient Rehabilitation
Division. From March 1992 to February 1995, Mr. Hogan practiced law at Weissburg
and Aronson in San Diego, California. From 1985 to March 1992, Mr. Hogan
practiced law at Saul, Ewing, Remick & Saul in Philadelphia, Pennsylvania.

Linda F. Larson has been Vice President--Management Information Systems of
the Company since joining the Company in October 1996. From February 1995 until
joining the Company, Ms. Larson served as Director of Information Systems at The
Pet Practice. She was Director of Information Systems of the Hospital Division
of NovaCare from 1991 until January 1995. Before joining NovaCare in 1991, she
was Director of System Development and Maintenance at National Medical
Enterprises, Specialty Hospital Group.

Constance M. Phillips-Jones has been Vice President--Network Development of
the Company since joining the Company in November 1996. From July 1991 until
joining the Company, Ms. Phillips-Jones was Vice President--Managed Care
Services for the PMA Group, one of the largest commercial workers' compensation
insurance carriers in Pennsylvania. From 1986 until July 1991, she served as
Director of Utilization, Management and Quality Assurance for Penn Health
Corporation (a subsidiary of Maxicare). From 1976 to 1986 Ms. Phillips-Jones
held various positions with The Graduate Hospital and the Hospital of the
Medical College of Pennsylvania as well as other tertiary acute care hospitals
in Philadelphia.

Lewis S. Sharps, M.D. F.A.C.S., is a practicing orthopedic surgeon who has
been Chief of Medical Operations of the Company since March 1996. Dr. Sharps was
a managing partner of Orthopaedic Surgery and Sports Medicine, P.C. from July
1980 until it became an Affiliated Practice of the Company in March 1997. Dr.
Sharps served as President of Orthopaedic Rehabilitation and Sports Center, P.C.
from 1985 until February 1994 at which time that company was acquired by
NovaCare. He serves as a Director of the Pennsylvania Orthopaedic Society,
chairs its Political Action Committee, and will become President of that
organization in 2000.

James M. McCrossin has been Vice President--Operations since December 1997
and prior to such time served as Director of Operations since joining the
Company in July 1996. From September 1993 until joining the Company, Mr.
McCrossin served as Area Vice President of the Mid Atlantic Region of the
Outpatient Rehabilitation Division of NovaCare. He served as Vice President and
General Manager of Pat Croce's Sports Physical Therapists, Inc. from 1984 until
September 1993 at which time that company was acquired by RehabClinics, Inc.,
which was acquired by NovaCare in 1994.

Mark G. Hardin has been Vice President, Assistant Treasurer and Controller
of the Company since December 1997 and prior to such time served as Assistant
Vice President, Assistant Treasurer and Controller since joining the Company in
October 1996. From September 1994 until joining the Company, Mr. Hardin served
as Controller of The Pet Practice, which merged with Veterinary Centers of
America, Inc. in July 1996. He served as Controller of Everfast, Inc., a
retailer and wholesaler of decorative fabrics, from February 1991 until June
1994. Mr. Hardin served as Assistant Controller for McCrory Stores, Inc., a
variety retailer, from 1986 to 1991. He previously served as Director of General
Accounting for Service Merchandise Company and Assistant Director of Financial
Accounting for H.J. Wilson Co. from 1976 to 1982.

Kerry J. Dale has been a director of the Company since January 1997. Mr.
Dale is a General Partner of Keystone Venture Capital and an officer of the
general partner of Keystone Venture Fund IV, L.P. ("Keystone"), which he joined
in 1988. From 1982 to 1988, he was an owner/operator of two related
manufacturers of industrial products.

William P. Ferretti has been a director of the Company since May 1995. Mr.
Ferretti is the Chairman and Chief Executive Officer of Medstar Television,
Inc., a television programming company, which he co-founded in 1982. Mr.
Ferretti is also a limited partner of the general partner of NEPA Venture
Fund--II, L.P. ("NEPA"). He is a former director of Access Health. Mr. Ferretti
currently serves on the board of directors of

54
<PAGE>

Vitas Health Care Corp., a provider of hospice services in homes, hospitals and
nursing homes and MHM Services, Inc., an American Stock Exchange-listed
behavioral health services company.

Gustav H. Koven, III has been a director of the Company since September
1996. Mr. Koven is a General Partner of Edison Venture Fund, which he joined in
1990, and a general partner of the general partner of Edison Venture Fund III,
L.P. ("Edison"). From 1985 to 1990, Mr. Koven served as President of Chase
Manhattan Capital Corp. From 1980 to 1985, he served as a Vice President in
Corporate Development and Planning at The Chase Manhattan Bank. Before joining
Chase in 1980, Mr. Koven held marketing and corporate development positions at
Union Carbide. He serves as a director of Novalis Corporation, a provider of
services and software for managed care organizations.

Daniel Promislo has been a director of the Company since February 1995 and
since November 1997 has been Managing Director of the law firm of Wolf, Block,
Schorr and Solis-Cohen LLP, where he was a partner specializing in corporate and
securities law from 1977 to 1994. For more than five years, he has been the
President and a Director of Historical Documents Company and Historical Souvenir
Company, manufacturers of souvenirs related to American history. Mr. Promislo is
also a trustee of Resource Asset Investment Trust, a real estate investment
trust.

CLASSIFIED BOARD; COMMITTEES; ADDITIONAL DIRECTORS

The Company's Board of Directors is divided into three classes. Each class
holds office until the third annual meeting for the election of directors
following the election of such class, except that the initial terms of the Class
I, Class II and Class III directors expire in 1999, 2000 and 2001, respectively.
Messrs. ________ and ________ are Class I directors, Messrs. ________ and
________ are Class II directors and Mr. ________ is a Class III director.

The Board of Directors has a Compensation Committee, which currently is
composed of the entire Board of Directors, and an Audit Committee composed of
Messrs. Ferretti, Koven and Promislo. The Compensation Committee determines
salaries and bonuses and other compensation matters for officers of the Company,
administers employee health and benefit plans, and administers the Stock
Incentive Plans and any similar plans created in the future. The Audit Committee
recommends the appointment of the Company's independent public accountants and
reviews the scope and results of audits, internal accounting controls and tax
and other accounting related matters.

The Company intends that two additional independent directors will be
elected to the Board of Directors within 90 days after the completion of the
Offering.

DIRECTOR COMPENSATION

Each non-employee director of the Company is expected to receive a fee of
$1,000 per meeting of the Board of Directors (or board committee of which he is
a member) attended, plus reimbursement of out-of-pocket expenses. In addition,
non-employee directors receive a grant of options to purchase 40,000 shares of
Common Stock upon commencement of service as a director, and may receive annual
or other additional grants of options in amounts that have not yet been
determined.

EXECUTIVE COMPENSATION

Summary Compensation Table. The following table sets forth certain
information with respect to compensation paid or accrued by the Company during
1997 to the Company's Chief Executive Officer and to the other four executive
officers of the Company whose salary and bonus for 1997 exceeded $100,000 for
all services rendered in all capacities to the Company (the Chief Executive
Officer and such other four executive officers, collectively, the "Named
Executive Officers").

55
<PAGE>

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND --------------------- ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
------------------ ---- -------- ------- ------------
<S> <C> <C> <C> <C>
Thomas J. Keane................................... 1997 $157,205 -0- $ 879
Chairman, President and Chief Executive Officer

Edward R. Miersch................................. 1997 200,914 -0- 1,114
Senior Vice President and Chief Operating
Officer

Martin G. Chilek.................................. 1997 150,870 -0- 862
Senior Vice President--Administration and
Secretary

Warren D. Barratt................................. 1997 125,264 $25,000 846
Senior Vice President, Treasurer and Chief
Financial Officer

John M. Hogan..................................... 1997 125,264 -0- 810
Vice President and General Counsel
</TABLE>

Stock Option Grants. The following table contains information concerning
the grant of stock options under the Stock Incentive Plans to each of the Named
Executive Officers during 1997.

OPTION GRANTS

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------- POTENTIAL REALIZABLE
NUMBER VALUE AT ASSUMED
OF ANNUAL RATES OF STOCK
SECURITIES % OF TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM($)(1)
OPTIONS TO EMPLOYEES PRICE EXPIRATION -----------------------
NAME GRANTED(#) IN FISCAL 1997 ($/SH) DATE 5% 10%
---- ---------- --------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Thomas J. Keane............. 200,000 15.7% $3.47 7/24/07 $ $
Edward R. Miersch........... 200,000 15.7% $3.15 7/24/07
Martin G. Chilek............ 50,000 3.9% $3.15 7/24/07
Warren D. Barratt........... 200,000 15.7% $3.15 7/24/07
John M. Hogan............... 40,000 3.1% $3.15 7/24/07
</TABLE>

Option Values. The following table sets forth certain information
regarding stock options held as of December 31, 1997 by the Named Executive
Officers. None of the Named Executive Officers exercised stock options during
1997.

FISCAL YEAR END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR END(#) FISCAL YEAR END($)(1)
---------------------- -----------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Thomas J. Keane............................. -0- 200,000 $ $
Edward R. Miersch........................... 34,438 268,877
Martin G. Chilek............................ 68,876 84,439
Warren D. Barratt........................... 34,438 268,877
John M. Hogan............................... 17,500 75,000
</TABLE>

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

(1) There was no public trading market for the Common Stock as of December 31,
1997. These values have been calculated on the basis of the assumed initial
public offering price of $________ per share, less the applicable per share
exercise price.

56
<PAGE>

EMPLOYMENT AGREEMENTS

The Company entered into an employment agreement with Thomas J. Keane,
Chairman, President and Chief Executive Officer, in October 1997. The agreement
has an initial term of three years and automatically renews for successive
one-year terms unless either party elects not to renew. The agreement provides
for an annual base salary of $157,532 and further provides that Mr. Keane will
be included in any bonus system, pool or incentive compensation program for
senior executives of the Company that may be implemented by the Board. The
agreement further provides that Mr. Keane's positions, titles or
responsibilities will not be diminished materially without his consent. In the
event Mr. Keane's employment is terminated for reasons other than his death,
disability or for cause, or if the Company elects not to renew his employment
for any additional term, the Company is obligated to continue to pay Mr. Keane
his then current base salary for the greater of a period of six months or the
remainder of the initial term or any additional term, or until such time as he
commences other full time employment, whichever occurs earlier. In the event Mr.
Keane's employment is terminated without cause upon a change in control (as
defined), he is entitled to receive a lump sum payment upon such termination
equal to 300% of his then current base salary plus 300% of any annual incentive
compensation for the prior year. The agreement also contains covenants with
respect to confidential information as well as a restrictive covenant which
generally prevents Mr. Keane from owning a material interest in or being
employed by or affiliated with competitors of the Company during his term of
employment and for a period of one year thereafter.

The Company entered into an employment agreement with Martin G. Chilek,
Senior Vice President--Administration and Secretary, in December 1995, which
agreement was amended and restated in October 1997. The employment agreement
expires in December 1998 and automatically renews for successive one-year terms
unless either party elects not to renew. The agreement provides for an annual
base salary of $150,000 and that Mr. Chilek will be included in any bonus
system, pool or incentive compensation plan for senior executives of the Company
that may be implemented by the Board. In addition, the agreement provides for a
grant to Mr. Chilek under the 1995 Company Option Plan of Options to purchase
103,315 shares of Common Stock at an exercise price of $0.49 per share, which
options are intended to be "incentive stock options" within the meaning of
Section 422 of the Code ("ISOs") and become exercisable in three equal
installments upon each of the first three anniversaries of the first day of Mr.
Chilek's employment with the Company, provided that, in the event of any
consolidation, merger or the sale or transfer of substantially all of the assets
of the Company to another corporation in which the Company is not the surviving
entity, any remaining options shall be exercisable in full whether or not the
right to exercise such options has accrued. In the event Mr. Chilek's employment
is terminated for reasons other than his death, disability or for cause, or if
the Company elects not to renew his employment for any additional term, then the
Company shall continue to pay Mr. Chilek his then-current base salary for the
greater of a period of six months or the remainder of the initial term or any
additional term, or until such time as he commences other full-time employment,
whichever occurs earlier. In the event Mr. Chilek's employment is terminated
without cause upon a change of control, he is entitled to receive a lump sum
payment upon such termination equal to the greater of: 200% of his then-current
base salary plus 200% of any annual incentive compensation for the prior year,
or 100% of his then-current base salary plus 100% of his annual incentive
compensation for the remainder of the initial term or any additional term. The
agreement also contains covenants with respect to confidential information as
well as a restrictive covenant which generally prevents Mr. Chilek from owning a
material interest in or being employed by or affiliated with competitors of the
Company during his term of employment and for a period of one year thereafter.

The Company entered into an employment agreement with Edward R. Miersch,
Senior Vice President and Chief Operating Officer, in May 1996 which was amended
and restated in October 1997. The employment agreement expires in June 1999 and
automatically renews for successive one-year terms unless either party elects
not to renew. The agreement provides for a base salary of $200,000 and that Mr.
Miersch will be included in any bonus system, pool or incentive compensation
plan for senior executives of the Company that may be implemented by the Board.
In addition, the agreement provides for a grant to Mr. Miersch under the 1995
Company Option Plan of options to purchase 103,315 shares of Common Stock at an
exercise price of $0.49 per share, which options are intended to be ISOs and
become exercisable in three equal installments upon each of the first three
anniversaries of the first day of Mr. Miersch's employment with

57
<PAGE>

the Company, provided that, in the event of any consolidation, merger or the
sale or transfer of substantially all of the assets of the Company to another
corporation in which the Company is not the surviving entity, any remaining
options shall be exercisable in full whether or not the right to exercise such
options has accrued. In the event Mr. Miersch's employment is terminated for
reasons other than his death, disability or for cause, or if the Company elects
not to renew his employment for any additional term, then the Company shall
continue to pay Mr. Miersch his then-current base salary for the greater of six
months or the remainder of the initial term or any additional term, or until
such time as he commences other full-time employment, whichever occurs earlier.
In the event Mr. Miersch's employment is terminated without cause upon a change
of control, he is entitled to receive a lump sum payment upon such termination
equal to the greater of: 200% of his then-current base salary plus 200% of any
annual incentive compensation for the prior year, or 100% of his then-current
base salary plus 100% of his annual incentive compensation for the remainder of
the initial term or any additional term. The agreement also contains covenants
with respect to confidential information as well as a restrictive covenant which
generally prevents Mr. Miersch from owning a material interest in or being
employed by or affiliated with competitors of the Company during his term of
employment and for a period of one year thereafter.

The Company entered into an employment agreement with Warren D. Barratt,
Senior Vice President, Treasurer and Chief Financial Officer, in August 1996
which was amended and restated in October 1997. The employment agreement expires
in September 1999 and automatically renews for successive one-year terms unless
either party elects not to renew. The agreement provides for a base salary of
$125,000 and two initial bonuses of $25,000 and that Mr. Barratt will be
included in any bonus system, pool or incentive compensation plan for senior
executives of the Company that may be implemented by the Board. In addition, the
agreement provides for a grant to Mr. Barratt under the 1995 Company Option Plan
of options to purchase 103,315 shares of Common Stock at an exercise price of
$1.00 per share, which options are intended to be ISOs and become exercisable in
three equal installments upon each of the first three anniversaries of the first
day of Mr. Barratt's employment with the Company, provided that, in the event of
any consolidation, merger or the sale or transfer of substantially all of the
assets of the Company to another corporation in which the Company is not the
surviving entity, any remaining options shall be exercisable in full whether or
not the right to exercise such options has accrued. In the event Mr. Barratt's
employment is terminated for reasons other than his death, disability or for
cause, or if the Company elects not to renew his employment for any additional
term, then the Company shall continue to pay Mr. Barratt his then-current base
salary for the greater of six months or the remainder of the initial term or any
additional term, or until such time as he commences other full-time employment,
whichever occurs earlier. In the event Mr. Barratt's employment is terminated
without cause upon a change of control, he is entitled to receive a lump sum
payment upon such termination equal to the greater of: 200% of his then-current
base salary plus 200% of any annual incentive compensation for the prior year,
or 100% of his then-current base salary plus 100% of his annual incentive
compensation for the remainder of the initial term or any additional term. The
agreement also contains covenants with respect to confidential information as
well as a restrictive covenant which generally prevents Mr. Barratt from owning
a material interest in or being employed by or affiliated with competitors of
the Company during his term of employment and for a period of one year
thereafter.

The Company entered into an employment agreement with John M. Hogan, Vice
President and General Counsel, in September 1996 which was amended and restated
in October 1997. The employment agreement expires in October 1999 and
automatically renews for successive one-year terms unless either party elects
not to renew. The agreement provides for a base salary of $125,000 and that Mr.
Hogan will be included in any bonus system, pool or incentive compensation plan
for senior executives of the Company that may be implemented by the Board. In
addition, the agreement provides for a grant to Mr. Hogan under the 1995 Company
Option Plan of options to purchase 52,500 shares of Common Stock at an exercise
price of $1.00 per share, which options are intended to be ISOs and become
exercisable in three equal installments upon each of the first three
anniversaries of the first day of Mr. Hogan's employment with the Company,
provided that, in the event of any consolidation, merger or the sale or transfer
of substantially all of the assets of the Company to another corporation in
which the Company is not the surviving entity, any remaining options shall be
exercisable in full whether or not the right to exercise such options has
accrued. In the event Mr. Hogan's employment is terminated for reasons other
than his death, disability or for cause, or if the Company elects not to renew
his employment for any additional term, then the Company shall continue to pay
Mr. Hogan his

58
<PAGE>

then-current base salary for the greater of six months or the remainder of the
initial term or any additional term, or until such time as he commences other
full-time employment, whichever occurs earlier. In the event Mr. Hogan's
employment is terminated without cause upon a change of control, he is entitled
to receive a lump sum payment upon such termination equal to the greater of:
100% of his then-current base salary plus 100% of any annual incentive
compensation for the prior year, or 100% of his then-current base salary plus
100% of his annual incentive compensation for the remainder of the initial term
or any additional term. The agreement also contains covenants with respect to
confidential information as well as a restrictive covenant which generally
prevents Mr. Hogan from owning a material interest in or being employed by or
affiliated with competitors of the Company during his term of employment and for
a period of one year thereafter.

STOCK INCENTIVE PLANS

Stock Incentive Plan

Under the Company's 1997 Stock Incentive Plan (the "Stock Incentive Plan"),
a variety of awards, including Options, stock appreciation rights and restricted
and unrestricted stock grants may be made to the Company's employees, officers,
directors, affiliates, consultants and advisors who are expected to contribute
to the Company's future growth and success. The Company has reserved 1,250,000
shares of Common Stock for issuance under the Stock Incentive Plan.
Notwithstanding the foregoing, under the terms of the Stock Incentive Plan,
Options to acquire more than 250,000 shares of Common Stock may not be granted
to any individual optionee during any one fiscal year of the Company.
Approximately 400 individuals are currently eligible to receive grants or awards
under the Stock Incentive Plan. The Compensation Committee will administer the
Stock Incentive Plan and determine the price and other terms upon which awards
shall be made. Options may be granted either in the form of ISOs or
non-statutory stock Options. The option exercise price of ISOs may not be less
than the fair market value of the Common Stock on the date of the grant. While
the Company currently anticipates that most grants under the Stock Incentive
Plan will consist of Options, the Company may grant stock appreciation rights,
which represent rights to receive any excess in value of shares of Common Stock
over the exercise price; restricted stock awards, which entitle recipients to
acquire shares of Common Stock, subject to the right of the Company to
repurchase all or a part of such shares at their purchase price in the event
that the conditions specified in the award are not satisfied; or unrestricted
stock awards, which represent grants of shares to participants free of any
restrictions under the Stock Incentive Plan. Options or other awards that are
granted under the Stock Incentive Plan but expire unexercised are available for
future grants. The Company has committed to grant options to purchase 70,750
shares of Common Stock to date under the Stock Incentive Plan. It is expected
that, prior to the completion of the Offering, additional Options to purchase
approximately 30,000 shares of Common Stock will be granted under the Stock
Incentive Plan to the employees, officers and directors of the Company with an
exercise equal price to the initial public offering price and a three-year
vesting schedule. It is not anticipated that any stock appreciation right or
restricted or unrestricted stock grants will be made under the Stock Incentive
Plan prior to the completion of the Offering.

Under the terms of the Stock Incentive Plan, if a "Change of Control"
(which is defined as including certain changes in the ownership or corporate
structure of the Company, as well as a liquidation of the Company or any other
event that may be defined by the Company's Board of Directors as constituting a
Change of Control) occurs, the Compensation Committee (or such other committee
as may be charged with responsibility for administration of the Stock Incentive
Plan) has the right to take whatever actions are deemed to be necessary or
desirable with respect to any outstanding Options (which actions may be taken on
a case by case basis), including, without limitation, the acceleration of the
expiration or termination of the Options (to a date no earlier than thirty days
after notice is given to the optionees affected) and the acceleration of the
exercisability of any outstanding Options.

In general, no income is recognized by an optionee on the grant of an
Option. On the exercise of an Option, the excess of the fair market value of the
shares acquired over the option exercise price paid for the shares (the
"spread") is recognized as income if the option is a non-statutory option. If
the Option is an ISO, the spread will be taken into account as income for
purposes of the federal alternative minimum tax, but not for purposes of the
regular federal income tax. The Company generally is allowed a deduction for
federal

59
<PAGE>

income tax purposes equal to the income recognized by an optionee on exercise of
a non-statutory Option (subject to applicable limitations on deductibility of
compensation expenses, including the limitations imposed under Section 162(m) of
the Code), but is allowed no deduction with respect to the exercise of an ISO.

If an optionee exercises an ISO and holds the shares acquired beyond a
required holding period (which ends on the later of two years after the date the
ISO was granted or one year after the shares were acquired), the optionee will
recognize capital gain (or loss) on the disposition of the shares determined by
reference to the optionee's purchase price. The tax liability, if any,
attributable to such a subsequent disposition will depend, in part, on the
optionee's holding period. The maximum tax liability on capital gains with
respect to property that has been held more than 18 months is 20%. If an
optionee exercises an ISO and sells without satisfying the applicable holding
period (a "disqualifying disposition"), the sale will result in ordinary
compensation income equal to the excess of the amount realized over the price
paid for the shares. The Company will be allowed a deduction equal to the amount
of ordinary income recognized by the optionee on a disqualifying disposition.

If shares which are acquired on exercise of a non-statutory Option are
subject to any restrictions that would be treated as creating a risk of
forfeiture that is "substantial," in the absence of a special election by the
optionee under Section 83(b) of the Code, the tax treatment described above will
vary, as the income to the optionee (and the deduction to the Company) will be
determined as of the date the substantial risk of forfeiture lapses.

Section 162(m) of the Code set limits on the deductibility of compensation
in excess of $1,000,000 paid by publicly held companies to certain "covered"
employees (the "million dollar cap"). It is anticipated that compensation
expense attributable to the exercise of non-statutory options granted under the
Stock Incentive Plan will be exempt from these limitations pursuant to certain
exemptions contained in Treasury Regulations promulgated by the IRS.

1995 Company Option Plan and 1995 Affiliate Option Plan

In 1995, the Company adopted the 1995 Company Option Plan and the 1995
Affiliate Option Plan. An aggregate of 2,090,059 Options (1,930,059 ISOs and
160,000 non-statutory stock Options) have been granted under the 1995 Company
Option Plan, of which 205,315 have been canceled, 15,000 have been exercised and
1,869,744 remain outstanding. An aggregate of 187,500 non-statutory stock
Options have been granted under the 1995 Affiliate Option Plan, of which 25,000
have been canceled and 162,500 remain outstanding. All such Options were granted
with a 10-year term and with an exercise price equal to the fair market value of
the Common Stock as determined by the Board of Directors at the date of grant.
The 1995 Company Option Plan and the 1995 Affiliate Option Plan have been
amended to provide that no additional Options may be granted pursuant to such
plans.

60
<PAGE>

CERTAIN TRANSACTIONS

Thomas J. Keane, Chairman, President and Chief Executive Officer of the
Company, has received shares of Common Stock in exchange for services rendered
to the Company as follows: in July 1994, he received 1,020,000 shares, and in
February 1995, he received 1,774,518 shares.

Daniel Promislo, a director of the Company, has received shares of Common
Stock in exchange for services rendered to the Company as follows: in September
1994, he received 30,000 shares; in February 1995, he received 52,194 shares; in
November 1995, he received 205,479 shares; and in July 1996, he received 25,000
shares.

From the Company's inception through January 1995, TJK Holdings Inc., a
corporation owned by Mr. Keane, made advances to the Company in the aggregate
amount of $262,000, of which amount $90,000 was repaid during 1995 and remains
outstanding and $172,000 bears interest at an annual rate of 6%.

In February 1995, the Company issued shares of Series A Preferred Stock to
Edison Venture Fund III, L.P. ("Edison") and NEPA Venture Fund II, L.P.
("NEPA"), each of which owns beneficially more than five percent of the
outstanding Common Stock of the Company, as follows: to Edison, 856,164 shares
of Series A Preferred Stock for a purchase price of $1,249,999; and to NEPA,
513,699 shares of Series A Preferred Stock for a purchase price of $750,001.
Each outstanding share of Series A Preferred Stock will be converted into three
shares of Common Stock upon completion of the Offering. See "Description of
Capital Stock."

In February 1996, William P. Ferretti purchased 205,479 shares of Common
Stock for $100,000. In July 1996, Edward R. Miersch purchased 408,163 shares of
Common Stock for $200,000.

In December 1996, the Company issued shares of Series B Preferred Stock and
Common Stock Warrants to Keystone Venture IV, L.P. ("Keystone"), which owns
beneficially more than five percent of the outstanding Common Stock of the
Company, and to Edison and NEPA as follows: to Keystone, 396,825 shares of
Series B Preferred Stock and 79,365 Common Stock Warrants for an aggregate
purchase price of $1,250,000; to Edison, 128,968 shares of Series B Preferred
Stock and 25,794 Common Stock Warrants for an aggregate purchase price of
$406,250; and to NEPA, 109,127 shares of Series B Preferred Stock and 21,825
Common Stock Warrants for an aggregate purchase price of $343,750. Each
outstanding share of Series B Preferred Stock will be converted into one share
of Common Stock upon completion of the Offering, subject to adjustment if the
Price to Public in the Offering is less than $9.45, which could result in the
issuance of additional shares of Common Stock upon such conversion. See
"Description of Capital Stock."

In February 1997, the Company issued shares of Series B Preferred Stock and
Common Stock Warrants to various investors, including 31,746 shares of Series B
Preferred Stock for a purchase price of $99,500 and 6,349 Common Stock Warrants
for a purchase price of $500 to Mr. Keane; and 317,460 shares of Series B
Preferred Stock for a purchase price of $995,000 and 63,492 Common Stock
Warrants for a purchase price of $5,000 to Dominion Fund IV ("Dominion"), which
owns beneficially more than five percent of the outstanding Common Stock of the
Company.

In April 1997, Dominion made a loan to the Company in the aggregate
principal amount of $2,000,000, bearing interest at an annual rate of 12%, which
remains outstanding and will be repaid in full upon completion of the Offering
from proceeds of the Offering. See "Use of Proceeds." In connection with the
loan, the Company granted to Dominion a security interest in all of the
Company's assets. Also, in connection with such loan, the Company issued to
Dominion a Series B Warrant to purchase 266,667 shares of Series B Preferred
Stock at an exercise price of $3.15 per share, which Series B Warrant expires
four years from the date of completion of the Offering and converts to a Common
Stock Warrant to purchase a like number of shares of Common Stock, subject to
adjustment if the Price to Public in the Offering is less than $9.45 upon
completion of the Offering. Series B Warrants will become Common Stock Warrants
to purchase an equal number of shares of Common Stock upon completion of the
Offering. See "Description of Capital Stock" and "Use of Proceeds."

In September 1997, certain shareholders of the Company made bridge loans to
the Company in the following respective principal amounts: Dominion, $1,500,000;
Keystone, $150,000; Edison, $125,000; NEPA, $125,000; and Mr. Keane, $100,000.
Such loans remain outstanding and bear interest at an annual rate of 10%,

61
<PAGE>

and will be repaid upon completion of the Offering from proceeds of the
Offering. See "Use of Proceeds." In connection with such loans, the Company
issued to Dominion a Series B Warrant to purchase 166,667 shares of Series B
Preferred Stock at an exercise price of $3.15 per share and Series B Warrants to
purchase shares of Series B Preferred Stock at an exercise price of $____ per
share (45% of the Price to Public) to the other lenders in the following
amounts: Keystone, 16,667 shares; Edison, 13,889 shares; NEPA, 13,889 shares;
and Mr. Keane, 11,111 shares. All of such Series B Warrants expire four years
from the date of completion of the Offering and convert to Common Stock Warrants
to purchase a like number of shares of Common Stock, subject, in the case of the
Series B Warrant issued to Dominion, to adjustment if the Price to Public in the
Offering is less than $9.45, upon completion of the Offering. Such loans shall
be repaid upon completion of the Offering with the proceeds of the Offering. See
"Description of Capital Stock" and "Use of Proceeds."

In January 1998, Dominion made a loan to the Company in the principal
amount of $800,000, bearing interest at a rate of 8% per annum, which principal
amount and $2,104 of accrued interest were repaid by the Company in January 1998
with a payment of $502,140 in cash and the issuance of shares of Series C
Preferred Stock described below. In connection with the repayment of such loan,
the Company issued to Dominion Common Stock Warrants to purchase 38,555 shares
of Common Stock at an exercise price of $4.15 per share, subject to
anti-dilution and other adjustments, which Common Stock Warrants expire January
16, 2008.

In January 1998, the Company issued shares of Series C Preferred Stock and
Common Stock Warrants to Capital Ventures International ("CVI"), which owns
beneficially more than five percent of the outstanding Common Stock of the
Company, and to Dominion, Keystone, Edison, NEPA and Mr. Keane, as follows: to
CVI, 722,892 shares of Series C Preferred Stock and 200,000 Common Stock
Warrants for an aggregate purchase price of $3,000,000; to Dominion, 72,289
shares of Series C Preferred Stock and 20,000 Common Stock Warrants for an
aggregate purchase price of $300,000; to Keystone, 60,241 shares of Series C
Preferred Stock and 16,667 Common Stock Warrants for an aggregate purchase price
of $250,000; to Edison, 54,217 shares of Series C Preferred Stock and 15,000
Common Stock Warrants for an aggregate purchase price of $225,000; to NEPA,
48,193 shares of Series C Preferred Stock and 13,333 Common Stock Warrants for
an aggregate purchase price of $200,000; and to Mr. Keane, 24,096 shares of
Series C Preferred Stock and 6,667 Common Stock Warrants for an aggregate
purchase price of $100,000. Each outstanding share of Series C Preferred Stock
will be converted into one share of Common Stock upon completion of the
Offering, subject to anti-dilution and other adjustments. See "Description of
Capital Stock." Each of such Common Stock Warrants expires on December 31, 2000
and allows the holder to purchase a like number of shares of Common Stock at an
exercise price of $4.15 per share, subject to anti-dilution and other
adjustments.

The Company, Mr. Keane, Dominion, Edison, Keystone and NEPA and certain
other holders of the Series A Preferred Stock and Series B Preferred Stock and
the Warrants are parties to an Amended and Restated Registration Rights
Agreement dated as of December 31, 1996, as amended (the "Series A and B
Registration Rights Agreement"), to provide for the registration under the
Securities Act of the shares of Common Stock issuable upon conversion of the
Series A Preferred Stock and Series B Preferred Stock and exercise of the
Warrants issued in connection therewith (the "Underlying Shares") owned by such
shareholders. The Series A and B Registration Rights Agreement provides that the
holders of at least 40% of the Underlying Shares may demand registration of at
least 20% of the Underlying Shares originally issued ("Demand Registration").
The Company is required to effect a total of two Demand Registrations. In
connection with any Demand Registration, the Company and Mr. Keane, for their
own accounts, may include shares of Common Stock in any such registration,
subject to reduction by a managing underwriter if such inclusion would adversely
affect the marketing of the shares to be included in the Demand Registration.
The Series A and B Registration Rights Agreement also provides for incidental
registration of the Underlying Shares with respect to any registrations of
Common Stock undertaken by the Company (other than registrations on Forms S-4
and S-8 and registrations for the benefit of holders of Series C Preferred
Stock). The Series A and B Registration Rights Agreement provides the holders of
Underlying Shares the right to register their shares on Form S-3 if and when the
Company becomes eligible to use such form. The costs to register shares will be
borne by the Company, except for underwriting discounts and commissions. The
Series A and B Registration Rights Agreement also requires the Company to
indemnify each selling shareholder for violations of certain securities laws in
connection with a registration that results in losses to the selling

62
<PAGE>

shareholder, unless a violation is caused by such shareholder. In turn, the
selling shareholders must indemnify the Company for losses due to any violation
of securities laws by them in the registration process.

The Company and the holders of the shares of Series C Preferred Stock are
parties to a Registration Rights Agreement dated as of January 16, 1998 (the
"Series C Registration Rights Agreement" and, together with the Series A and B
Registration Rights Agreement, the "Registration Rights Agreements"), to provide
for the registration under the Securities Act of the shares of Common Stock
issuable upon conversion of the Series C Preferred Stock and the exercise of the
Warrants issued in connection therewith (collectively, the "Series C Underlying
Shares") owned by such shareholders. The Series C Registration Rights Agreement
provides that the holders of at least 40% of the Series C Underlying Shares may
demand registration of any amount of the Series C Underlying Shares 90 days
following the effective date of the registration statement of which this
prospectus is a part, in which event the Company is obligated to cause a
registration statement to become effective within 90 days after such demand. The
Series C Registration Rights Agreement provides that, in the event of a breach
by the Company of its obligation to cause a registration statement to become and
remain effective, in addition to other remedies, the Company must pay liquidated
damages in the amount of approximately $90,000 per month (pro-rated for partial
months) during the term of any breach. The Series C Registration Rights
Agreement also provides for incidental registration of the Series C Underlying
Shares with respect to any registration of Common Stock undertaken by the
Company (other than registrations on Forms S-4 and S-8), and contains certain
other provisions similar to those in the Series A and B Registration Rights
Agreement.

Mr. Promislo is currently Managing Director of Wolf, Block, Schorr and
Solis-Cohen LLP, which provides legal services to the Company.

63
<PAGE>

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding the ownership
of the Common Stock as of January 28, 1998 as adjusted to reflect the sale of
shares offered pursuant to this Prospectus, by (i) each of the Company's Named
Executive Officers and directors; (ii) all of the Company's executive officers
and directors as a group; and (iii) each person known to the Company to own more
than five percent of the outstanding shares of Common Stock.

<TABLE>
<CAPTION>
PERCENT OF OUTSTANDING
NUMBER OF SHARES SHARES
BENEFICIALLY OWNED ------------------------------
PRIOR TO THE PRIOR TO THE AFTER THE
NAME OF BENEFICIAL OWNER OFFERING OFFERING OFFERING
- ------------------------ ------------------ ------------ ---------
<S> <C> <C> <C>
Thomas J. Keane(1)................................. 2,874,487 26.0
Edward R. Miersch(2)............................... 422,601 4.0
Martin G. Chilek(3)................................ 68,876 *
Warren D. Barratt(4)............................... 34,438 *
John M. Hogan(5)................................... 17,500 *
Kerry J. Dale(6)................................... 0 --
William P. Ferretti(7)............................. 205,479 1.9
Gustav H. Koven, III(8)............................ 0 --
Daniel Promislo(9)................................. 282,673 2.6
Edison Venture Fund III, L.P.(10).................. 2,806,360 25.4
NEPA Venture Fund II, L.P.(11)..................... 1,747,464 15.8
Keystone Venture IV, L.P.(12)...................... 569,765 5.2
Dominion Fund IV(13)............................... 945,130 8.5
Capital Ventures International(14)................. 922,892 8.3
All executive officers and
directors as a group (14 persons)(15)............ 4,158,929 37.6
</TABLE>

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

(1) Includes currently exercisable Warrants to purchase 6,349 shares at an
exercise price of $3.15 per share, 11,111 shares at an exercise price of
$____ per share and 6,667 shares at an exercise price of $4.15 per share;
also includes 173,000 shares owned by Mr. Keane which may be acquired from
Mr. Keane by certain lenders, at their election, in satisfaction of
outstanding loans to Mr. Keane. Mr. Keane's address is care of the Company,
220 Commerce Drive, Fort Washington, PA 19034

(2) Includes options to purchase 34,438 shares currently exercisable at an
exercise price of $0.49 per share. Mr. Miersch's address is care of the
Company, 220 Commerce Drive, Fort Washington, PA 19034.

(3) Consists of options to purchase 68,876 shares currently exercisable at an
exercise price of $0.49 per share. Mr. Chilek's address is care of the
Company, 220 Commerce Drive, Fort Washington, PA 19034.

(4) Consists of options to purchase 34,438 shares currently exercisable at an
exercise price of $1.00 per share. Mr. Barratt's address is care of the
Company, 220 Commerce Drive, Fort Washington, PA 19034.

(5) Consists of options to purchase 17,500 shares currently exercisable at an
exercise price of $1.00 per share. Mr. Hogan's address is care of the
Company, 220 Commerce Drive, Fort Washington, PA 19034.

(6) Does not include 457,066 shares and currently exercisable Warrants to
purchase 79,365 shares at an exercise price of $3.15 per share, 16,667
shares at an exercise price of $____ per share and 16,667 shares at an
exercise price of $4.15 per share owned by Keystone, of which Mr. Dale is
an officer of the general partner of the general partner. Mr. Dale's
address is care of Keystone Venture Capital Management Company, 1601 Market
Street, Philadelphia, PA 19103.

(7) Does not include 1,698,417 shares and currently exercisable Warrants to
purchase 21,825 shares at an exercise price of $3.15 per share, 13,889
shares at an exercise price of $____ per share and 13,333 shares

64
<PAGE>

at an exercise price of $4.15 per share. owned by NEPA, of which Mr.
Ferretti is a limited partner of the general partner. Mr. Ferretti's
address is care of Mid-Atlantic Venture Funds, 125 Goodman Drive,
Bethlehem, PA 18015.

(8) Does not include 2,751,677 shares and currently exercisable Warrants to
purchase 25,794 shares at an exercise price of $3.15 per share, 13,889
shares at an exercise price of $____ per share and 13,333 shares at an
exercise price of $4.15 per share owned by Edison, of which Mr. Koven is a
general partner of the general partner. Mr. Koven's address is care of
Edison Venture Fund, 997 Lenox Drive #3, Lawrenceville, NJ 08648.

(9) Does not include 30,000 shares owned by Mr. Promislo's children, all of
whom are adults. Mr. Promislo disclaims any beneficial ownership with
respect to such shares. The address for Mr. Promislo is care of Wolf,
Block, Schorr and Solis-Cohen LLP, 111 S. 15th Street, Twelfth Floor,
Packard Building, Philadelphia, PA 19102.

(10) Includes currently exercisable Warrants to purchase 25,794 shares at an
exercise price of $3.15 per share, 13,889 shares at an exercise price of
$______ per share and 15,000 shares at an exercise price of $4.15 per
share. The address for Edison is care of Edison Venture Fund, 997 Lenox
Drive #3, Lawrenceville, NJ 08648.

(11) Includes currently exercisable Warrants to purchase 21,825 shares at an
exercise price of $3.15 per share, 13,889 shares at an exercise price of
$______ per share and 13,333 shares at an exercise price of $4.15 per
share. The address for NEPA is care of Mid-Atlantic Venture Funds, 125
Goodman Drive, Bethlehem, PA 18015.

(12) Includes currently exercisable Warrants to purchase 79,365 shares at an
exercise price of $3.15 per share, 16,667 shares at an exercise price of
$____ per share and 16,667 shares at an exercise price of $4.15 per share.
The address for Keystone is care of Keystone Venture Capital Management
Company, 1601 Market Street, Philadelphia, PA 19103.

(13) Includes currently exercisable Warrants to purchase 496,826 shares at an
exercise price of $3.15 per share and currently exercisable Warrants to
purchase 58,555 shares at an exercise price of $4.15 per share. The address
for Dominion is care of Dominion Ventures, Inc., 44 Montgomery Street,
Suite 4200, San Francisco, CA 94104.

(14) Includes currently exercisable Warrants to purchase 200,000 shares of
Common Stock at an exercise price of $4.15 per share. The address for CVI
is c/o Heights Capital Management, Inc., 425 California Street, Suite 1100,
San Francisco, CA 94104.

(15) See notes one through nine above. Also includes currently exercisable
Options to purchase 103,315 shares at an exercise price of $0.49 per share,
95,271 shares at an exercise price of $1.00 per share and 104,949 shares at
an exercise price of $3.15 per share.

65
<PAGE>

DESCRIPTION OF CAPITAL STOCK

Upon completion of the Offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, and 5,000,000 shares
of undesignated Preferred Stock, par value $.01 ("Preferred Stock"). Of the
Common Stock, 3,951,581 shares are issued and outstanding, an aggregate of
1,250,000 shares are reserved for issuance pursuant to outstanding Options which
may be issued pursuant to the Stock Incentive Plan, 1,869,774 shares are
reserved for issuance pursuant to the exercise of outstanding Options issued
pursuant to the 1995 Company Option Plan, and 162,500 shares are reserved for
issuance pursuant to the exercise of outstanding Options issued pursuant to the
1995 Affiliate Option Plan. In addition, the Company has issued Common Stock
Warrants to purchase 43,573 shares of Common Stock at an exercise price of $0.01
per share, which Common Stock Warrants are currently exercisable and expire
November 25, 2004; Common Stock Warrants to purchase 249,206 shares of Common
Stock at an exercise price of $3.15 per share, which Common Stock Warrants are
currently exercisable and expire on December 31, 1999; Common Stock Warrants to
purchase 410,222 shares of Common Stock at an exercise price of $4.15 per share,
which Common Stock Warrants are currently exercisable and expire on December 31,
2000 (as to 371,667 Warrants) and January 16, 2008 (as to 38,555 Warrants);
Series B Warrants to purchase 433,334 shares of Series B Preferred Stock which
upon completion of the Offering will convert into Warrants to purchase the same
number of shares of Common Stock at an exercise price of $3.15 per share, which
Warrants expire four years from the date of completion of the Offering; and
Series B Warrants to purchase 55,556 shares of Series B Preferred Stock which
upon completion of the Offering will convert into Warrants to purchase the same
number of shares of Common Stock at an exercise price of $____ per share (45% of
the Price to Public), which warrants expire four years from the date of
completion of the Offering. The Company has also issued and outstanding
convertible promissory notes (the "Convertible Notes") in an aggregate principal
amount of $19,349,284 which upon completion of the Offering are convertible at
the election of the holders into an aggregate of up to _____ shares of Common
Stock at a conversion price of $_____ per share. No shares of the undesignated
Preferred Stock are issued and outstanding.

The Company's authorized capital stock also currently includes 1,506,849
shares of Series A Preferred Stock, all of which are outstanding as of the date
of this Prospectus, 1,830,158 shares of Series B Preferred Stock, of which
1,246,031 shares are outstanding as of the date of this Prospectus and 1,445,784
shares of Series C Preferred Stock, 1,343,374 of which are outstanding as of the
date of this Prospectus. All of such outstanding shares will be converted into
an aggregate of 7,109,952 shares of Common Stock, subject to adjustment as
described below, on the completion of this Offering, and no additional shares of
Convertible Preferred Stock will be issued. The holders of the Convertible
Preferred Stock shall be entitled to receive, out of funds legally available
therefor, when and if declared by the Board of Directors, cumulative quarterly
dividends at the rate per annum of $.073 per share of Series A Preferred Stock,
$.1575 per share of Series B Preferred Stock and $.20 per share of Series C
Preferred Stock. Upon the completion of the Offering, the 1,506,849 issued and
outstanding shares of Series A Preferred Stock will be converted, at a
three-to-one ratio, into 4,520,547 shares of Common Stock, and each of the
1,246,031 issued and outstanding shares of Series B Preferred Stock will be
converted into one share of Common Stock, provided that if, the Price to Public
is less than $9.45, each share of Series B Preferred Stock will be converted
into a number of shares of Common Stock equal to a number determined by dividing
$3.15 by an amount equal to one-third of the Price to Public. Upon completion of
the Offering, each of the 1,343,374 issued and outstanding shares of Series C
Preferred Stock will be converted into one share of Common Stock, subject to
adjustments if the Offering is not completed by specified dates and certain
financing is not obtained by the Company. In addition, upon completion of the
Offering, outstanding warrants to purchase 433,334 shares of Series B Preferred
Stock at an exercise price of $3.15 per share (subject to adjustment as
described above if the Price to Public is less than $9.45) and outstanding
warrants to purchase 55,556 shares of Series B Preferred Stock at an exercise
price of $____ per share (45% of the Price to Public) will be converted into
Warrants to purchase the same number of shares of Common Stock at the same
respective exercise price, which Warrants are currently exercisable and will
expire four years from the date of the completion of the Offering. After the
completion of the Offering, no shares of Convertible Preferred Stock will be
outstanding or authorized for issuance.

The holders of Common Stock are entitled to receive dividends, when and as
declared by the Board of Directors, out of funds legally available therefor and
to receive pro rata the assets of the Company legally available for distribution
upon liquidation after payment to holders of Preferred Stock having a
liquidation preference over the Common Stock. In addition, holders of Common
Stock are entitled to one vote per share on all matters voted on by shareholders
generally, including the election of directors, and do not have

66
<PAGE>

cumulative voting rights. There are no preemptive, conversion or redemption
rights applicable to the shares of the Common Stock. The currently outstanding
shares of Common Stock are, and the shares of Common Stock offered by the
Company hereby, upon issuance by the Company against receipt of the purchase
price therefor, will be, fully paid and non-assessable.

The Board of Directors is empowered by the Company's Amended and Restated
Articles of Incorporation, as amended (the "Articles"), to designate and issue
from time to time one or more classes or series of Preferred Stock without any
action of the shareholders. The Board of Directors may fix and determine the
relative rights, preferences and limitations of each class or series so
authorized. The issuance of, or the ability to issue, the Preferred Stock could
adversely affect the voting power and other rights of the holders of the Common
Stock or could have the effect of decreasing the market price of the Common
Stock or of discouraging or making difficult any attempt by a person or group to
obtain control of the Company, including any attempt involving a bid for the
Common Stock at a premium over the then market price. The Company does not have
any present intention to issue any Preferred Stock.

Subchapter F of Chapter 25 of the Pennsylvania Business Corporation Law of
1988, as amended (the "BCL"), which is applicable to the Company, may have an
anti-takeover effect and may delay, defer or prevent a tender offer or takeover
attempt that a shareholder might consider in his or her best interest, including
those attempts that might result in a premium over the market price for the
shares held by shareholders. In general, Subchapter F of Chapter 25 of the BCL
delays for five years and imposes conditions upon "business combinations"
between an "interested shareholder" and the Company, unless prior approval of
the Board of Directors is given. The term "business combination" is defined
broadly to include various merger, consolidation, division, exchange or sale
transactions, including transactions utilizing the Company's assets for purchase
price amortization or refinancing purposes. An "interested shareholder," in
general, would be a beneficial owner of shares entitling that person to cast at
least 20% of the votes that all shareholders would be entitled to cast in an
election of directors of the Company.

As permitted by the BCL, the Articles and the By-laws provide that a
director shall not be personally liable, as such, for monetary damages for any
action taken, or any failure to take any action, unless the director breaches or
fails to perform the duties of his or her office under the BCL, and the breach
or failure to perform constitutes self-dealing, willful misconduct or
recklessness. These provisions, however, do not apply to the responsibility or
liability of a director pursuant to any criminal statute, or to the liability of
a director for the payment of taxes pursuant to local, Pennsylvania or federal
law. These provisions offer persons who serve on the Board of Directors of the
Company protection against awards of monetary damages for negligence in the
performance of their duties. The Articles and the By-laws also provide that
every person who is or was a director or executive officer of the Company, or of
any corporation which he or she served as such at the request of the Company,
shall be indemnified by the Company to the fullest extent permitted by law
against all expenses and liabilities reasonably incurred by or imposed upon him
or her, in connection with any proceeding to which he or she may be made, or
threatened to be made, a party, or in which he or she may become involved by
reason of his or her being or having been a director or executive officer of the
Company, or of such other corporation, whether or not he or she is a director or
executive officer of the Company or such other corporation at the time the
expenses or liabilities are incurred, and that such directors and executive
officers are entitled to the advancement of expenses in connection therewith.

The By-laws provide that shareholders seeking to nominate candidates for
election as directors at an annual or a special meeting of shareholders must
provide timely notice thereof in writing. To be timely, a stockholder's notice
must be delivered to, or mailed and received at, the principal executive offices
of the Company (i) in the case of an annual meeting that is called for a date
that is within 30 days before or after the anniversary date of the immediately
preceding annual meeting of shareholders, not less than 120 days prior to the
anniversary of the date that the Company's proxy statement was released to
stockholders in connection with the immediately preceding annual meeting, and
(ii) in the case of an annual meeting that is called for a date that is not
within 30 days before or after the anniversary date of the immediately preceding
annual meeting, or in the case of a special meeting of shareholders called for
the purpose of electing directors, not later than the close of business on the
tenth day following the day on which notice of the date of the meeting was
mailed or public disclosure of the date of the meeting was made, whichever
occurs first. The By-laws also specify certain requirements for a shareholder's
notice to be in proper written form.

Application has been made to have the Common Stock approved for quotation
on The Nasdaq Stock Market's National Market under the symbol "USPY."

The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company.

67
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Prior to the Offering, there has been no public market for the Common
Stock. Sales of substantial amounts of shares of the Common Stock in the public
market following the Offering could adversely affect the market price of the
Common Stock, making it more difficult for the Company to sell equity securities
in the future at a time and price which it deems appropriate.

Upon the completion of the Offering, assuming no exercise of the
overallotment option, the Company will have outstanding _______ shares of Common
Stock. Of these shares, the _______ shares of Common Stock sold in the Offering
will be freely tradeable without restriction or registration under the
Securities Act. The remaining 11,061,533 shares of Common Stock outstanding as
of the date of this Prospectus are "restricted securities" as defined by Rule
144, 68.2% of which are held by the Principal Shareholders and would be able to
be sold in accordance with the provisions of Rule 144 beginning 90 days after
the date of this Prospectus.

In general, under Rule 144, a person who has beneficially owned shares for
at least one year, including an "affiliate," as that term is defined in the
Securities Act, is entitled to sell within any three-month period a number of
shares that does not exceed the greater of one percent of the then outstanding
shares of Common Stock (approximately _______ shares after the completion of the
Offering), or the average weekly trading volume during the four calendar weeks
preceding filing of notice of such sale, subject to certain requirements
concerning availability of public information, manner and notice of sale.

In addition, affiliates must comply with the restrictions and requirements
of Rule 144, other than the one-year holding period requirements, in order to
sell shares of Common Stock which are not restricted securities. Under Rule
144(k), a person who is not an affiliate and has not been an affiliate for at
least three months prior to the sale and who has beneficially owned restricted
shares for at least a two year holding period may resell such shares without
compliance with the foregoing restrictions.

Upon the completion of the Offering, it is expected that there will be
2,102,994 shares of Common Stock issuable upon exercise of outstanding Options
granted under the Stock Incentive Plans, 350,668 of which are currently vested
and the remainder of which will vest in various installments through July 2002.
Pursuant to the Underwriting Agreement, the Company has agreed not to file, at
any time prior to the date 180 days from the date of this Prospectus, a
registration statement under the Securities Act covering any of such shares. The
Company, however, intends to file a registration statement or statements
covering a portion of these shares within one year from the date of this
Prospectus. The shares registered under such registration statement will be
available for resale in the open market upon the exercise of vested options,
subject to Rule 144 volume limitations applicable to affiliates.

In addition, upon completion of the Offering, there will be outstanding
Warrants to purchase an aggregate of 43,573 shares of Common Stock at an
exercise price of $0.01 per share, 682,540 shares of Common Stock at an exercise
price of $3.15 per share 410,222 shares of Common Stock at an exercise price of
$4.15 per share and 55,556 shares of Common Stock at an exercise price of $____
per share (45% of the Price to Public), which warrants are presently exercisable
and expire four years from the date of completion of the Offering. In addition,
upon completion of the Offering, the Company will have outstanding Convertible
Notes in the aggregate principal amount of $20.0 million, which Convertible
Notes are convertible at the election of the holders into an aggregate of up to
_______ shares of Common Stock at a conversion price of $____ per share.

The Company, each executive officer and director and certain other
shareholders of the Company have agreed that, for a period of 180 days after the
date of this Prospectus (the "Lock-Up Period"), they will not, without the prior
written consent of BancAmerica Robertson Stephens, issue, offer to sell,
contract to sell or otherwise sell, dispose of, loan, pledge or grant any rights
with respect to any shares of Common Stock, any options or warrants to purchase
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for or that represent the right to receive any shares of Common
Stock or enter into any swap, option, future, forward or other agreement that
transfers, in whole or in part, the economic consequences of ownership of the
Common Stock, except in certain limited circumstances.

68
<PAGE>

For a description of the Registration Rights Agreements, which provide
registration rights, including rights to Demand Registration, to holders of the
Convertible Preferred Stock and Warrants, see "Certain Transactions."

UNDERWRITING

The Underwriters named below, acting through their representatives
BancAmerica Robertson Stephens, NationsBanc Montgomery Securities LLC and Piper
Jaffray Inc. (the "Representatives"), have severally agreed, subject to the
terms and conditions of the Underwriting Agreement, to purchase from the Company
the number of shares of Common Stock set forth opposite their names below. The
Underwriters are committed to purchase and pay for all such shares, if any are
purchased.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
BancAmerica Robertson Stephens..............................
NationsBanc Montgomery Securities LLC.......................
Piper Jaffray Inc...........................................
Total..................................................
-------
</TABLE>

The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the price to the public set
forth on the cover page of this Prospectus and to certain dealers at such price
less a concession of not more than $0.__ per share, of which $0.__ may be
reallowed to other dealers. After the public offering, the public offering
price, concession and reallowance to dealers may be reduced by the
Representatives. No such reduction shall change the amount of proceeds to be
received by the Company as set forth on the cover page of this Prospectus.

The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to _______
additional shares of Common Stock at the same price per share as the Company
will receive for the _______ shares that the Underwriters have agreed to
purchase. To the extent that the Underwriters exercise such option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares that the number of shares of Common Stock
to be purchased by it shown in the above table represents as a percentage of the
______ shares offered hereby. If purchased, such additional shares will be sold
by the Underwriters on the same terms as those on which the _______ shares are
being sold.

The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the Underwriting Agreement.

Each executive officer and director and certain other shareholders of the
Company have agreed with the Representatives for the Lock-Up Period not to offer
to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant
any rights with respect to any shares of Common Stock, any options or warrants
to purchase any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for or that represent the right to receive any
shares of Common Stock or enter into any swap, option, future, forward or other
agreement that transfers, in whole or in part, the economic consequences of
ownership of the Common Stock owned as of the date of this Prospectus or
thereafter acquired directly by such holders for with respect to which they have
or hereafter acquire the power of disposition, without the prior written consent
of BancAmerica Robertson Stephens, subject to certain limited exceptions.
However, BancAmerica Robertson Stephens may, in its sole discretion at any time
or from time to time, without notice, release all or any portion of the
securities subject to the lock-up agreements. In addition, the Company has
agreed that during the Lock-Up Period, it will not, without the prior written
consent of BancAmerica Robertson Stephens, issue, sell, contract to sell or
otherwise dispose of any shares of Common Stock, any options or warrants to
purchase any shares of Common Stock or any securities convertible into,
exercisable for or exchangeable for or represent the right to receive any shares
of Common Stock or enter into any swap, option, future, forward or other
agreement that transfers, in whole or in part, the economic consequences of
ownership of the Common Stock, other than the issuance of Common Stock upon the
exercise of outstanding Options and Warrants, the

69
<PAGE>

Company's issuance of Options under existing Stock Incentive Plans and certain
other conditions. See "Shares Eligible For Future Sale."

Prior to the Offering, there has been no public market for the shares of
Common Stock. The initial public offering price will be negotiated among the
Company and the Representatives. Among the factors to be considered in
determining the initial public offering price of the Common Stock, in addition
to prevailing market conditions, will be the Company's historical performance,
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuation of companies in related businesses.

The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority in excess of 5% of the number of shares of
Common Stock offered hereby.

The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters for
the purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with the offering. A "penalty bid" is an arrangement
permitting the Representatives to reclaim the selling concession otherwise
accruing to an Underwriter or syndicate member in connection with the Offering
if the Common Stock originally sold by such Underwriter or syndicate member is
purchased by the Representatives in a syndicate covering transaction and has
therefore not been effectively placed by such Underwriter or syndicate member.
The Representatives have advised the Company that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.

From time to time in the ordinary course of their respective business,
certain of the Underwriters and their affiliates have engaged in and may in the
future engage in commercial and/or investment banking transactions with the
Company and its affiliates.

LEGAL MATTERS

Wolf, Block, Schorr and Solis-Cohen LLP, Philadelphia, Pennsylvania, has
rendered an opinion that the shares of Common Stock offered hereby will be
legally issued, fully paid and non-assessable. Daniel Promislo, a director of
the Company, is the Managing Director of Wolf, Block, Schorr and Solis-Cohen LLP
and presently owns 282,673 shares of Common Stock. Cozen and O'Connor P.C.,
Philadelphia, Pennsylvania, has reviewed the matters set forth under "Risk
Factors -- Government Regulation" and " -- Risks Related to Relationships with
Third Party Payors" and "Business -- Reimbursement for Services" and " --
Government Regulation." Certain legal matters relating to the Offering will be
passed upon for the Underwriters by Shearman & Sterling.

EXPERTS

The audited financial statements included in this Prospectus and elsewhere
in the Registration Statement, to the extent and for the periods indicated on
their reports, have been audited by Arthur Andersen LLP, independent public
accountants, and are included herein in reliance upon the authority of said firm
as experts in giving said reports.

70
<PAGE>

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission"), 450 Fifth Street, N.W., Washington, D.C. 20549, a Registration
Statement on Form S-1 under the Securities Act with respect to the shares of
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
shares of Common Stock, reference is hereby made to the Registration Statement
and the exhibits and schedules filed as a part thereof. Statements contained in
this Prospectus as to the contents of any contract or other document are not
necessarily complete and, in each instance, reference is made to the copy of
such contract or document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. The
Registration Statement, including exhibits and schedules thereto, may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's Regional Offices located at Seven World Trade Center, Suite 1300,
New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials may also be obtained at
prescribed rates from the Public Reference Section of the Commission,
Washington, D.C. 20549. In addition, registration statements and certain other
filings made with the Commission through its Electronic Data Gathering, Analysis
and Retrieval ("EDGAR") systems are publicly available through the Commission's
site on the Internet's World Wide Web, located at http://www.sec.gov. The
Registration Statement, including all exhibits thereto and amendments thereof,
has been filed with the Commission through EDGAR.

<PAGE>
U.S. PHYSICIANS, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<C> <S> <C>
I. U.S. PHYSICIANS, INC.

Report of Independent Public Accountants.................... F-7
Consolidated Balance Sheets as of December 31, 1995 and 1996
and September 30, 1997.................................... F-8
Consolidated Statements of Operations for the period from
inception (July 14, 1994) to December 31, 1994, for the
years ended December 31, 1995 and 1996, and for the nine
months ended September 30, 1996 (unaudited) and 1997...... F-9
Consolidated Statements of Convertible Preferred Stock
Securities, Common Stock to be Issued on Conditional
Affiliation Transactions and Shareholders' Equity
(Deficit) for the period from inception (July 14, 1994) to
December 31, 1994, for the years ended December 31, 1995
and 1996, and for the nine months ended September 30,
1997...................................................... F-10
Consolidated Statements of Cash Flows for the period from
inception (July 14, 1994) to December 31, 1994, for the
years ended December 31, 1995 and 1996, and for the nine
months ended September 30, 1996 (unaudited) and 1997...... F-11
Notes to Consolidated Financial Statements.................. F-12

II. CONDITIONAL AFFILIATION TRANSACTIONS
-- ENTERED INTO PRIOR TO SEPTEMBER 30, 1997

BONE AND JOINT SPECIALISTS OF WESTERN PENNSYLVANIA, PC

Report of Independent Public Accountants.................... F-30
Balance Sheets as of December 31, 1995 and 1996 and
September 30, 1997 (unaudited)............................ F-31
Statements of Operations for the years ended December 31,
1994, 1995 and 1996, and for the nine months ended
September 30, 1996 and 1997 (unaudited)................... F-32
Statements of Owners' Equity for the years ended December
31, 1994, 1995 and 1996, and for the nine months ended
September 30, 1997 (unaudited)............................ F-33
Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996, and for the nine months ended
September 30, 1996 and 1997 (unaudited)................... F-34
Notes to Financial Statements............................... F-35

BRYN MAWR UROLOGY ASSOCIATES, INC.

Report of Independent Public Accountants.................... F-40
Balance Sheets as of December 31, 1995 and 1996 and
September 30, 1997 (unaudited)............................ F-41
Statements of Operations and Retained Earnings for the years
ended December 31, 1994, 1995 and 1996, and for the nine
months ended September 30, 1996 and 1997 (unaudited)...... F-42
Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996, and for the nine months ended
September 30, 1996 and 1997 (unaudited)................... F-43
Notes to Financial Statements............................... F-44

CENTER FOR WOMEN'S HEALTHCARE, PC AND CORAZON G. GEMIL,
M.D., PC

Report of Independent Public Accountants.................... F-49
Combined Balance Sheets as of December 31, 1995 and 1996 and
September 30, 1997 (unaudited)............................ F-50
Combined Statements of Operations and Owner's Deficit for
the years ended December 31, 1994, 1995 and 1996, and for
the nine months ended September 30, 1996 and 1997
(unaudited)............................................... F-51
Combined Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996, and for the nine months
ended September 30, 1996 and 1997 (unaudited)............. F-52
Notes to Combined Financial Statements...................... F-53
</TABLE>

F-1
<PAGE>

<TABLE>
<C> <S> <C>
CESARE, METZGER, COYLE AND HENZES, INC.
Report of Independent Public Accountants.................... F-57
Balance Sheets as of December 31, 1995 and 1996 and
September 30, 1997 (unaudited)............................ F-58
Statements of Operations for the years ended December 31,
1994, 1995 and 1996, and for the nine months ended
September 30, 1996 and 1997 (unaudited)................... F-59
Statements of Shareholders' Equity for the years ended
December 31, 1994, 1995 and 1996, and for the nine months
ended September 30, 1997 (unaudited)...................... F-60
Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996, and for the nine months ended
September 30, 1996 and 1997 (unaudited)................... F-61
Notes to Financial Statements............................... F-62

FAMILY CARE OF LANCASTER, INC.

Report of Independent Public Accountants.................... F-67
Balance Sheets as of December 31, 1995 and 1996 and
September 30, 1997 (unaudited)............................ F-68
Statements of Operations and Retained Earnings for the years
ended December 31, 1994, 1995 and 1996, and for the nine
months ended September 30, 1996 and 1997 (unaudited)...... F-69
Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996, and for the nine months ended
September 30, 1996 and 1997 (unaudited)................... F-70
Notes to Financial Statements............................... F-71

NETWORK MEDICAL, INC.

Report of Independent Public Accountants.................... F-77
Balance Sheets as of September 30, 1996 and 1997............ F-78
Statements of Operations for the years ended September 30,
1995, 1996 and 1997....................................... F-79
Statements of Shareholders' Deficit for the years ended
September 30, 1995, 1996 and 1997......................... F-80
Statements of Cash Flows for the years ended September 30,
1995, 1996 and 1997....................................... F-81
Notes to Financial Statements............................... F-82

ORTHOPAEDIC AND SPORTS MEDICINE SPECIALISTS OF THE MAIN
LINE, INC.

Report of Independent Public Accountants.................... F-86
Balance Sheets as of December 31, 1995 and 1996 and
September 30, 1997 (unaudited)............................ F-87
Statements of Operations and Retained Earnings for the years
ended December 31, 1994, 1995 and 1996, and for the nine
months ended September 30, 1996 and 1997 (unaudited)...... F-88
Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996, and for the nine months ended
September 30, 1996 and 1997 (unaudited)................... F-89
Notes to Financial Statements............................... F-90

ORTHOPAEDIC SURGERY AND SPORTS MEDICINE, INC.

Report of Independent Public Accountants.................... F-95
Balance Sheets as of December 31, 1995 and 1996 and
September 30, 1997 (unaudited)............................ F-96
Statements of Operations and Retained Earnings for the years
ended December 31, 1994, 1995 and 1996, and for the nine
months ended September 30, 1996 and 1997 (unaudited)...... F-97
Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996, and for the nine months ended
September 30, 1996 and 1997 (unaudited)................... F-98
Notes to Financial Statements............................... F-99
</TABLE>

F-2
<PAGE>

<TABLE>
<C> <S> <C>
RJK MEDICAL ASSOCIATES, LTD.

Report of Independent Public Accountants.................... F-103
Balance Sheets as of December 31, 1996 and September 30,
1997 (unaudited).......................................... F-104
Statements of Operations and Retained Earnings for the year
ended December 31, 1996, and for the nine months ended
September 30, 1996 and 1997 (unaudited)................... F-105
Statements of Cash Flows for the year ended December 31,
1996, and for the nine months ended September 30, 1996 and
1997 (unaudited).......................................... F-106
Notes to Financial Statements............................... F-107

SOUTH SHORE ORTHOPEDICS, PA

Report of Independent Public Accountants.................... F-111
Balance Sheets as of March 31, 1996 and 1997 and September
30, 1997 (unaudited)...................................... F-112
Statements of Operations and Retained Earnings for the year
ended March 31, 1995, 1996 and 1997, and for the six
months ended September 30, 1996 and 1997 (unaudited)...... F-113
Statements of Cash Flows for the years ended March 31, 1995,
1996 and 1997, and for the six months ended September 30,
1996 and 1997 (unaudited)................................. F-114
Notes to Financial Statements............................... F-115

SPORTS MEDICINE AND REHABILITATION CENTER, INC. AND RELATED
COMPANIES

Report of Independent Public Accountants.................... F-119
Combined Balance Sheets as of December 31, 1995 and 1996 and
September 30, 1997 (unaudited)............................ F-120
Combined Statements of Operations for the years ended
December 31, 1994, 1995 and 1996, and for the nine months
ended September 30, 1996 and 1997 (unaudited)............. F-121
Combined Statements of Owner's Equity for the years ended
December 31, 1993, 1994, 1995 and 1996, and for the nine
months ended September 30, 1997 (unaudited)............... F-122
Combined Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996, and for the nine months
ended September 30, 1996 and 1997 (unaudited)............. F-123
Notes to Combined Financial Statements...................... F-124

STEEL VALLEY ORTHOPEDIC ASSOCIATION, INC.

Report of Independent Public Accountants.................... F-128
Balance Sheets as of February 29, 1996, February 28, 1997
and September 30, 1997 (unaudited)........................ F-129
Statements of Operations and Retained Earnings for the years
ended February 28, 1995, February 29, 1996 and February
28, 1997, and for the seven months ended September 30,
1996 and 1997 (unaudited)................................. F-130
Statements of Cash Flows for the years ended February 28,
1995, February 29, 1996 and February 28, 1997, and for the
seven months ended September 30, 1996 and 1997
(unaudited)............................................... F-131
Notes to Financial Statements............................... F-132
</TABLE>

F-3
<PAGE>

<TABLE>
<C> <S> <C>
VALLEY FORGE FACIAL PLASTIC SURGERY/EAR,
NOSE & THROAT ASSOCIATES, LTD.

Report of Independent Public Accountants.................... F-137
Balance Sheets as of September 30, 1996 and 1997............ F-138
Statements of Operations and Retained Earnings for the years
ended September 30, 1995, 1996 and 1997................... F-139
Statements of Cash Flows for the years ended September 30,
1995, 1996 and 1997....................................... F-140
Notes to Financial Statements............................... F-141

III. CONDITIONAL AFFILIATION TRANSACTIONS
-- ENTERED INTO AFTER SEPTEMBER 30, 1997

LEHIGH VALLEY ORTHOPEDICS, INC.

Report of Independent Public Accountants.................... F-145
Balance Sheets as of December 31, 1995 and 1996 and
September 30, 1997 (unaudited)............................ F-146
Statements of Operations and Retained Earnings for the years
ended December 31, 1994, 1995 and 1996, and for the nine
months ended September 30, 1996 and 1997
(unaudited)............................................... F-147
Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996, and for the nine months ended
September 30, 1996 and 1997 (unaudited)................... F-148
Notes to Financial Statements............................... F-149

IV. INITIAL PUBLIC OFFERING ("IPO") AFFILIATION TRANSACTIONS

ASSOCIATES IN UROLOGY, PC

Report of Independent Public Accountants.................... F-154
Balance Sheets as of December 31, 1995 and 1996 and
September 30, 1997........................................ F-155
Statements of Operations and Retained Earnings for the year
ended December 31, 1995 and 1996, and for the nine months
ended September 30, 1996 (unaudited) and 1997............. F-156
Statements of Cash Flows for the year ended December 31,
1995 and 1996, and for the nine months ended September 30,
1996 (unaudited) and 1997................................. F-157
Notes to Financial Statements............................... F-158

CURAMED, LLC

Report of Independent Public Accountants.................... F-162
Combined Balance Sheets as of December 31, 1995 and 1996 and
September 30, 1997........................................ F-163
Combined Statements of Operations for the years ended
December 31, 1995 and 1996, and for the nine months ended
September 30, 1996 (unaudited) and 1997................... F-164
Combined Statements of Owners' Equity for the years ended
December 31, 1995 and 1996 and the nine months ended
September 30, 1997........................................ F-165
Combined Statements of Cash Flows for the years ended
December 31, 1995 and 1996, and for the nine months ended
September 30, 1996 (unaudited) and 1997................... F-166
Notes to Combined Financial Statements...................... F-167
</TABLE>

F-4
<PAGE>

<TABLE>
<C> <S> <C>
DENNIS JAMES BONNER, M.D., LTD.

Report of Independent Public Accountants.................... F-170
Balance Sheets as of December 31, 1995 and 1996 and
September 30, 1997 (unaudited)............................ F-171
Statements of Operations and Retained Earnings for the years
ended December 31, 1994, 1995 and 1996, and for the nine
months ended September 30, 1996 and 1997 (unaudited)...... F-172
Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996, and for the nine months ended
September 30, 1996 and 1997 (unaudited)................... F-173
Notes to Financial Statements............................... F-174

NEIL CHESEN, M.D., PC

Report of Independent Public Accountants.................... F-178
Balance Sheets as of December 31, 1996 and September 30,
1997...................................................... F-179
Statements of Operations and Retained Earnings for the year
ended December 31, 1996, and for the nine months ended
September 30, 1996 (unaudited) and 1997................... F-180
Statements of Cash Flows for the year ended December 31,
1996 and for the nine months ended September 30, 1996
(unaudited) and 1997...................................... F-181
Notes to Financial Statements............................... F-182

NORTHERN OPHTHALMIC ASSOCIATES, INC.

Report of Independent Public Accountants.................... F-186
Balance Sheets as of November 30, 1995 and 1996, and
September 30, 1997 (unaudited)............................ F-187
Statements of Operations and Retained Earnings for the years
ended November 30, 1994, 1995 and 1996, and for the ten
months ended September 30, 1996 and 1997 (unaudited)...... F-188
Statements of Cash Flows for the years ended November 30,
1994, 1995 and 1996, and for the ten months ended
September 30, 1996 and 1997 (unaudited)................... F-189
Notes to Financial Statements............................... F-190

NORTHWEST ORTHOPEDIC ASSOCIATES, PC

Report of Independent Public Accountants.................... F-194
Balance Sheets as of December 31, 1995 and 1996 and
September 30, 1997 (unaudited)............................ F-195
Statements of Operations and Retained Earnings for the years
ended December 31, 1994, 1995 and 1996, and for the nine
months ended September 30, 1996 and 1997
(unaudited)............................................... F-196
Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996, and for the nine months ended
September 30, 1996 and 1997 (unaudited)................... F-197
Notes to Financial Statements............................... F-198

ONCOLOGY AND HEMATOLOGY ASSOCIATES, PA

Report of Independent Public Accountants.................... F-201
Balance Sheets as of December 31, 1995 and 1996 and
September 30, 1997 (unaudited)............................ F-202
Statements of Operations and Retained Earnings for the years
ended December 31, 1994, 1995 and 1996, and for the nine
months ended September 30, 1996 and 1997
(unaudited)............................................... F-203
Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996, and for the nine months ended
September 30, 1996 and 1997 (unaudited)................... F-204
Notes to Financial Statements............................... F-205
</TABLE>

F-5
<PAGE>

<TABLE>
<C> <S> <C>
ORTHOPEDIC ASSOCIATES OF PITTSBURGH, INC.

Report of Independent Public Accountants.................... F-209
Balance Sheets as of September 30, 1996 and 1997............ F-210
Statements of Operations for the years ended September 30,
1995, 1996 and 1997....................................... F-211
Statements of Shareholders' Equity for the years ended
September 30, 1995, 1996 and 1997......................... F-212
Statements of Cash Flows for the years ended September 30,
1995, 1996 and 1997....................................... F-213
Notes to Financial Statements............................... F-214

PHILADELPHIA URO-GYNECOLOGIC ASSOCIATES, PC

Report of Independent Public Accountants.................... F-218
Balance Sheets as of December 31, 1996 and September 30,
1997 (unaudited).......................................... F-219
Statements of Operations and Accumulated Deficit for the
year ended December 31, 1996, and for the nine months
ended September 30, 1996 and 1997 (unaudited)............. F-220
Statements of Cash Flows for the year ended December 31,
1996 and for the nine months ended September 30, 1996 and
1997 (unaudited).......................................... F-221
Notes to Financial Statements............................... F-222

PRIMARY CARE & REHABILITATION, PC
AND MEDICAL CONSULTANTS, PC

Report of Independent Public Accountants.................... F-225
Combined Balance Sheets as of December 31, 1995 and 1996 and
September 30, 1997........................................ F-226
Combined Statements of Operations and Owner's Equity for the
years ended December 31, 1995 and 1996, and for the nine
months ended September 30, 1996 (unaudited) and 1997...... F-227
Combined Statements of Cash Flows for the years ended
December 31, 1995 and 1996, and for the nine months ended
September 30, 1996 (unaudited) and 1997................... F-228
Notes to Combined Financial Statements...................... F-229

VINELAND OBSTETRICAL AND GYNECOLOGICAL, PA

Report of Independent Public Accountants.................... F-233
Balance Sheets as of December 31, 1995 and 1996 and
September 30, 1997 (unaudited)............................ F-234
Statements of Operations and Retained Earnings for the years
ended December 31, 1994, 1995 and 1996, and for the nine
months ended September 30, 1996 and 1997 (unaudited)...... F-235
Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996, and for the nine months ended
September 30, 1996 and 1997 (unaudited)................... F-236
Notes to Financial Statements............................... F-237
</TABLE>

F-6
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To U.S. PHYSICIANS, Inc.:

We have audited the accompanying consolidated balance sheets of U.S. PHYSICIANS,
Inc. (a Pennsylvania corporation) and subsidiaries as of December 31, 1995 and
1996 and September 30, 1997, and the related consolidated statements of
operations, convertible preferred stock securities, common stock to be issued on
conditional affiliation transactions and shareholders' equity (deficit) and cash
flows for the period from inception (July 14, 1994) to December 31, 1994, for
the years ended December 31, 1995 and 1996 and the nine months ended September
30, 1997. 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 financial position of U.S. PHYSICIANS, Inc. and
subsidiaries as of December 31, 1995 and 1996 and September 30, 1997, and the
results of their operations and their cash flows for the period from inception
to December 31, 1994, for the years ended December 31, 1995 and 1996 and the
nine months ended September 30, 1997, in conformity with generally accepted
accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As of September 30, 1997 the Company
had a working capital deficit and an accumulated deficit of $18,176,453 and
$6,603,985, respectively. Further, the Company's growth strategy will require
substantial additional funds to finance acquisitions, for working capital and
for capital expenditures. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management plans in regard to
these matters are described in Note 2. The accompanying financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classifications of liabilities that might
be necessary should the Company be unable to continue as a going concern.

ARTHUR ANDERSEN LLP

Philadelphia, Pa.
January 23, 1998

F-7

<PAGE>

U.S. PHYSICIANS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, SHAREHOLDERS'
-------------------------- SEPTEMBER 30, EQUITY
1995 1996 1997 (NOTE 3)
----------- ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents...................... $ 1,394,698 $ 2,066,089 $ 1,832,770
Accounts receivable............................ -- -- 217,656
Due from Conditional Affiliation
Transactions................................. -- -- 483,789
Prepaid expenses and other..................... 19,818 47,824 657,066
----------- ----------- -----------
Total current assets....................... 1,414,516 2,113,913 3,191,281
Property and equipment, net...................... 13,601 251,177 1,538,840
Investment in Conditional Affiliation
Transactions................................... -- 223,806 36,872,207
Intangible assets, net........................... -- -- 127,362
Deferred offering costs.......................... -- -- 209,316
Other assets..................................... 64,277 42,835 351,003
----------- ----------- -----------
$ 1,492,394 $ 2,631,731 $42,290,009
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabilities:
Current portion of notes payable on Conditional
Affiliation Transactions..................... $ -- $ -- $16,728,782
Current portion of long-term debt.............. -- -- 733,418
Accounts payable............................... 103,442 682,468 537,724
Accrued expenses............................... 85,853 734,656 2,797,011
Due to Conditional Affiliation Transactions.... -- -- 570,799
----------- ----------- -----------
Total current liabilities.................. 189,295 1,417,124 21,367,734
----------- ----------- -----------
Notes payable on Conditional Affiliation
Transactions................................... -- -- 7,467,275
----------- ----------- -----------
Other long-term debt............................. 172,000 172,000 2,770,066
----------- ----------- -----------
Other long-term liabilities...................... -- 309,241 247,425
----------- ----------- -----------
Series A convertible preferred stock............. 2,158,774 2,169,082 2,176,812
----------- ----------- -----------
Series B convertible preferred stock............. -- 1,917,752 3,801,641
----------- ----------- -----------
Series B convertible preferred stock warrants.... -- -- 851,000
----------- ----------- -----------
Common Stock to be issued on Conditional
Affiliation Transactions....................... -- -- 9,643,096
----------- ----------- -----------
Commitments and contingencies (Note 14)
Shareholders' equity (deficit):
Common Stock, $.01 par value; 25,000,000 shares
authorized; 3,205,479, 3,919,121, 3,936,581
and ______ shares issued and outstanding..... 32,055 39,191 39,366
Additional paid-in capital..................... -- 380,114 433,579
Common Stock warrants.......................... -- 33,500 96,000
Accumulated deficit............................ (1,059,730) (3,806,273) (6,603,985)
----------- ----------- ----------- -----------
Total shareholders' equity (deficit)....... (1,027,675) (3,353,468) (6,035,040)
----------- ----------- ----------- -----------
$ 1,492,394 $ 2,631,731 $42,290,009
=========== =========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements.

F-8

<PAGE>

U.S. PHYSICIANS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FROM
INCEPTION
(JULY 14, 1994) YEAR ENDED NINE MONTHS ENDED
TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ----------------------- -------------------------
1994 1995 1996 1996 1997
--------------- --------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues:
Net patient revenues..................... $ -- $ -- $ -- $ -- $ 207,785
Management fees from Conditional
Affiliation Transactions............... -- -- -- -- 2,000,223
Other revenues........................... -- -- 69,833 39,000 282,086
--------- --------- ----------- ----------- -----------
-- -- 69,833 39,000 2,490,094
Cost of revenues........................... -- -- -- -- 704,483
--------- --------- ----------- ----------- -----------
Gross profit............................... -- -- 69,833 39,000 1,785,611
--------- --------- ----------- ----------- -----------
Operating expenses:
General and administrative............... 321,232 691,740 2,295,202 1,354,677 3,759,586
Depreciation and amortization............ -- 2,525 5,881 4,236 105,790
--------- --------- ----------- ----------- -----------
Loss from operations................. (321,232) (694,265) (2,231,250) (1,319,913) (2,079,765)
Loss in terminated joint venture........... -- 56,012 528,829 522,994 --
Interest income............................ -- (80,597) (36,714) (33,208) (69,102)
Interest expense........................... -- 10,688 12,870 7,685 750,853
--------- --------- ----------- ----------- -----------
Net loss................................... $(321,232) $(680,368) $(2,736,235) $(1,817,384) $(2,761,516)
========= ========= =========== =========== ===========
Pro forma net loss per common share (Note
3) (unaudited)........................... $ $
=========== ===========
Shares used in computing pro forma net loss
per common share (Note 3) (unaudited)....
=========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements.

F-9
<PAGE>

U.S. PHYSICIANS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK SECURITIES, COMMON STOCK
TO BE ISSUED ON CONDITIONAL AFFILIATION TRANSACTIONS
AND SHAREHOLDERS' EQUITY (DEFICIT)

CONVERTIBLE PREFERRED STOCK SECURITIES
--------------------------------------------------------------------
SERIES A SERIES B SERIES B WARRANTS
---------------------- ---------------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ---------- --------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>

Date of Inception, July 14, 1994........... -- $ -- -- $ -- -- $ --
Issuance of Common Stock for services
rendered................................ -- -- -- -- -- --
Net loss.................................. -- -- -- -- -- --
--------- ---------- --------- ---------- ------- --------

Balance at December 31, 1994............... -- -- -- -- -- --
Sale of Series A Preferred Stock.......... 1,506,849 2,148,466 -- -- -- --
Accretion of redemption premium on Series
A Preferred Stock....................... -- 10,308 -- -- -- --
Issuance of Common Stock for services
rendered................................ -- -- -- -- -- --
Purchase of Common Stock.................. -- -- -- -- -- --
Net loss.................................. -- -- -- -- -- --
--------- ---------- --------- ---------- ------- --------

Balance at December 31, 1995............... 1,506,849 2,158,774 -- -- -- --
Sale of Series B Preferred Stock.......... -- -- 634,920 1,917,752 -- --
Accretion of redemption premium on Series
A Preferred Stock....................... -- 10,308 -- -- -- --
Sale of Common Stock...................... -- -- -- -- -- --
Issuance of Common Stock for services
rendered................................ -- -- -- -- -- --
Net loss.................................. -- -- -- -- -- --
--------- ---------- --------- ---------- ------- --------
Balance at December 31, 1996............... 1,506,849 2,169,082 634,920 1,917,752 -- --
Sale of Series B Preferred Stock.......... -- -- 611,111 1,855,423 -- --
Accretion of redemption premium on Series
A Preferred Stock....................... -- 7,730 -- -- -- --
Accretion of redemption premium on Series
B Preferred Stock....................... -- -- -- 28,466 -- --
Sale of Common Stock...................... -- -- -- -- -- --
Issuance of Series B Warrants............. -- -- -- -- 488,890 851,000
Common Stock to be issued in connection
with Conditional Affiliation
Transactions............................ -- -- -- -- -- --
Net loss.................................. -- -- -- -- -- --
--------- ---------- --------- ---------- ------- --------
Balance at September 30, 1997.............. 1,506,849 $2,176,812 1,246,031 $3,801,641 488,890 $851,000
========= ========== ========= ========== ======= ========

COMMON STOCK TO BE
ISSUED ON CONDITIONAL
AFFILIATION TRANSACTIONS
-------------------------
SHARES AMOUNT
---------- ------------
<S> <C> <C>
Date of Inception, July 14, 1994........... -- $ --
Issuance of Common Stock for services
rendered................................ -- --
Net loss.................................. -- --
--------- -----------
Balance at December 31, 1994............... -- --
Sale of Series A Preferred Stock.......... -- --
Accretion of redemption premium on Series
A Preferred Stock....................... -- --
Issuance of Common Stock for services
rendered................................ -- --
Purchase of Common Stock.................. -- --
Net loss.................................. -- --
--------- -----------
Balance at December 31, 1995............... -- --
Sale of Series B Preferred Stock.......... -- --
Accretion of redemption premium on Series
A Preferred Stock....................... -- --
Sale of Common Stock...................... -- --
Issuance of Common Stock for services
rendered................................ -- --
Net loss.................................. -- --
--------- -----------
Balance at December 31, 1996............... -- --
Sale of Series B Preferred Stock.......... -- --
Accretion of redemption premium on Series
A Preferred Stock....................... -- --
Accretion of redemption premium on Series
B Preferred Stock....................... -- --
Sale of Common Stock...................... -- --
Issuance of Series B Warrants............. -- --
Common Stock to be issued in connection
with Conditional Affiliation
Transactions............................ 9,643,096
Net loss.................................. -- --
--------- -----------
Balance at September 30, 1997.............. $ 9,643,096
========= ===========

<CAPTION>
SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------------------------------------------
COMMON STOCK TOTAL
COMMON STOCK ADDITIONAL WARRANTS SHAREHOLDERS'
------------------- PAID-IN ----------------- ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT (DEFICIT)
--------- ------- ---------- ------- ------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Date of Inception, July 14, 1994........... -- $ -- $ -- -- $ -- $ -- $ --
Issuance of Common Stock for services
rendered................................ 3,423,288 34,233 -- -- -- -- 34,233
Net loss.................................. -- -- -- -- -- (321,232) (321,232)
--------- ------- -------- ------- ------- ----------- -----------
Balance at December 31, 1994............... 3,423,288 34,233 -- -- -- (321,232) (286,999)
Sale of Series A Preferred Stock.......... -- -- -- -- -- -- --
Accretion of redemption premium on Series
A Preferred Stock....................... -- -- -- -- -- (10,308) (10,308)
Issuance of Common Stock for services
rendered................................ 205,479 2,055 97,945 -- -- -- 100,000
Purchase of Common Stock.................. (423,288) (4,233) (97,945) -- -- (47,822) (150,000)
Net loss.................................. -- -- -- -- -- (680,368) (680,368)
--------- ------- -------- ------- ------- ----------- -----------
Balance at December 31, 1995............... 3,205,479 32,055 -- -- -- (1,059,730) (1,027,675)
Sale of Series B Preferred Stock.......... -- -- -- 126,984 33,500 -- 33,500
Accretion of redemption premium on Series
A Preferred Stock....................... -- -- -- -- -- (10,308) (10,308)
Sale of Common Stock...................... 688,642 6,886 368,114 -- -- -- 375,000
Issuance of Common Stock for services
rendered................................ 25,000 250 12,000 -- -- -- 12,250
Net loss.................................. -- -- -- -- -- (2,736,235) (2,736,235)
--------- ------- -------- ------- ------- ----------- -----------
Balance at December 31, 1996............... 3,919,121 39,191 380,114 126,984 33,500 (3,806,273) (3,353,468)
Sale of Series B Preferred Stock.......... -- -- -- 122,222 62,500 -- 62,500
Accretion of redemption premium on Series
A Preferred Stock....................... -- -- -- -- -- (7,730) (7,730)
Accretion of redemption premium on Series
B Preferred Stock....................... -- -- -- -- -- (28,466) (28,466)
Sale of Common Stock...................... 17,460 175 53,465 -- -- -- 53,640
Issuance of Series B Warrants............. -- -- -- -- -- -- --
Common Stock to be issued in connection
with Conditional Affiliation
Transactions............................ -- -- -- -- -- -- --
Net loss.................................. -- -- -- -- -- (2,761,516) (2,761,516)
--------- ------- -------- ------- ------- ----------- -----------
Balance at September 30, 1997.............. 3,936,581 $39,366 $433,579 249,206 $96,000 $(6,603,985) $(6,035,040)
========= ======= ======== ======= ======= =========== ===========
</TABLE>

The accompanying notes are an integral part of theses financial statements.

F-10

<PAGE>

U.S. PHYSICIANS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FROM INCEPTION
(JULY 14, 1994) YEAR ENDED NINE MONTHS
TO DECEMBER 31, ENDED SEPTEMBER 30,
DECEMBER 31, ------------------------ -------------------------
1994 1995 1996 1996 1997
--------------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss............................ $(321,232) $ (680,368) $(2,736,235) $(1,817,384) $(2,761,516)
Adjustments to reconcile net loss to
net cash used in operating
activities--
Depreciation and amortization... -- 2,525 5,881 4,236 105,790
Amortization of debt discount... -- -- -- -- 62,300
Stock issued for services
rendered..................... 34,233 100,000 12,250 12,250 --
Loss in terminated joint
venture...................... -- 56,012 528,829 522,994 --
Loss on repurchased Conditional
Affiliation Transactions..... -- -- -- -- 264,681
Changes in assets and
liabilities--
Accounts receivable.......... -- -- -- -- (217,656)
Due from Conditional
Affiliation Transactions... -- -- -- -- (483,789)
Prepaid expenses and other... -- (19,818) (28,006) (23,948) (343,926)
Other assets................. -- -- (42,835) (29,265) (308,168)
Accounts payable............. -- 103,442 579,026 (18,613) (144,744)
Accrued expenses............. 25,000 60,853 387,786 367,439 1,387,009
Due to Conditional
Affiliation Transactions... -- -- -- -- 570,799
--------- ---------- ----------- ----------- -----------
Net cash used in operating
activities............... (261,999) (377,354) (1,293,304) (982,291) (1,869,220)
--------- ---------- ----------- ----------- -----------
Investing activities:
Purchases of property and
equipment......................... -- (16,126) (184,555) (32,577) (1,218,043)
Completed acquisitions.............. -- -- -- -- (150,000)
Cash deposits on Conditional
Affiliation Transactions.......... -- -- -- -- (2,327,499)
Investment in joint venture......... -- (120,289) (177,002) (141,775) --
--------- ---------- ----------- ----------- -----------
Net cash used in financing
activities............... -- (136,415) (361,557) (174,352) (3,695,542)
--------- ---------- ----------- ----------- -----------
Financing activities:
Proceeds from long-term debt........ 262,000 -- -- -- 3,900,000
Repayment of long-term debt......... -- (90,000) -- -- (15,630)
Repayments on notes payable on
Conditional Affiliation
Transactions...................... -- -- -- -- (366,493)
Repayments on notes payable on
repurchased Conditional
Affiliation Transactions.......... -- -- -- -- (157,997)
Net proceeds from sale of Common
Stock............................. -- -- 375,000 300,000 53,640
Repurchase of Common Stock.......... -- (150,000) -- -- --
Net proceeds from sale of Series A
Preferred Stock................... -- 2,148,466 -- -- --
Net proceeds from sale of Series B
Preferred Stock................... -- -- 1,951,252 -- 1,917,923
--------- ---------- ----------- ----------- -----------
Net cash provided by
financing activities..... 262,000 1,908,466 2,326,252 300,000 5,331,443
--------- ---------- ----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents.................... 1 1,394,697 671,391 (856,643) (233,319)
Cash and cash equivalents, beginning
of period........................... -- 1 1,394,698 1,394,698 2,066,089
--------- ---------- ----------- ----------- -----------
Cash and cash equivalents, end of
period.............................. $ 1 $1,394,698 $ 2,066,089 $ 538,055 $ 1,832,770
========= ========== =========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements.

F-11
<PAGE>

U.S. PHYSICIANS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

1. BUSINESS AND ORGANIZATION:

U.S. PHYSICIANS, Inc. (a Pennsylvania corporation) and its affiliated
professional corporations (the "Company"), is a multi-specialty physician
practice management company that, upon completion of the Initial Affiliation
Transactions (as defined below), will have practice locations in four states in
the mid-Atlantic region. The Company, primarily through affiliation agreements
with physician practices, is developing integrated, multi-specialty physician
networks in various health care service areas in the mid-Atlantic region and
surrounding states.

As of December 31, 1997, the Company and its affiliated professional
corporations had entered into Affiliation Agreements under which they have
acquired either the stock or the majority of the assets of 18 physician
practices (the "Conditional Affiliation Transactions"). In consideration, the
selling owners received a combination of cash, notes, convertible notes and
rights to receive shares of the Company's Common Stock in the future.

The Affiliation Agreements for the Conditional Affiliation Transactions
contain a repurchase provision that allows the selling owners, in the event that
an initial public offering ("IPO") has not been completed by the Company by a
specified date (the "Repurchase Date"), to repurchase the net assets of their
practice for a defined period of time by returning all of the consideration
received, excluding the nonrefundable cash consideration. The Repurchase Dates
for the 18 Conditional Affiliation Transactions are as follows: eleven occur on
May 14, 1998, five occur on March 31, 1998, and two occur on June 30, 1998. If
the selling owners exercise their rights to repurchase their practice, the
aggregate amount of the cash consideration that would be retained by the selling
owners is $2,055,499. If the selling owners do not exercise their rights to
repurchase their practice, the provision expires.

In accordance with Accounting Principles Board Opinion No. 16, "Accounting
for Business Combinations," ("APB No. 16"), the Conditional Affiliation
Transactions are not considered effective for applying purchase accounting until
either the date that the Company completes an IPO or the repurchase provision
lapses (the "Final Closing Date"). Pursuant to the Affiliation Agreements for
the period of time between the closing of the Affiliation Agreement (the
"Initial Closing Date") and the Final Closing Date, the Company is entitled to a
management fee equal to the residual net income loss earned by each practice and
is responsible for centrally managing the cash of each practice. Accordingly,
the statement of operations includes management fee revenue for the residual net
income or loss earned by the practice for the period from the Initial Closing
Date to September 30, 1997, and the balance sheet as of September 30, 1997
reflects a Due from/to Conditional Affiliation Transactions account to reflect
the net cash activity for the same period.

In addition to the Conditional Affiliation Transactions discussed above,
since January 1, 1997, the Company and its affiliated professional corporations
have entered into Affiliation Agreements to purchase 14 physician practices,
which will close upon the completion of the Company's IPO, as defined (the "IPO
Affiliation Transactions" and, with the Conditional Affiliation Transactions,
the "Initial Affiliation Transactions"). There is no interim management
agreement in place between the Company and the physician practices that are
parties to IPO Affiliation Transactions. In accordance with APB No. 16, the IPO
Affiliation Transactions are not considered effective for applying purchase
accounting until the Company completes its IPO, as defined.

Upon the date that the Company completes an IPO or the repurchase provision
lapses, the Company will account for the Initial Affiliation Transactions in
accordance with the Emerging Issues Task Force of the Financial Accounting
Standards Board Issue No. 97-2 "Application of FASB Statement No. 94,
Consolidation of All Majority-Owned Subsidiaries, and APB Opinion No. 16,
Business Combinations to Physician Practice Management Entities and Certain
Other Entities with Contractual Management Arrangements" ("EITF 97-2"). (See
Note 3 -- Principles of Consolidation.)

F-12

<PAGE>

U.S. PHYSICIANS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

1. BUSINESS AND ORGANIZATION: -- (CONTINUED)

In addition to the Initial Affiliation Transactions discussed above,
subsequent to September 30, 1997 the selling owners of three physician practices
that were acquired between January and September 1997 exercised their repurchase
provision (See Note 3).

Also, since January 1, 1997 the Company has acquired substantially all of
the assets of a medical billings and collection company and a physical therapy
practice (the "Completed Transactions"). In addition the Company has acquired a
manager of a multi-county physician contracting network which contains
substantially the same repurchase provision as the Conditional Affiliation
Transactions (the "Conditional Transaction"). On January 16, 1998, the
Repurchase Period lapsed for the Conditional Transaction (See Note 5).

2. LIQUIDITY:

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As of September 30, 1997, the Company
had a working capital deficit of $18,176,453 and an accumulated deficit of
$6,603,985. Included in the working capital deficit is $16,728,782 for the
current portion of notes payable issued on Conditional Affiliation Transactions
as of September 30, 1997. The Company has incurred losses since its inception
and is subject to those risks associated with companies in the early stages of
development. Substantial financing will be required to continue the Company's
affiliation transactions strategy and to fund operations.

The Company is currently in the process of obtaining senior debt or equity
financing in order to fund the Company's short term working capital needs and to
fund any necessary acquisition or affiliation payments pending completion of the
IPO. In addition, the Company expects to obtain a demand credit facility with a
bank to provide additional funding for future working capital needs and
affiliation transactions which will be effective with the completion of the IPO.
The Company expects that adequate financing will be available to fund the
Company's working capital needs and to fund the required acquisition payments.
However, there is no assurance that the Company will be able to obtain
sufficient debt or equity financing on favorable terms or at all. If the Company
is unable to secure adequate financing, its ability to implement its growth
strategy will be impaired and its financial condition and results of operations
are likely to be materially adversely affected.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and all wholly and beneficially owned subsidiaries including its affiliated
professional corporations.

As described in Note 1 the Conditional Transaction and the Initial
Affiliation Transactions are not considered effective for accounting purposes
until either the date that the Company completes an IPO or the repurchase
provision lapses (the "Effective Date"). Accordingly for the period of time
prior to the Effective Date, the Conditional Affiliation Transactions are
treated as Management Agreements. Under the Management Agreement the Company is
entitled to the residual net income or loss earned by the Conditional
Affiliation Transactions, other than the New York Affiliation Transaction, from
the Initial Closing Date to the Effective Date. The New York Affiliation
Transaction pays the Company an amount equal to the Company's costs plus a
percentage of such costs.

Upon the date that the Company completes an IPO or the repurchase provision
lapses, the Initial Affiliation Transactions will be accounted for in accordance
with EITF 97-2. Due to laws restricting the corporate practice of medicine in
the states in which the Company operates, simultaneous with the effective date
of the Affiliation Agreement, the physicians of the physician practice enter
into employment agreements with a single professional corporation in the state
in which they practice. There is a 40-year Management and Services Agreement
("Management Agreement") in place between the Company and the professional

F-13

<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

corporation. Through the Management Agreement, the Company has exclusive
authority over decision making relating to all major ongoing operations of the
underlying professional corporations with the exception of the professional
aspects of medical practice as required by state law. Under the Management
Agreement, the Company establishes annual operating and capital budgets for the
professional corporations and compensation guidelines for the licensed medical
professionals. In addition, the applicable professional corporation (other than
the professional corporation in New York, the "New York PC"), the officers and
directors of which are generally officers of the Company, has the contractual
right to designate, in its sole discretion, at any time, the licensed doctor who
is the owner of the capital stock of the professional corporation ("Nominee
Arrangements"). Through the Management Agreement and the Nominee Arrangements,
the Company has significant long-term financial interests in the professional
corporations, the interests in which are unilaterally saleable and transferable
by the Company and fluctuate based upon the actual performance of the operations
of the professional corporations. The Company has established an
other-than-temporary controlling financial interest in each professional
corporation (except with respect to the New York PC) and accordingly, upon
completion of the IPO or the lapse of the repurchase provision, each
professional corporation, (except the New York PC) will be consolidated with the
financial statements of the Company. The two New York Affiliation Transactions
will continue to be treated as Management Agreements.

All significant intercompany accounts and transactions have been
eliminated.

Interim Financial Statements

The consolidated financial statements for the nine months ended September
30, 1996 are unaudited, and, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results of operations for the nine months ended
September 30, 1996. The results of operations for the nine months ended
September 30, 1996, are not necessarily indicative of the results to be expected
for the entire year.

Use of Estimates

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

Cash and Cash Equivalents

The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.

Revenues

Revenues from patients, third party-payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.

Management fees from Conditional Affiliation Transactions which closed
prior to September 30, 1997 represent the residual net income or loss (after
deducting the new physicians employment agreements) of the physician practices
that are parties to the Conditional Affiliation Transactions for the period from
the Initial Closing Date to September 30, 1997. The Company is entitled to this
residual net income or loss pursuant to the Affiliation Agreements (see Notes 1
and 5) and such residual net income or loss is nonrefundable even if the
repurchase provision is exercised. Management fees from the New York Conditional
Affiliation

F-14

<PAGE>

U.S. PHYSICIANS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Transaction which closed subsequent to September 30, 1997 will equal the
Company's cost plus a percentage of such costs.

Other revenues consist of fees charged to customers for billing and
collection services provided by the Company's wholly owned subsidiary, RRI Corp.
(see Note 5).

Accounts Receivable

Accounts receivable consist primarily of receivables from third-party
payors and patients for medical services provided by physicians. Such amounts
are reduced by an allowance for contractual adjustments and doubtful accounts.
Contractual adjustments result from the differences between the rates charged by
the physicians for the services performed and the amounts allowed by the
Medicare and Medicaid programs and other public and private insurers. The
allowance for doubtful accounts is estimated based on an ongoing review of
collectibility.

Concentration of Credit Risk

The Company grants credit without collateral to its patients, most of whom
are insured under third-party payor agreements. The Company manages credit risk
with the various public and private insurance providers, as appropriate.
Allowances for doubtful accounts have been made for potential losses, when
appropriate.

Property and Equipment

Property and equipment are stated at cost. Depreciation of property and
equipment is provided using the straight-line method over the estimated useful
lives of the assets which range from three to seven years. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
lease term or estimated useful life of the assets.

Investment in Conditional Affiliation Transactions

Investment in Conditional Affiliation Transactions consists of various
external costs, including legal, accounting, and other professional services
associated with Conditional Affiliation Transactions and the consideration paid
in connection with the Conditional Affiliation Transactions which includes
$2,055,499 of nonrefundable deposits, $9,075,250 of notes, $15,487,300 of
convertible notes and $9,643,097 of Common Stock to be issued in the future (see
Note 5). Subsequent to September 30, 1997, in connection with extending the
Repurchase Date for certain Conditional Affiliation Transactions, the Company
paid additional consideration of $732,100 of notes, $1,430,165 of convertible
notes, and $72,599 of Common Stock to be issued in the future. The additional
consideration is not included in the accompanying balance sheet. Internal costs
associated with completing acquisitions have been expensed as incurred. Upon the
Final Closing Date of the Conditional Affiliation Transactions, the Investment
in Conditional Affiliation Transactions will be allocated to the fair value of
the tangible assets acquired and liabilities assumed with any excess allocated
to identifiable intangible assets.

In connection with the exercise of the repurchase provision by three
physician practices, the Company reduced the Investment in Conditional
Affiliation Transactions by the previously issued consideration consisting of
$5,888,003 in notes, $1,167,000 in convertible notes, and $4,561,670 in Common
Stock to be issued. In addition, the Company expensed $150,684 in non refundable
cash deposits and $113,997 in payments made on the notes. Such expense amounts,
net of cash received from the practices, are included in general and
administrative expenses for the nine months ended September 30, 1997.

F-15
<PAGE>

U.S. PHYSICIANS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Deferred Offering Costs

Deferred offering costs consist of external costs including legal,
accounting and other professional services which are necessary to complete the
Company's IPO. These costs will be charged against the proceeds from the IPO
upon its successful completion.

Intangible Assets

Assets and liabilities acquired in connection with business combinations
accounted for under the purchase method are recorded at their respective fair
values. The excess of the purchase price over the fair value of the tangible net
assets acquired is amortized on a straight-line basis over the estimated useful
lives of the intangible assets, which range from three to 25 years. Intangible
assets include covenants not-to-compete, patient lists and goodwill.

Subsequent to its acquisitions, the Company continually evaluates whether
later events and circumstances have occurred that indicate the remaining
estimated useful life of intangible assets may warrant revision or that the
remaining balance may not be recoverable. When factors indicate that intangible
assets should be evaluated for possible impairment, the Company uses an estimate
of the related undiscounted cash flows over the remaining life of the intangible
asset in measuring whether the intangible asset is recoverable. As of September
30, 1997, management believes that no revision to the remaining useful lives or
write-down of intangible assets is required.

Terminated Joint Venture

Prior to adopting its current physician practice management strategy, the
Company was party to a joint venture which operated a cancer rehabilitation
facility. The Company had a 50% interest in the joint venture and shared in
profits and losses equally. In connection with the joint venture termination in
1996, the Company assumed 100% of certain lease obligations totalling $401,500
and recorded certain other charges totalling $57,503.

Income Taxes

The Company records income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
Under SFAS No. 109, the liability method is used in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates and laws that are expected
to be in effect when the differences reverse. A valuation allowance is
established against deferred tax assets unless the Company believes it is more
likely than not that the benefit will be realized.

Statements of Cash Flows Information

For the period ended December 31, 1994 and the year ended December 31,
1995, no amounts were paid for taxes or interest. For the year ended December
31, 1996, and the nine months ended September 30, 1996 and 1997, the Company
paid $2,605, $0 and $73,796 in interest, respectively and no taxes were paid.

Disclosures About the Fair Value of Financial Instruments

Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" requires disclosure about the fair value of
financial instruments. Carrying amounts of all financial instruments (including
cash and cash equivalents, accounts receivable, accounts payable, accrued
liabilities, notes payable and long-term debt) approximate their fair values.

F-16
<PAGE>

U.S. PHYSICIANS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Unaudited Pro Forma Net Loss Per Common Share

Pro forma net loss per common share was calculated by dividing net loss by
the weighted average number of common shares outstanding for the respective
periods adjusted for the dilutive effect of common stock equivalents, which
consist of stock options and warrants using the treasury stock method. Pursuant
to the requirements of the Securities and Exchange Commission, Common Stock
issued by the Company during the 12 months immediately preceding the IPO, plus
the number of common equivalent shares which became issuable during the same
period pursuant to the grant of Common Stock options and warrants, have been
included in the calculation of the shares used in computing pro forma net loss
per share as if they were outstanding for all periods presented (using the
treasury stock method and an assumed IPO price of $___ per share). Pursuant to
the policy of the staff of the Securities and Exchange Commission, the
calculation of shares used in computing pro forma net loss per Common share also
includes the Series A Preferred Stock which will convert into ___________ shares
of Common Stock on consummation of the IPO contemplated in the Prospectus as if
they were converted to Common Stock on their original date of issuance. The
Series B and Series C Preferred Stock, which will convert into ____ and _______
shares, respectively, of Common Stock upon the consummation of the IPO, has been
included as outstanding for all periods presented (using the treasury stock
method and an assumed IPO price of $_____ per share) since they were issued
during the twelve months immediately preceding the IPO (see Note 9).

Unaudited Pro Forma Shareholders' Equity

Upon consummation of the proposed IPO of the Company's Common Stock, all of
the outstanding shares of the Series A, Series B and Series C Convertible
Preferred Stock will convert into Common Stock. In addition, the Series B
Convertible Preferred Stock Warrants will convert into Common Stock Warrants.
The unaudited pro forma shareholders' equity (deficit) at September 30, 1997
reflects the assumed conversion of the Series A, Series B and Series C
Convertible Preferred Stock into ________, ________ and ________ shares,
respectively, of Common Stock and the conversion of the Series B Convertible
Preferred Stock Warrants into ________ Common Stock Warrants. In addition, in
conjunction with the proposed IPO, Common Stock to be issued on Conditional
Affiliation Transactions of _________ shares will convert into Common Stock
issued and outstanding.

Recently Issued Accounting Standards

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128")
which the Company is required to adopt in its financial statements for the
quarter ended December 31, 1997. SFAS No. 128 requires dual presentation of
basic and diluted earnings per share for complex capital structures on the face
of the statement of operations. According to SFAS No. 128 basic earnings per
share, which replaces primary earnings per share, is calculated by dividing net
income available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share, which replaces
fully diluted earnings per share, reflects the potential dilution from the
exercise or conversion of securities into common stock such as options and
warrants. The adoption of this pronouncement is not expected to have a
significant impact on the Company's pro forma net loss per share reported in the
accompanying financial statements.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. SFAS No. 130 establishes standards for the reporting and display of
comprehensive income in a set of financial statements. Comprehensive income is
defined as the change in net assets of a business enterprise during a period
from transactions generated from non-owner sources. It includes all changes in
equity during a period except those resulting from investments by owners

F-17
<PAGE>

U.S. PHYSICIANS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

and distributions to owners. Management believes that the adoption of SFAS No.
130 will not have a material impact on the financial statements.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 applies to
all public companies and is effective for fiscal years beginning after December
15, 1997. SFAS No. 131 requires that business segment financial information be
reported in the financial statements utilizing the management approach. The
management approach is defined as the manner in which management organizes the
segments within the enterprise for making operating decisions and assessing
performance. Management believes that the adoption of SFAS No. 131 will not have
a material impact on the financial statements.

4. RISKS AND UNCERTAINTIES:

The Company's future results of operations involve a number of risks and
uncertainties. Factors that could cause the Company's future operating results
to vary materially from expectations include, but are not limited to, limited
operating history, integration of operations, growth strategy, limited capital
and the need for additional financing, ability to service debt, government
regulation, relationships with third party payors, provision of medical
services, dependence on information systems, dependence on Affiliated
Physicians, competition, dependence on key personnel and the realizability of
intangible assets.

5. COMPLETED AND AFFILIATION TRANSACTIONS:

Completed Transactions

On April 7, 1997, in consideration for the assumption of certain
liabilities, the Company acquired substantially all of the assets of a business
specializing in medical billings and collections for medical providers. On May
19, 1997, the Company acquired substantially all of the assets of an independent
physical therapy practice for $150,000 in cash. Both of these acquisitions have
been accounted for using the purchase method of accounting with the total
purchase price allocated to the fair value of assets and liabilities. The
results of operations of each acquisition are included in the accompanying
statement of operations from each of their respective acquisition dates.

The following table displays the noncash assets and liabilities that were
consolidated as a result of the two acquisitions:

<TABLE>
<S> <C>
Noncash assets (liabilities)
Property and equipment.................................. $ 37,732
Intangible assets....................................... 129,083
Accounts payable and accrued expenses................... (16,815)
--------
Cash paid................................................. $150,000
========
</TABLE>

F-18

<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

5. COMPLETED AND AFFILIATION TRANSACTIONS: -- (CONTINUED)

The following unaudited pro forma summary presents the results of
operations of the Company as if the acquisitions had occurred on January 1,
1996. The pro forma information does not purport to be indicative of the results
that would have been attained if the operations had actually been combined
during the periods presented and is not necessarily indicative of operating
results to be expected in the future.

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Net revenues...................................... $1,362,180 $2,814,664
Pro forma net loss................................ (2,751,054) (2,973,920)
Pro forma net loss per share......................
</TABLE>

In January 1997, the Company acquired the manager of a multi-county
physician contracting network (the "Conditional Transaction") which contained
substantially the same repurchase provisions as the Conditional Affiliation
Transactions. On January 16, 1998, the Repurchase Period lapsed for the
Conditional Transaction. As a result, in accordance with APB No. 16, this
Affiliation Transaction will be considered effective for applying purchase
accounting with the Company acquiring substantially all of the assets and
assuming certain liabilities in consideration for a note payable of $250,000 and
a convertible note payable of $275,000 (see Note 7).

Conditional and IPO Affiliation Transactions

During the nine months ended September 30, 1997, the Company and its
affiliated professional corporations have entered into Affiliation Agreements
and acquired either the stock or the majority of the assets of fifteen physician
practices. The consideration given by the Company in these acquisitions was a
combination of cash, notes, convertible notes and Common Stock to be issued in
the future. Each of the agreements contains a repurchase provision that allows
the selling owners, in the event that an IPO has not been completed by the
Company by a specified date, to repurchase their practice by returning all of
the consideration received excluding the nonrefundable cash consideration.
Because of this provision, these transactions are not considered effective for
applying purchase accounting until either the date that the Company completes an
IPO or the repurchase provision lapses (the "Final Closing Date"). However, for
the period of time from the closing of the agreement (the "Initial Closing
Date") through the Final Closing Date, the Company is entitled to a management
fee equal to the residual net income or loss earned by each practice and is
responsible for centrally managing the cash of each practice. Accordingly, the
statement of operations includes management fee revenue for the residual net
income or loss earned by these practices for the period from the Initial Closing
Date to September 30, 1997 and the balance sheet as of September 30, 1997
reflects a Due to/from Conditional Affiliation Transactions account to reflect
the net cash activity for the same period. The balance sheet also reflects an
Investment in Conditional Affiliation Transactions account which includes
external transaction costs and the consideration paid by the Company to the
selling owners since legally the transactions have closed.

As of September 30, 1997, the total consideration paid by the Company to
the selling owners was $2,055,499 in cash, $8,825,250 in notes, $15,212,300 in
convertible notes and $9,643,097 in Common Stock to be issued in the future
(____________ shares of Common Stock assuming an IPO price of $ per share).
Subsequent to September 30, 1997, in connection with extending the Repurchase
Date for certain Conditional Affiliation Transactions, the Company paid
additional considerations of $732,100 of notes, $1,430,165 of convertible notes,
and $72,599 of Common Stock. The Affiliation Agreements may require the Company
to issue additional shares if the IPO price is less than $10 per share. The
Common Stock to be issued has been recorded at the guaranteed value to the
selling owners net of a 15% discount due to the restriction on the sale and
transferability of the shares to be issued.

F-19
<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

5. COMPLETED AND AFFILIATION TRANSACTIONS: -- (CONTINUED)

After September 30, 1997, the Company and its affiliated professional
corporations has entered into Affiliation Agreements and acquired either the
stock or the majority of the assets of three physician practices. These
transactions have the same repurchase provisions as the transactions made prior
to September 30, 1997 and accordingly will not be considered effective for
applying purchase accounting until the Final Closing Date. The total
consideration paid by the Company to the selling owners was $2,041,745 in cash,
$2,153,880 in notes, $3,080,749 in convertible notes and $2,058,539 in Common
Stock to be issued in the future ( shares of Common Stock assuming an
IPO stock price of $ per share). The Affiliation Agreements may require the
Company to issue additional shares if the initial public offering price is less
than $10 per share. The Common Stock to be issued has been recorded at the
guaranteed value to the selling owners net of a 15% discount due to the
restriction on the sale and transferability of the shares to be issued.

In addition to the Conditional Affiliation Transactions discussed above,
since January 1, 1997, the Company has entered into Affiliation Agreements to
purchase 14 physician practices, which will close upon the completion of an IPO
by the Company (the "IPO Affiliation Transactions"). The total purchase price to
be paid by the Company to the selling owners will be cash of $19,474,000, notes
of $8,902,635 and Common Stock of $7,800,093 ( shares of Common Stock
assuming an IPO price of $ per share). The Common Stock will be recorded at
the guaranteed value to the selling owners net of a 15% discount due to the
restriction on the sale and transferability of the shares to be issued.

Additional consideration could be paid in connection with the Conditional
and the IPO Affiliation Transactions if specific financial criteria are attained
(see Note 14).

6. PROPERTY AND EQUIPMENT:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
------- -------- -------------
<S> <C> <C> <C>
Medical equipment................................... $ -- $ -- $ 209,768
Office equipment.................................... 16,126 235,837 1,135,986
Furniture and fixtures.............................. -- 21,547 194,491
Leasehold improvements.............................. -- 2,199 114,344
------- -------- ----------
16,126 259,583 1,654,589
Less -- Accumulated depreciation and amortization... (2,525) (8,406) (115,749)
------- -------- ----------
$13,601 $251,177 $1,538,840
======= ======== ==========
</TABLE>

7. NOTES PAYABLE ON CONDITIONAL AFFILIATION TRANSACTIONS:

<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Convertible Notes Payable for Conditional Affiliation
Transactions, annual payments of principal through
September 2002, interest of 6% payable annually........... $15,174,870
Notes Payable for Conditional Affiliation Transactions,
annual payments of principal through September 2002,
interest of 6% payable annually........................... 9,021,187
-----------
24,196,057
Less -- Current portion..................................... (16,728,782)
-----------
$ 7,467,275
-----------
</TABLE>

In connection with the Conditional Affiliation Transactions (see Note 5),
the Company issued convertible notes (the "Convertible Notes") and subordinated
notes (the "Notes Payable") to the selling owners. The Company negotiated the
extention of the Repurchase Dates for certain Conditional Affiliation
Transactions with the prepayment of $366,493 of the convertible notes payable.

F-20

<PAGE>

U.S. PHYSICIANS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

7. NOTES PAYABLE ON CONDITIONAL AFFILIATION TRANSACTIONS: -- (CONTINUED)

The Convertible Notes are payable in five equal annual installments
commencing on the first anniversary date unless the Company files a Registration
Statement for an IPO. If the Company files a Registration Statement, then the
convertible noteholder can elect either (i) to have all or any portion of the
principal and accrued interest paid in full upon the closing of the IPO, (ii) to
have all or any portion of the principal and accrued interest converted into
Common Stock of the Company at the IPO price or (iii) to maintain the
Convertible Notes with the original terms. Based upon elections of the
convertible noteholders in response to the Company's filing of a Registration
Statement in November 1997, $14,855,870 of the Convertible Notes will be paid in
full upon the closing of the IPO and the remaining balance of $319,000 will be
payable under the original terms. These amounts have been reflected in the
classification of the Convertible Notes in the September 30, 1997 balance sheet.

Maturities of these notes as of September 30, 1997 are as follows:

<TABLE>
<CAPTION>
NOTES CONVERTIBLE
PAYABLE NOTES
----------- -----------
<S> <C> <C>
Remaining 1997............................................. $ 4,062 $ --
1998....................................................... 1,805,050 14,919,670
1999....................................................... 1,805,050 63,800
2000....................................................... 1,805,050 63,800
2001....................................................... 1,805,050 63,800
2002....................................................... 1,796,925 63,800
----------- -----------
$ 9,021,187 $15,174,870
=========== ===========
</TABLE>

F-21
<PAGE>

U.S. PHYSICIANS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

8. OTHER LONG-TERM DEBT:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Term loan, monthly principal payments of $55,556
beginning May 1999 through April 2002, interest
at 12%, net of original issue discount of
$371,700......................................... $ -- $ -- $1,628,300
Term notes, monthly principal payments of $166,667
beginning June 1998 through May 1999, interest at
10% through May 1998 and 12% thereafter, net of
original issue discount of $417,000.............. -- -- 1,583,000
Note payable to physician employee for medical
equipment purchase, payable in monthly
installments of $1,074 through June 2000,
interest at 7.5%................................. -- -- 35,660
Note payable to bank, payable in monthly
installments of $803 through February 2000,
interest at 9.35%, collateralized by equipment... -- -- 20,776
Capital lease obligations.......................... -- -- 63,748
Note payable to related party, payable in four
quarterly installments commencing on May 1, 1995,
with interest at 6%, payments under the note are
only required to the extent the Company has net
profits.......................................... 131,000 131,000 131,000
Advances from related party, contains no definitive
repayment terms, with interest at 6%............. 41,000 41,000 41,000
-------- -------- ----------
172,000 172,000 3,503,484
Less -- Current portion............................ -- -- (733,418)
-------- -------- ----------
$172,000 $172,000 $2,770,066
======== ======== ==========
</TABLE>

In April 1997, the Company entered into a $2,000,000 term loan (the "Term
Loan") with a preferred shareholder, which is secured by substantially all of
the Company's assets. The Term Loan is due immediately upon the completion of
the Company's IPO or other significant event, as defined, or otherwise is
payable in 36 equal monthly installments of $55,556 beginning on May 1, 1999
through April 1, 2002. The Term Loan bears interest at 12%, which is payable
monthly. In connection with the Term Loan, the Company issued warrants to
purchase 266,667 shares of Series B Convertible Preferred Stock at an exercise
price of $3.15 per share. The warrants expire the earlier of April 7, 2007 or
four years after the Company's IPO. The warrants were valued at $413,000, based
on an independent valuation, and have been recorded as an original issue
discount on the Term Loan. The original issue discount is being amortized to
interest expense over the life of the Term Loan. In addition, the Company is
required to comply with various financial and nonfinancial covenants, the most
restrictive of which are limitations on the assumption of additional
non-acquisition related debt, minimum net worth requirements, as defined, and
limitations on capital expenditures.

In September 1997, the Company issued $2,000,000 of subordinated term notes
(the "Term Notes") to common and preferred shareholders. The Term Notes bear
interest at 10% through May 31, 1998 and 12% thereafter. The Term Notes are
payable beginning June 1, 1998 through May 1, 1999 in twelve monthly principal
installments of $166,667. The Term Notes become due upon completion of the
Company's IPO or other significant events, as defined. In connection with the
Term Notes, the Company issued warrants to purchase 222,223 shares of Series B
Convertible Preferred Stock. The exercise price for 166,667 of the warrants is
$3.15 per share. The exercise price for the remaining warrants is equal to 45%
of the IPO price, as defined. If an IPO is not completed prior to the warrant
expiration, the exercise price of the warrants shall be equal to 45% of the
value of the Company's Common Stock as determined at that date. These warrants
expire on the earlier of ten years from the grant date or four years after the
completion of an IPO. The warrants were

F-22

<PAGE>

U.S. PHYSICIANS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

8. OTHER LONG-TERM DEBT: -- (CONTINUED)

valued at $438,000, based on an independent valuation, and have been recorded as
an original issue discount on the Term Notes. The original issue discount is
being amortized to interest expense over the life of the Term Notes. In
addition, if the Company has a default under the terms of the Term Notes, as
defined, the Company is required to issue additional warrants to purchase
444,446 shares of the Company's Common Stock at an exercise price of $0.01 per
share.

Long-term debt maturities as of September 30, 1997, are as follows:

<TABLE>
<S> <C>
Remaining 1997.................................. $ 26,235
1998............................................ 1,380,404
1999............................................ 1,321,342
2000............................................ 675,314
2001............................................ 666,667
2002 and thereafter............................. 222,222
----------
4,292,184
Less -- Unamortized discount.................... (788,700)
----------
$3,503,484
==========
</TABLE>

In November 1997, the Company issued a $850,000 demand note (the "Demand
Note") which is secured by shares of common stock pledged by the President and
CEO. The Demand Note bears interest at 12% for the first three months and 15%
for the last three months. In connection with the Demand Note, the Company
issued warrants to purchase 43,573 shares of the Company's Common Stock at an
exercise price of $0.01 per share. These warrants, which expire November 25,
2004, were valued at $127,000 and will be recorded as an original issue discount
on the Demand Note. The original issue discount will be expensed as interest
expense on the date the Demand Note is issued since it is due on demand. The
Demand Note was repaid in January 1998 in connection with the issuance of the
Series C Stock.

In January 1998, the Company issued an $800,000 demand note (the "Second
Demand Note") to a preferred shareholder. The Second Demand Note bears interest
of 8%. In connection with the Second Demand Note, the Company issued warrants to
purchase 38,555 shares of the Company's Common Stock at an exercise price of
$4.15 per share. These warrants, which expire on January 20, 2008, were valued
at $82,000 and will be recorded as an original issue discount on the Second
Demand Note. The original issue discount will be expensed as interest expense on
the date the Second Demand Note is issued since it is due on demand. The Second
Demand Note was repaid in January 1998 in connection with the issuance of the
Series C Stock.

9. CONVERTIBLE PREFERRED STOCK:

Series A, Series B and Series C Convertible Preferred Stock

The Company is authorized to issue 1,506,849 shares of Series A Convertible
Preferred Stock ("Series A Stock"), 1,830,158 shares of Series B Convertible
Preferred Stock ("Series B Stock") and 1,445,784 shares of Series C Convertible
Preferred Stock ("Series C Stock").

In January 1995, the Company sold 1,506,849 shares of Series A Stock for
$2,148,466, net of expenses of $51,534. The Series A Stock is convertible, at
any time, at the holder's option into an aggregate of 4,520,547 shares of Common
Stock, subject to adjustment as defined. The holders of Series A Stock are
entitled to cumulative quarterly dividends at the per annum rate of $0.073 per
share. No dividends have ever been declared on the Series A Stock.

In December 1996 and February 1997, the Company sold 1,246,031 shares of
Series B Stock for $3,869,175, net of expenses of $55,825. The Series B Stock is
convertible, at any time, at the holder's option into an aggregate of 1,246,031
shares of Common Stock, subject to adjustment as defined. The holders of Series
B Stock are entitled to cumulative quarterly dividends at the per annum rate of
$0.1575 per share. No

F-23
<PAGE>

U.S. PHYSICIANS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

9. CONVERTIBLE PREFERRED STOCK: -- (CONTINUED)

dividends have ever been declared on the Series B Stock. The holders of the
Series B Stock also received warrants to purchase 249,206 shares of the Common
Stock at an exercise price of $3.15 per share which expire on December 31, 1999.
The warrants were valued at $96,000, based on an independent valuation, and have
been recorded as a discount on the Series B Stock.

In January 1998, the Company sold 1,343,374 shares of Series C Stock for
$5,575,000. The Series C is convertible, at any time, at the holder's option
into an aggregate of 1,343,374 shares of Common Stock based upon a conversion
price of $4.15 per common shares, subject to adjustment as defined. The holders
of Series C Stock are entitled to cumulative quarterly dividends at the per
annum rate of $0.20 per share. No dividends have been declared on the Series C
Stock. The holders of the Series C Stock also received warrants to purchase
371,667 shares of Common Stock at an exercise price of $4.15 per share which
expire on December 31, 2000. The warrants were valued at $348,000, based on an
independent valuation, and will be recorded as a discount on the Series C Stock.
The holders of the Series C Stock will receive additional warrants to purchase
139,375 and 278,750 shares of Common Stock at an exercise price of $4.15 per
share, subject to adjustment as defined, on February 27, 1998 and May 29, 1998,
respectively, if the Company has not completed an IPO by these dates.

Immediately prior to the consummation of an IPO of the Company's Common
Stock, as defined, all shares of Series A Stock, Series B Stock and Series C
Stock will convert into 4,520,547, 1,246,031 and 1,343,374 shares of Common
Stock, respectively, subject to adjustment as defined. In the event that an IPO
is not completed by February 1, 2000, the Company is required to redeem any
outstanding Series A Stock and Series B Stock upon written request of two-thirds
of the holders. The redemption price is equal to the aggregate stated value of
Series A Stock ($1.46 per share) and Series B Stock ($3.15 per share) plus
dividends declared but unpaid. Upon written request of two thirds of the holders
of the Series C Stock, the Company is required to redeem any outstanding Series
C Stock by December 1, 1998 if an IPO has not occurred by February 27, 1998 or
September 1, 1998 if an IPO has not occurred by May 29, 1998. The Series A and
Series B Stock value in the accompanying consolidated balance sheet reflects the
original investment, less transaction expenses plus the accretion recorded. The
accretion is recognized to record the Preferred Stock at the per share
redemption value as of the redemption date.

The Series A, Series B and Series C shareholders are entitled to one vote
for each share of Common Stock into which the Series A, Series B and Series C
Stock is convertible. The Series A, Series B and Series C Stock is senior to
Common Stock in liquidation and has a liquidation preference equal to the
aggregate stated value of Series A, Series B and Series C Stock plus accrued and
unpaid dividends, whether declared or not.

Series B Convertible Preferred Stock Warrants

In April 1997, in connection with the $2,000,000 Term Loan (see Note 8) the
Company issued warrants to purchase 266,667 shares of Series B Stock at an
exercise price of $3.15 per share. In September 1997, in connection with the
$2,000,000 Term Notes (see Note 8), the Company issued warrants to purchase
222,223 shares of Series B Stock at an exercise price of $3.15 per share as to
166,667 shares and 45% of the IPO price, as defined, as to 55,556 shares. Upon
consummation of an IPO, as defined, all of the Series B Stock warrants will
convert into warrants to purchase the same number of Common Stock at the same
exercise prices.

10. SHAREHOLDERS' EQUITY:

Common Stock to be Issued

In connection with the Conditional Affiliation Transactions which occurred
between January 1, 1997 and September 30, 1997 (see Note 5), common shares
valued at $9,643,096 ( shares of Common Stock assuming an IPO price of
$ per share) will be issued no later than the Final Closing Date. The
Affiliation Agreements may require the Company to issue additional shares if the
IPO price is less than $10 per share. The Common Stock to be issued has been
recorded at the guaranteed value to the selling owners net of a 15% discount due
to restrictions on the sale and transferability of the shares to be issued.

F-24
<PAGE>

U.S. PHYSICIANS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

10. SHAREHOLDERS' EQUITY: -- (CONTINUED)

Stock Options

In October 1997, the Company ceased granting options under the U.S.
PHYSICIANS, Inc. 1995 Company Stock Option Plan (the "Company Plan") and the
U.S. PHYSICIANS, Inc. 1995 Affiliate Stock Option Plan (the "Affiliate Plan"),
for which there were 2,250,000 shares available for grant under the Company Plan
and 1,000,000 shares available under the Affiliate Plan. Simultaneously, the
Company established the 1997 Stock Incentive Plan (the "Incentive Plan") which
provides for the grant of options to employees of the Company and affiliates, as
defined. There are 1,250,000 shares available for grant under the Incentive
Plan. Stock options are granted at an exercise price equal to the fair value of
the Common Stock as of the grant date and expire ten years from the date of
grant.

The following summarizes the activity for the plans:

<TABLE>
<CAPTION>
EXERCISE WEIGHTED
PRICE PER AVERAGE AGGREGATE
OPTIONS SHARE EXERCISE PRICE PROCEEDS
--------- --------- -------------- ----------
<S> <C> <C> <C> <C>
Balance, July 14, 1994 and December 31,
1994................................. -- $ -- $ -- $ --
Granted.............................. 212,630 0.49 0.49 104,189
--------- --------- ----- ----------
Balance, December 31, 1995............. 212,630 0.49 0.49 104,189
Granted.............................. 491,630 0.49-3.15 0.94 461,579
Canceled............................. (27,000) 0.49 0.49 (13,230)
--------- --------- ----- ----------
Balance, December 31, 1996............. 677,260 0.49-3.15 0.82 552,538
Granted.............................. 1,593,299 3.15-7.50 3.26 5,192,642
Canceled............................. (84,315) 0.49-3.15 1.83 (154,619)
--------- --------- ----- ----------
Balance, September 30, 1997............ 2,186,244 $.49-7.50 $2.56 $5,590,561
========= ========= ===== ==========
</TABLE>

The following table summarizes information relating to the Company Plan and
the Affiliate Plan based upon each exercise price:

WEIGHTED
OPTIONS AVERAGE OPTIONS
OUTSTANDING AT REMAINING EXERCISABLE AT
OPTION SEPTEMBER 30, CONTRACTUAL SEPTEMBER 30,
EXERCISE PRICES 1997 LIFE (YEARS) 1997
- --------------- ---------------- ------------ ----------------

$0.49 308,630 8.47 82,210
$1.00 301,815 9.05 34,770
$3.15 1,315,799 9.73 140,949
$3.47 200,000 9.83 --
$4.00 7,500 9.94 --
$5.00 50,000 9.75 --
$7.50 2,500 9.83 --
--------- ----- -------
2,186,244 9.47 257,929
========= ===== =======

The Company accounts for all of its option plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
under which no compensation cost has been recognized. In 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No.
123 establishes a fair value based method of accounting for stock-based
compensation plans. This statement also applies to transactions in which an
entity issues its equity instruments to acquire goods or services from
non-employees. SFAS No. 123

F-25
<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

10. SHAREHOLDERS' EQUITY: -- (CONTINUED)

requires that an employer's financial statements include certain disclosures
about stock-based employee compensation arrangements regardless of the method
used to account for the plan. Had the Company recognized compensation cost for
its stock option plans consistent with the provisions of SFAS No. 123, the
Company's net loss in the years ended December 31, 1995 and 1996 and the nine
months ended September 30, 1997 would have been increased to the following pro
forma amounts:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED NINE MONTHS
DECEMBER 31, DECEMBER 31, ENDED SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------------
<S> <C> <C> <C>
Net loss, as reported.......... $(680,368) $(2,736,235) $(2,761,516)
Pro forma net loss............. (681,050) (2,759,853) (2,919,389)
Pro forma net loss per common
share, as reported
(unaudited)..................
Pro forma net loss per common
share, as adjusted
(unaudited)..................
</TABLE>

The weighted average fair value of the options granted during the years
ended December 31, 1995 and 1996 and the nine months ended September 30, 1997 is
estimated as $0.14, $0.30 and $1.04 per share, respectively. The fair value of
each option is estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED NINE MONTHS
DECEMBER 31, DECEMBER 31, ENDED SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------------
<S> <C> <C> <C>
Risk-free interest rate........ 5.7% 6.5% 6.4%
Expected dividend yield........ 0.0% 0.0% 0.0%
Expected life.................. 6 years 6 years 6 years
</TABLE>

In accordance with SFAS No. 123 no volatility factor was assumed since the
Company is not a public entity.

Common Stock Warrants

In connection with the December 1996 and February 1997 Series B Stock
issuances (see Note 9), the Company granted to the holders warrants to purchase
126,984 and 122,222 shares of Common Stock, respectively, at an exercise price
of $3.15 per share. The warrants expire on December 31, 1999.

In connection with the Demand Note issued in November 1997 (see Note 8),
the Company issued warrants to purchase 43,573 shares of Common Stock at an
exercise price of $0.01 per share. These warrants expire on November 25, 2004.

In connection with the Second Demand Note issued in January 1998 (see Note
8), the Company issued warrants to purchase 38,555 shares of Common Stock at an
exercise price of $4.15 per share. These warrants expire on January 18, 2008.

In connection with the January 1998 issuance of the Series C Stock, the
Company issued warrants to purchase 371,667 shares of Common Stock at an
exercise price of $4.15 per share. The warrants expire on December 31, 2000. The
holders of the Series C Stock will receive additional warrants to purchase
139,375 and 278,750 shares of Common Stock at an excerise price of $4.15 per
share, subject to adjustment as defined, on February 27, 1998 and May 29, 1998,
respectively, if the Company has not completed an IPO by these dates.

F-26
<PAGE>

U.S. PHYSICIANS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

11. INCOME TAXES:

The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
---------------------------------- SEPTEMBER 30,
1994 1995 1996 1997
--------- --------- ---------- -----------------
<S> <C> <C> <C> <C>
Current:
Federal................................. $ -- $ -- $ -- $ --
State................................... -- -- -- --
--------- --------- ---------- ----------
Total current provision.............. -- -- -- --
--------- --------- ---------- ----------
Deferred:
Federal................................. -- (200,563) (854,184) (927,789)
State................................... -- (38,933) (165,812) (180,100)
--------- --------- ---------- ----------
Total deferred benefit............... -- (239,466) (1,019,996) (1,107,889)
Increase in valuation allowance........... -- 239,466 1,019,996 1,107,889
--------- --------- ---------- ----------
$ -- $ -- $ -- $ --
========= ========= ========== ==========
</TABLE>

At September 30, 1997, the Company has net operating loss carryforwards
which begin to expire in 2009. Since the realization of the tax benefit
associated with these carryforwards is not assured, a valuation allowance was
recorded as required by SFAS No. 109. The Tax Reform Act of 1986 contains
provisions that may limit the net operating loss carryforwards available to be
used in any given year in the event of significant changes in ownership.

The effective tax rate on income before income taxes is reconciled to
statutory federal income tax rate as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
--------------------------- SEPTEMBER 30,
1994 1995 1996 1997
----- ----- ----- -----------------
<S> <C> <C> <C> <C>
Statutory federal rate........................... (34.0%) (34.0%) (34.0%) (34.0%)
State income taxes, net of federal income tax
benefit........................................ (6.6) (6.6) (6.6) (6.6)
Valuation allowance.............................. 40.6 40.6 40.6 40.6
----- ----- ----- -----
--% --% --% --%
===== ===== ===== =====
</TABLE>

The following is a summary of the deferred income tax assets and
liabilities:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1995 1996 1997
-------- ---------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Joint venture.................................. $ 5,749 $ 163,055 $ 137,940
Accrued vacation............................... 4,503 22,328 101,153
Other.......................................... -- -- 111,582
Net operating losses........................... 229,472 1,093,140 2,110,205
-------- ---------- ----------
239,724 1,278,523 2,460,880
Gross deferred tax liabilities................... (228) (19,031) (93,499)
Less -- Valuation allowance...................... (239,496) (1,259,492) (2,367,381)
-------- ---------- ----------
$ -- $ -- $ --
======== ========== ==========
</TABLE>

F-27
<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

12. EMPLOYEE BENEFIT PLAN:

In June 1997, the Company adopted a 401(k) defined contribution plan for
eligible employees. Employees are eligible to participate in the plan provided
that they have completed one year of service and have attained the age of 21.
Employer matching contributions are discretionary and determined on an annual
basis. Employee contributions are fully vested while employer contributions vest
ratably over seven years. For the nine months ended September 30, 1997, the
Company has contributed $5,571.

13. RELATED PARTY TRANSACTIONS:

A director of the Company is currently Managing Director of a law firm
which provides legal services to the Company. During the year ended December 31,
1996 and the nine months ended September 30, 1997, legal services of $165,553
and $124,090, respectively were provided by this firm.

14. COMMITMENTS AND CONTINGENCIES:

Lease Obligations

The Company leases office space and certain equipment under noncancellable
operating lease agreements. Rental expense under noncancellable operating leases
during the period from inception (July 14, 1994) to December 31, 1994, for the
years ended December 31, 1995 and 1996 and the nine months ended September 30,
1996 and 1997 was $0, $20,836, $117,060, $59,713 and $155,407, respectively.

At September 30, 1997, minimum annual rental commitments under
noncancellable operating leases are as follows:

<TABLE>
<S> <C>
Remaining 1997.................................... $ 70,344
1998.............................................. 286,803
1999.............................................. 297,927
2000.............................................. 291,548
2001.............................................. 290,913
2002.............................................. 140,257
</TABLE>

Litigation

The Company and its affiliated professional corporations maintain insurance
with respect to medical malpractice risks on an occurrence basis in amounts
believed to be customary. Management is not aware of any outstanding claims or
unasserted claims probable of assertion against it or its affiliated
professional corporations that would have a material impact on the Company's
financial position or results of operations.

The Pennsylvania Medical Professional Liability Catastrophic Loss Fund (the
"CAT Fund"), an agency fund of the Commonwealth of Pennsylvania, acts as a
service agent to facilitate the payment of medical malpractice claims exceeding
the primary layer of professional liability insurance carried by physicians and
other health care providers practicing in Pennsylvania. The CAT Fund policies
are retrospectively rated on a claims-made basis. The CAT Fund levies health
care provider surcharges, as a percentage of insurance premiums for basic
coverage, to pay claims and administrative expenses on behalf of CAT Fund
participants.

The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. No
provision has been made for any future CAT Fund assessments in the accompanying
financial statements as the Company's portion of the CAT Fund unfunded liability
could not be reasonably estimated.

F-28

<PAGE>
U.S. PHYSICIANS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

14. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)

Employment Agreements

The Company has employment agreements with certain of its key executive
management. The agreements provide for minimum levels of compensation during
current and future years and are subject to adjustment, as defined. In addition,
the agreements provide for a lump sum payment, as defined, upon termination
without cause and change in control. The following table summarizes the
aggregate amounts the Company is obligated to pay to those employees as of
September 30, 1997 based on these agreements:

Remaining 1997.................................... $210,633
1998.............................................. 842,532
1999.............................................. 547,115
2000.............................................. 118,149

Contingent Consideration in Affiliation Transactions

In connection with certain Conditional Affiliation Transactions and IPO
Affiliation Transactions (see Note 5), the Company has entered into contractual
arrangements whereby cash or Common Stock may be issued to former owners of
acquired businesses upon attainment of specified financial criteria primarily
over periods of one to three years as set forth in the respective agreements.
The amount of the cash or Common Stock to be issued cannot be fully determined
until the periods expire and the attainment of criteria is established. If the
criteria are attained, but not exceeded, the amount of cash or Common Stock
which could be paid or issued under all Conditional Affiliation Transactions and
IPO Affiliation Transactions is $5,941,000. If the maximum targets are achieved,
the amount of cash or Common Stock which could be paid or issued is $14,787,000,
respectively. The Company will account for additional consideration, when the
specified financial criteria are achieved and it is probable it will be paid, as
additional purchase price for the related acquisitions.

Health Care Regulatory Environment and Reliance on Government Programs

The health care industry in general and the services that the Company
provides are subject to extensive federal and state laws and regulations.
Additionally, a portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.

F-29

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Bone and Joint Specialists of Western Pennsylvania, PC:

We have audited the accompanying balance sheets of Bone and Joint Specialists of
Western Pennsylvania, PC (a Pennsylvania corporation) as of December 31, 1995
and 1996, and the related statements of operations, owners' equity and cash
flows for each of the three years in the period ended December 31, 1996. 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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bone and Joint Specialists of
Western Pennsylvania, PC as of December 31, 1995 and 1996, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.

ARTHUR ANDERSEN LLP

Philadelphia, Pa.
March 28, 1997

F-30
<PAGE>

BONE AND JOINT SPECIALISTS OF WESTERN PENNSYLVANIA, PC
BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1995 1996 1997
---------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 38,157 $ 15,916 $ --
Accounts receivable, net of allowance of $309,906,
$463,272 and $757,836............................... 442,611 377,303 553,461
Due from U.S. PHYSICIANS, Inc.......................... -- -- 47,167
Prepaid expenses and other............................. 21,090 21,780 30,755
---------- -------- --------
Total current assets.............................. 501,858 414,999 631,383
---------- -------- --------
Property and equipment:
Equipment, furniture and fixtures...................... 433,234 417,167 417,167
Building and improvements.............................. 1,027,784 -- --
---------- -------- --------
1,461,018 417,167 417,167
Less -- Accumulated depreciation....................... (242,566) (163,230) (209,243)
---------- -------- --------
1,218,452 253,937 207,924
---------- -------- --------
$1,720,310 $668,936 $839,307
========== ======== ========
LIABILITIES AND OWNERS' EQUITY

Current liabilities:
Current maturities of long-term debt................... $ 147,366 $ 46,751 $ 46,459
Accounts payable....................................... 16,000 31,683 11,033
Accrued compensation................................... 63,943 25,922 249,557
---------- -------- --------
Total current liabilities......................... 227,309 104,356 307,049
---------- -------- --------
Long-term debt........................................... 960,240 116,852 81,960
---------- -------- --------
Commitments and contingencies (Note 6)
Owners' equity........................................... 532,761 447,728 450,298
---------- -------- --------
$1,720,310 $668,936 $839,307
========== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-31
<PAGE>

BONE AND JOINT SPECIALISTS OF WESTERN PENNSYLVANIA, PC
STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues........................... $3,061,872 $3,187,200 $2,492,447 $1,865,586 $2,384,646
---------- ---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits......... 2,272,581 2,281,363 1,673,331 1,495,450 1,563,114
Pharmaceuticals and medical
supplies........................... 87,607 99,334 65,770 55,350 48,628
General and administrative........... 509,846 574,994 616,483 421,715 496,741
Management fee due
U.S. PHYSICIANS, Inc............... -- -- -- -- 218,325
Depreciation......................... 53,124 88,245 90,775 77,495 46,013
---------- ---------- ---------- ---------- ----------
Income (loss) from operations.......... 138,714 143,264 46,088 (184,424) 11,825
Interest expense, net.................. 83,606 106,038 84,493 79,828 9,255
---------- ---------- ---------- ---------- ----------
Net income (loss)...................... $ 55,108 $ 37,226 $ (38,405) $ (264,252) $ 2,570
========== ========== ========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-32
<PAGE>

BONE AND JOINT SPECIALISTS OF WESTERN PENNSYLVANIA, PC
STATEMENTS OF OWNERS' EQUITY

<TABLE>
<S> <C>
Balance, January 1, 1994.................................... $440,427

Net income................................................ 55,108
--------

Balance, December 31, 1994.................................. 495,535

Net income................................................ 37,226
--------

Balance, December 31, 1995.................................. 532,761

Net loss.................................................. (38,405)

Issuance of Common Stock.................................. 200

Distributions............................................. (46,828)
--------

Balance, December 31, 1996.................................. 447,728

Net income (unaudited).................................... 2,570
--------

Balance, September 30, 1997 (unaudited)..................... $450,298
========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-33
<PAGE>

BONE AND JOINT SPECIALISTS OF WESTERN PENNSYLVANIA, PC
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ --------------------
1994 1995 1996 1996 1997
-------- -------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss) $ 55,108 $ 37,226 $(38,405) $(264,252) $ 2,570
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities --
Depreciation........................... 53,124 88,245 90,775 77,495 46,013
Changes in assets and liabilities --
Accounts receivable.................. 132,923 80,243 (22,210) 278,860 (176,158)
Due from related parties............. (38,716) 38,716 -- -- --
Due from U.S. PHYSICIANS, Inc........ -- -- -- -- (47,167)
Prepaid expenses and other........... (11,000) 1,910 (5,780) 13,000 (8,975)
Accounts payable..................... (26,000) 2,000 55,683 9,000 (20,650)
Accrued compensation................. 1,453 (111,182) (38,021) (47,893) 223,635
-------- -------- -------- --------- --------
Net cash provided by operating
activities...................... 166,892 137,158 42,042 66,210 19,268
-------- -------- -------- --------- --------
Investing activities:
Purchases of property and equipment......... (8,310) (192,944) (16,734) (11,257) --
-------- -------- -------- --------- --------
Financing activities:
Proceeds from long-term debt................ -- 161,986 75,452 75,452 --
Repayments on long-term debt................ (87,372) (162,941) (107,983) (113,343) (35,184)
Proceeds from issuance of common stock...... -- -- 200 -- --
Distributions............................... -- -- (15,218) -- --
-------- -------- -------- --------- --------
Net cash used in financing
activities...................... (87,372) (955) (47,549) (37,891) (35,184)
-------- -------- -------- --------- --------
Net increase (decrease) in cash and cash
equivalents................................. 71,210 (56,741) (22,241) 17,062 (15,916)
Cash and cash equivalents, beginning of
period...................................... 23,688 94,898 38,157 38,157 15,916
-------- -------- -------- --------- --------
Cash and cash equivalents, end of period...... $ 94,898 $ 38,157 $ 15,916 $ 55,219 $ --
======== ======== ======== ========= ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-34
<PAGE>

BONE AND JOINT SPECIALISTS OF WESTERN PENNSYLVANIA, PC

NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

1. ORGANIZATION AND BUSINESS:

William D. Fritz M.D. (the "Fritz Practice"), formerly Northwest
Orthopedic, and Orthopedic, Occupational and Sports Medicine Specialists (the
"Smith Practice"), formerly Venango Orthopedics and Sports Medicine Center,
provide medical orthopedic and rehabilitative services to the general public. On
October 7, 1996, the Fritz Practice and the Smith Practice merged to form Bone
and Joint Specialists of Western Pennsylvania, PC (the "Company"). The combined
practice serves Franklin, Grove City and Titusville, Pennsylvania as well as
surrounding areas in Western Pennsylvania. In conjunction with the merger,
certain assets and liabilities of the individual practices were not contributed
to the Company including cash of $15,218, net accounts receivable of $87,518,
property and equipment of $965,274, other assets of $5,090, payables of $40,000
and debt of $986,272.

On January 28, 1997 (the "Initial Closing Date"), the Company and the
selling owners entered into an Asset Acquisition Agreement, as amended on
December 11, 1997 (the "Affiliation Agreement") with U.S. PHYSICIANS, Inc.
("USP"). Under the terms of the Affiliation Agreement, USP and its affiliated
professional corporation acquired the majority of the assets and liabilities of
the Company in exchange for cash, notes, convertible notes and shares of USP
Common Stock, subject to adjustment, as defined. The Affiliation Agreement
contains a repurchase provision that allows the selling owners, in the event
that an initial public offering ("IPO") has not been completed by USP by May 14,
1998 (the "Repurchase Date"), to repurchase the net assets of their practice for
a defined period of time (the "Repurchase Period") by returning all of the
consideration received excluding the initial cash payment. If the selling owners
do not exercise their rights under the repurchase provision during the
Repurchase Period, the provision terminates.

In accordance with Accounting Principles Board Opinion No. 16, the
Affiliation Agreement is not considered effective for applying purchase
accounting until either the date that USP completes an IPO or the repurchase
provision terminates (the "Final Closing Date"). Pursuant to the Affiliation
Agreement, for the period of time between the Initial Closing Date and the Final
Closing Date, USP is responsible for managing the Company, including cash
management, and receives a management fee equal to the income earned by the
Company. Accordingly, the statement of operations includes a management fee
charge for the income earned by the Company for the period from the Initial
Closing Date to September 30, 1997, and the balance sheet as of September 30,
1997 reflects a Due from U.S. PHYSICIANS, Inc. account to reflect the net cash
activity for the same period.

2. SIGNIFICANT ACCOUNTING POLICIES:

Principles of Combination

The financial statements combine the accounts of both the Fritz and Smith
Practices for all periods presented. Prior to the merger, these companies were
unrelated, and there were no transactions between the entities.

Interim Financial Statements

The financial statements for the nine months ended September 30, 1996 and
1997, are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of September 30, 1997, and the results
of its operations for the nine months ended September 30, 1996 and 1997. The
results of operations for the nine-month period are not necessarily indicative
of the results to be expected for the entire year.

F-35
<PAGE>

BONE AND JOINT SPECIALISTS OF WESTERN PENNSYLVANIA, PC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Use of Estimates

Fair Value of Financial Instruments

Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and debt obligations. The carrying
amounts reported in the balance sheets for these items approximate their fair
value.

Net Revenues

Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.

Accounts Receivable

Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.

Concentration of Credit Risk

The Company extends credit to patients covered by programs such as
Medicare, Medicaid and private insurers. The Company manages credit risk with
the various public and private insurance providers, as appropriate. Allowances
for bad debts have been made for potential losses when appropriate.

Property and Equipment

Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation is provided over the
estimated useful life of each class of depreciable asset ranging from five to
seven years with the exception of building and improvements which are
depreciated over thirty years and are computed using the straight-line method.

Income Taxes

Prior to October 1996, the individual practices were treated as sole
proprietorships whereby income taxes were the responsibility of the individual
physicians. Effective in October 1996, the Company has elected treatment as an
"S" Corporation for both federal and state income tax purposes, and accordingly
is not taxed as a separate entity. The Company's taxable income or loss is
allocated to each owner and recognized on their individual tax return.
Accordingly, no provision for income taxes has been reflected in the
accompanying financial statements.

F-36
<PAGE>

BONE AND JOINT SPECIALISTS OF WESTERN PENNSYLVANIA, PC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

The Company reports certain income and expense items for income tax
purposes on a different basis than that reflected in the accompanying financial
statements. The primary differences are due to the cash basis of accounting for
income tax purposes. The cumulative amount of these differences as of December
31, 1996 was approximately $350,000. If the S Corporation status is terminated,
then a deferred income tax liability of approximately $85,000 related to these
cumulative differences would need to be reflected in the accompanying financial
statements.

Owners' Equity

Equity includes the capital stock and retained earnings of the Company.

Statements of Cash Flows Information

For the years ended December 31, 1994, 1995 and 1996, the Company paid
interest of $83,621, $106,073, and $84,052, respectively. Amounts paid for taxes
were insignificant.

In 1996, the Company entered into capital lease obligations of $74,800.

3. LONG-TERM DEBT:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
---------- --------
<S> <C> <C>
Mortgage with a bank, payable in monthly installments of
$8,866 through 2007, interest at bank's prime plus 1%,
assumed by Dr. Smith in 1996.............................. $ 834,090 $ --
Equipment notes with a bank, payable in monthly installments
of $2,496 through 1997, interest at bank's prime plus 1%,
secured by equipment, repaid in 1996...................... 38,179 --
Notes payable from a local medical center payable in various
monthly installments through 1999, interest ranging from
8% to 9.25% repaid in 1996................................ 105,473 --
Equipment note with a bank, payable in monthly installments
through 1998, interest at bank's prime rate, secured by
equipment, repaid in 1996................................. 100,026 --
Equipment note with a bank, payable in monthly installments
of $6,944 through 1999, interest at bank's prime rate,
secured by equipment...................................... -- 90,853
Vehicle loan with a bank, payable in monthly installments of
$1,063 through 1998, interest at bank's prime plus 1%,
secured by the vehicle, assumed by Dr. Smith in 1996...... 29,838 --
Capital lease obligations (see Note 6)...................... -- 72,750
---------- --------
1,107,606 163,603
Less -- Current maturities.................................. (147,366) (46,751)
---------- --------
$ 960,240 $116,852
========== ========
</TABLE>

Future maturities of long-term debt, excluding capital lease obligations
(see Note 6), as of December 31, 1996, are as follows:

F-37
<PAGE>

BONE AND JOINT SPECIALISTS OF WESTERN PENNSYLVANIA, PC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

3. LONG-TERM DEBT: -- (CONTINUED)

4. EMPLOYEE BENEFIT PLANS:

In 1994 and 1995, the Fritz and the Smith Practices, respectively,
terminated deferred profit sharing plans in which all employees were eligible to
participate after one year of service, as defined in the plan agreements. At the
time of termination, all participants became 100% vested in their plan benefits.
The assets of the plans are expected to be distributed to the participants
during 1997. Discretionary contributions to the Fritz plan for the year ended
December 31, 1994, were $9,659. Discretionary contributions to the Smith plan
for the years ended December 31, 1994 and 1995, were $74,920 and $7,300,
respectively.

The assets of both plans are held at local financial institutions which
serve as trustees for the respective plans.

5. RELATED-PARTY TRANSACTIONS:

The Fritz Practice leased office space from its sole shareholder for
approximately $120,000, $90,000 and $77,000 for the years ended December 31,
1994, 1995 and 1996, respectively. The Company leased office space from its two
shareholders for approximately $47,000 for the year ended December 31, 1996.

6. COMMITMENTS AND CONTINGENCIES:

Lease Obligations

The company leases office space and equipment under noncancellable
operating and capital leases. Future minimum lease payments under the Company's
leases as of December 31, 1996 are as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1997........................................................ $20,371 $44,016
1998........................................................ 18,804 16,800
1999........................................................ 18,804 --
2000........................................................ 18,804 --
2001........................................................ 17,237 --
-------
Total................................................ 94,020
Less -- Amounts representing interest....................... (21,270)
-------
Present value of future minimum lease payments.............. 72,750
Less -- Current maturities.................................. (12,681)
-------
$60,069
=======
</TABLE>

Rent expense, including related party leases (see Note 5), under operating
leases for the years ended December 31, 1994, 1995 and 1996, was $141,111,
$150,880 and $193,280, respectively. The cost of assets

F-38
<PAGE>

BONE AND JOINT SPECIALISTS OF WESTERN PENNSYLVANIA, PC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

6. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)
capitalized under capital lease obligations was $74,800 as of December 31, 1996
and accumulated depreciation was $5,343.

Insurance Policies

The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims which would have a material impact on the
Company's financial position or results of operations.

The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.

Health Care Regulatory Environment and Reliance on Government Programs

F-39
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Bryn Mawr Urology Associates, Inc.:

We have audited the accompanying balance sheets of Bryn Mawr Urology Associates,
Inc. (a Pennsylvania corporation) as of December 31, 1995 and 1996 and the
related statements of operations and retained earnings and cash flows for each
of the three years in the period ended December 31, 1996. 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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bryn Mawr Urology Associates,
Inc. as of December 31, 1995 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Philadelphia, Pa.
March 14, 1997

F-40
<PAGE>

BRYN MAWR UROLOGY ASSOCIATES, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 31,675 $ 57,672 $ --
Accounts receivable, net of allowance of $249,656,
$248,566 and $335,874................................. 464,416 517,922 607,661
Due from U.S. PHYSICIANS, Inc............................ -- -- 51,369
Due from related parties................................. 14,211 8,348 --
Prepaid expenses and other............................... 113,578 97,861 65,000
-------- -------- --------
Total current assets................................ 623,880 681,803 724,030
-------- -------- --------
Property and equipment:
Equipment, furniture and fixtures........................ 128,739 151,590 151,590
Leasehold improvements................................... 161,204 140,669 140,669
-------- -------- --------
289,943 292,259 292,259
Less -- Accumulated depreciation and amortization........ (183,093) (201,686) (233,042)
-------- -------- --------
106,850 90,573 59,217
-------- -------- --------
Deferred income taxes...................................... 15,236 15,224 15,224
-------- -------- --------
Other assets............................................... 11,665 10,005 --
-------- -------- --------
$757,631 $797,605 $798,471
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt..................... $ 26,400 $ 30,000 $ 30,000
Current maturities of officer loans...................... 60,000 65,360 --
Accounts payable......................................... 205,219 319,681 356,219
Accrued compensation..................................... 109,139 95,354 130,478
Deferred income taxes.................................... 85,857 63,542 68,056
-------- -------- --------
Total current liabilities........................... 486,615 573,937 584,753
-------- -------- --------
Long-term debt............................................. 26,400 112,500 90,000
-------- -------- --------
Officer loans.............................................. 65,360 -- --
-------- -------- --------
Commitments and contingencies (Note 7)
Shareholders' equity:
Common Stock, no par value, 1,000 shares authorized, 600
shares issued and outstanding......................... 300 300 300
Retained earnings........................................ 178,956 110,868 123,418
-------- -------- --------
Total shareholders' equity.......................... 179,256 111,168 123,718
-------- -------- --------
$757,631 $797,605 $798,471
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-41
<PAGE>

BRYN MAWR UROLOGY ASSOCIATES, INC.

STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................... $2,297,850 $2,640,036 $2,630,529 $2,064,544 $1,784,492
---------- ---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits............. 1,327,039 1,411,350 1,528,663 1,056,469 829,142
Pharmaceuticals and medical supplies..... 449,812 508,357 591,529 389,819 561,488
General and administrative............... 545,671 636,306 539,972 444,655 249,603
Management fee due U.S. PHYSICIANS,
Inc.................................... -- -- -- -- 84,916
Depreciation and amortization............ 40,056 44,114 39,643 28,213 31,356
---------- ---------- ---------- ---------- ----------
Income (loss) from operations.............. (64,728) 39,909 (69,278) 145,388 27,987
Interest expense, net...................... 19,095 18,451 19,582 13,336 8,545
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.......... (83,823) 21,458 (88,860) 132,052 19,442
Income tax (benefit) provision............. (18,200) 6,717 (20,772) 32,089 6,892
---------- ---------- ---------- ---------- ----------
Net income (loss).......................... (65,623) 14,741 (68,088) 99,963 12,550
Retained earnings, beginning of period..... 229,838 164,215 178,956 178,956 110,868
---------- ---------- ---------- ---------- ----------
Retained earnings, end of period........... $ 164,215 $ 178,956 $ 110,868 $ 278,919 $ 123,418
========== ========== ========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-42
<PAGE>

BRYN MAWR UROLOGY ASSOCIATES, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- -------------------
1994 1995 1996 1996 1997
-------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss).................................. $(65,623) $14,741 $(68,088) $ 99,963 $ 12,550
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating
activities --
Loss on disposal of property and equipment..... -- -- 33,013 33,013 --
Depreciation and amortization.................. 40,056 44,114 39,643 28,213 31,356
Deferred income taxes.......................... (17,410) 6,936 (22,303) 32,089 4,514
Changes in assets and liabilities --
Accounts receivable......................... 80,745 (91,077) (53,506) (83,634) (89,739)
Due from U.S. PHYSICIANS, Inc............... -- -- -- -- (51,369)
Due from related parties.................... 10,005 (3,174) 5,863 (139,593) 8,348
Prepaid expenses and other.................. 16,055 (35,071) 15,717 7,991 32,861
Other assets................................ -- -- 1,660 11,665 10,005
Accounts payable............................ (56,666) 70,260 114,462 12,103 36,538
Accrued compensation........................ (11,683) 26,936 (13,785) 79,498 35,124
-------- ------- -------- -------- --------
Net cash (used in) provided by operating
activities.............................. (4,521) 33,665 52,676 81,308 30,188
-------- ------- -------- -------- --------
Investing activities:
Purchases of property and equipment................ (27,798) (12,778) (56,379) (56,379) --
-------- ------- -------- -------- --------
Financing activities:
Proceeds from long-term debt....................... -- -- 150,000 150,000 --
Repayments on long-term debt....................... (53,483) (26,400) (60,300) (52,800) (22,500)
Proceeds (repayment) of officer loans.............. 65,660 -- (60,000) -- (65,360)
-------- ------- -------- -------- --------
Net cash provided by (used in) financing
activities.............................. 12,177 (26,400) 29,700 97,200 (87,860)
-------- ------- -------- -------- --------
Net (decrease) increase in cash and cash
equivalents........................................ (20,142) (5,513) 25,997 122,129 (57,672)
Cash and cash equivalents, beginning of period....... 57,330 37,188 31,675 31,675 57,672
-------- ------- -------- -------- --------
Cash and cash equivalents, end of period............. $ 37,188 $31,675 $ 57,672 $153,804 $ --
======== ======= ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-43
<PAGE>

BRYN MAWR UROLOGY ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

1. ORGANIZATION AND BUSINESS:

Bryn Mawr Urology Associates, Inc. (the "Company") provides urological and
incontinence care and related medical services to the general public. The
Company operates two divisions, Bryn Mawr Urology ("BMU") and Continence
Management Specialists ("CMS").

On February 19, 1997 (the "Initial Closing Date"), the Company and the
selling owners entered into a Stock Acquisition Agreement, as amended on
December 28, 1997, (the "Affiliation Agreement") with U.S. PHYSICIANS, Inc.
("USP"). Under the terms of the Affiliation Agreement, USP and its affiliated
professional corporation acquired the outstanding stock of the Company in
exchange for cash, notes, convertible notes and shares of USP Common Stock,
subject to adjustment, as defined. The Affiliation Agreement contains a
repurchase provision that allows the selling owners, in the event that an
initial public offering ("IPO") has not been completed by USP by May 14, 1998
(the "Repurchase Date"), to repurchase the stock of their practice for a defined
period of time (the "Repurchase Period") by returning all of the consideration
received excluding the initial cash payment. If the selling owners do not
exercise their rights under the repurchase provision during the Repurchase
Period, the provision terminates.

2. SIGNIFICANT ACCOUNTING POLICIES:

Interim Financial Statements

Use of Estimates

Fair Value of Financial Instruments

Net Revenues

F-44
<PAGE>

BRYN MAWR UROLOGY ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.

Accounts Receivable

Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.

Concentration of Credit Risk

Property and Equipment

Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation and amortization are
provided over the estimated useful lives of the applicable assets ranging from
five to ten years for equipment, furniture and fixtures and the remaining lease
term for leasehold improvements and are computed using the straight-line method.

Income Taxes

The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
SFAS No. 109 requires the liability method of accounting for deferred income
taxes. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities. Deferred tax assets or liabilities at the end of each period are
determined using the tax rate expected to be in effect when taxes are actually
paid or recovered.

Statements of Cash Flows Information

For the years ended December 31, 1994, 1995 and 1996, the Company paid
interest of $19,526, $19,473 and $19,587, respectively. Amounts paid for taxes
were not significant.

3. LONG-TERM DEBT:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
------- --------
<S> <C> <C>
Note payable to bank, monthly principal payments of $2,500
plus interest at prime (8.25% at December 31, 1996)
through September 2001, collateralized by certain assets
of the Company............................................ $ -- $142,500
Note payable to bank originally payable through December
1997, repaid in full in September 1996.................... 52,800 --
------- --------
52,800 142,500
Less -- Current maturities.................................. (26,400) (30,000)
------- --------
$26,400 $112,500
======= ========
</TABLE>

The Company advanced $50,000 of the proceeds from the note payable through
December 1997 to a related entity, SSE Leasing Associates ("SSE"), whose sole
shareholders are the owning physicians of the Company. The Company has the full
obligation of the debt included in its financial statements with an offsetting
receivable from SSE for its portion of the proceeds. At December 31, 1995 and
1996, advances due from SSE were $20,911 and $12,673, respectively. The notes
are subject to certain covenants as defined by the agreements and are guaranteed
by the owning physicians of the Company.

F-45
<PAGE>

BRYN MAWR UROLOGY ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

3. LONG-TERM DEBT: -- (CONTINUED)

Minimum principal repayments for long-term debt as of December 31, 1996,
are as follows:

4. EMPLOYEE BENEFIT PLAN:

The Company provides a 401(k) profit sharing plan that covers all qualified
employees, as defined by the plan agreement. Contributions to the plan are
discretionary and are determined by the Company on an annual basis. The
contributions for the years ended December 31, 1994, 1995 and 1996, were
$81,994, $68,195 and $38,461, respectively. Employer contributions vest pro rata
over six years beginning after their first year as a participant. The three
owning physicians are the trustees of the plan.

5. RELATED PARTY TRANSACTIONS:

Due from related parties consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
------- -------
<S> <C> <C>
Loan receivable from SSE (see Note 3)....................... $20,911 $12,673
Advance from SSE............................................ (8,975) --
Advances to officers........................................ 13,180 5,680
------- -------
25,116 18,353
Less -- Current portion..................................... (14,211) (8,348)
------- -------
Amount included in other assets............................. $10,905 $10,005
======= =======
</TABLE>

In 1995, the owners of BMU established a corporation, UroRehab, to provide
incontinence services to residents of long-term care facilities. Start-up cost
funding, the sharing of certain facilities and administrative services were
provided to UroRehab. The physicians will continue to provide management and
consultation services to UroRehab; however, the Company does not feel these
efforts will be significant.

In December 1994, the officers of the Company collectively loaned $150,000
to the Company. The loan was to be repaid in monthly installments of $1,062
including interest at 10% through January 1999. As of February 1995, the Company
and the officers amended the terms to monthly interest at 12% with no stated
repayment date for the remaining principal balance of $125,360. During 1996,
principal of $60,000 was repaid by the Company.

The Company leases a significant portion of its equipment from a related
entity, SSE. Payments made to SSE for the years ended December 31, 1994, 1995
and 1996, were $30,615, $39,793 and $37,146, respectively. In 1993, SSE also
paid $8,975 for leasehold improvements to office space on behalf of the Company.
During 1996, the Company repaid the balance due to SSE.

In addition, the Company leases its office space from two separate
partnerships in which the owning physicians are partners (see Note 7).

6. INCOME TAXES:

The components of the income tax provision (benefit) are as follows:

F-46
<PAGE>

BRYN MAWR UROLOGY ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

6. INCOME TAXES: -- (CONTINUED)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-------- ------ --------
<S> <C> <C> <C>
Current:
Federal............................................ $ (474) $ (131) $ 919
State.............................................. (316) (88) 612
-------- ------ --------
(790) (219) 1,531
-------- ------ --------
Deferred:
Federal............................................ (10,446) 4,162 (13,382)
State.............................................. (6,964) 2,774 (8,921)
-------- ------ --------
(17,410) 6,936 (22,303)
-------- ------ --------
$(18,200) $6,717 $(20,772)
======== ====== ========
</TABLE>

Income tax expense (benefit) differs from the amount currently payable or
receivable because certain expenses, primarily depreciation and accruals, are
reported in different periods for financial reporting and income tax purposes.
The Company is on a cash basis of accounting for income tax purposes.

The provision (benefit) for income taxes differs from the amount computed
by applying the U.S. Federal income tax rate (34%) because of the effect of the
following items:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-------- ------ --------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate................... $(28,500) $7,296 $(30,212)
Tax impact of Federal rate differential for graduated
rates.............................................. 16,045 (4,045) 16,653
State income taxes, net of federal benefit........... (8,303) 2,168 (9,039)
Non-deductible travel and entertainment.............. 2,558 1,298 1,826
-------- ------ --------
$(18,200) $6,717 $(20,772)
======== ====== ========
</TABLE>

The components of the net deferred tax liability, measured under SFAS No.
109, are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Property and equipment.................................... $ 15,236 $ 15,224
Net operating loss carryforward........................... 4,883 8,534
-------- --------
20,119 23,758
Deferred liabilities:
Cash to accrual adjustments............................... (90,740) (72,076)
-------- --------
Net deferred tax liability.................................. $(70,621) $(48,318)
======== ========
</TABLE>

7. COMMITMENTS AND CONTINGENCIES:

Lease Obligations

The Company leases office space in two buildings that are partially owned
by two of the owning physicians. As indicated in Note 5, the equipment is leased
from a related party, SSE. Future minimum lease payments under the Company's
leases are as follows:

F-47
<PAGE>

BRYN MAWR UROLOGY ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

7. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)

<TABLE>
<CAPTION>
EQUIPMENT BUILDING
LEASES LEASES
--------- --------
<S> <C> <C>
1997......................................... $40,203 $ 72,009
1998......................................... 10,051 72,009
1999......................................... -- 72,009
2000......................................... -- 24,978
</TABLE>

Rent expense under noncancelable operating leases for the years ended
December 31, 1994, 1995 and 1996, was approximately $132,788, $127,594 and
$118,141, respectively.

Insurance Policies

The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims that would have a material impact on the
Company's financial position or results of operations.

The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.

Health Care Regulatory Environment and Reliance on Government Programs

F-48
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Center for Women's Healthcare, PC and
Corazon G. Gemil, M.D., PC:

We have audited the accompanying combined balance sheets of the Center for
Women's Healthcare, PC and Corazon G. Gemil, M.D., PC (Pennsylvania
corporations) as of December 31, 1995 and 1996 and the related combined
statements of operations and owner's deficit and cash flows for the three years
in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Center for
Women's Healthcare, PC and Corazon G. Gemil, M.D., PC as of December 31, 1995
and 1996, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Philadelphia, Pa.,
April 8, 1997

F-49
<PAGE>

CENTER FOR WOMEN'S HEALTHCARE, PC AND
CORAZON G. GEMIL, M.D., PC

COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents................................ $ 27,883 $ 12,154 $ --
Accounts receivable, net of allowance of $49,101, $51,129
and $37,299........................................... 87,290 90,896 133,103
Prepaid expenses and other............................... 417 -- 17,446
-------- -------- --------
Total current assets................................ 115,590 103,050 150,549
-------- -------- --------
Property and equipment:
Equipment, furniture and fixtures........................ 82,425 85,594 86,050
Leasehold improvements................................... 50,389 50,389 50,389
-------- -------- --------
132,814 135,983 136,439
Less -- Accumulated depreciation and amortization........ (69,361) (82,000) (86,393)
-------- -------- --------
63,453 53,983 50,046
-------- -------- --------
Other assets............................................... 1,859 -- --
-------- -------- --------
$180,902 $157,033 $200,595
======== ======== ========
LIABILITIES AND OWNER'S DEFICIT

Current liabilities:
Short term notes payable................................. $ 73,778 $ 63,316 $ 58,312
Accounts payable......................................... 35,920 30,726 23,558
Accrued compensation..................................... 81,481 59,729 2,818
Due to U.S. PHYSICIANS, Inc.............................. -- -- 53,010
Deferred service revenues................................ 118,880 118,880 118,880
-------- -------- --------
Total current liabilities........................... 310,059 272,651 256,578
-------- -------- --------
Deferred service revenues.................................. 267,477 148,597 59,437
-------- -------- --------
Commitments and contingencies (Note 5)
Owner's deficit............................................ (396,634) (264,215) (115,420)
-------- -------- --------
$180,902 $157,033 $200,595
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these combined financial
statements.

F-50
<PAGE>

CENTER FOR WOMEN'S HEALTHCARE, PC AND
CORAZON G. GEMIL, M.D., PC

COMBINED STATEMENTS OF OPERATIONS AND OWNER'S DEFICIT

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ---------------------
1994 1995 1996 1996 1997
---------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues................................... $1,081,523 $ 696,901 $ 785,707 $ 599,604 $ 578,443
---------- --------- --------- --------- ---------
Operating expenses:
Salaries, wages and benefits................. 829,018 482,994 558,935 374,059 313,093
Pharmaceuticals and medical supplies......... 16,940 10,606 17,394 10,325 12,785
General and administrative................... 317,605 277,138 182,539 123,223 93,924
Management fee due U.S. PHYSICIANS, Inc...... -- -- -- -- 93,976
Depreciation and amortization................ 20,411 15,532 12,639 9,479 4,393
---------- --------- --------- --------- ---------
Income (loss) from operations.................. (102,451) (89,369) 14,200 82,518 60,272
Other income................................... (58,569) (72,132) (118,880) (89,160) (89,160)
Interest expense, net.......................... 35,923 3,761 661 235 637
---------- --------- --------- --------- ---------
Net income (loss).............................. (79,805) (20,998) 132,419 171,443 148,795
Owner's deficit, beginning of period........... (295,831) (375,636) (396,634) (396,634) (264,215)
---------- --------- --------- --------- ---------
Owner's deficit, end of period................. $ (375,636) $(396,634) $(264,215) $(225,191) $(115,420)
========== ========= ========= ========= =========
</TABLE>

The accompanying notes are an integral part of these combined financial
statements.

F-51
<PAGE>

CENTER FOR WOMEN'S HEALTHCARE, PC AND
CORAZON G. GEMIL, M.D., PC

COMBINED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)................................. $(79,805) $(20,998) $132,419 $171,443 $148,795
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating
activities --
Depreciation and amortization................. 20,411 15,532 12,639 9,479 4,393
Changes in assets and liabilities --
Accounts receivable........................ (15,067) 32,370 (3,606) (3,915) (42,207)
Prepaid expenses and other................. 20,223 13,617 417 -- (17,446)
Other assets............................... (19,243) 30,386 1,859 1,626 --
Accounts payable........................... 20,089 (26,757) (5,194) (5,194) (7,168)
Accrued compensation....................... 3,224 (370) (21,752) 7,984 (56,911)
Due to U.S. PHYSICIANS, Inc................ -- -- -- -- 53,010
Deferred service revenues.................. -- (82,961) (118,880) (89,160) (89,160)
-------- -------- -------- -------- --------
Net cash (used in) provided by operating
activities............................. (50,168) (39,181) (2,098) 92,263 (6,694)
-------- -------- -------- -------- --------
Investing activities:
Purchases of property and equipment............... -- (19,788) (3,169) (3,169) (456)
-------- -------- -------- -------- --------
Financing activities:
Net proceeds (payments) on related party
payable......................................... 26,195 20,517 (23,396) (72,219) 34,996
Proceeds from notes payable....................... 90,000 47,000 40,000 -- --
Repayments on notes payable....................... (64,607) (2,718) (27,066) -- (40,000)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities............................. 51,588 64,799 (10,462) (72,219) (5,004)
-------- -------- -------- -------- --------
Net (decrease) increase in cash and cash
equivalents....................................... 1,420 5,830 (15,729) 16,875 (12,154)
Cash and cash equivalents, beginning of period...... 20,633 22,053 27,883 27,883 12,154
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period............ $ 22,053 $ 27,883 $ 12,154 $ 44,758 $ --
======== ======== ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these combined financial
statements.

F-52
<PAGE>
CENTER FOR WOMEN'S HEALTHCARE, PC AND
CORAZON G. GEMIL, M.D., PC

NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

1. ORGANIZATION AND BUSINESS:

The Center for Women's Healthcare, PC and Corazon G. Gemil, M.D., PC
(collectively, the Company), were merged on January 1, 1996 with the Center for
Women's Healthcare, PC as the surviving entity. The Company provides obstetrical
and gynecological care and related medical services to the general public.

On March 6, 1997 (the "Initial Closing Date"), the Company and the selling
owner entered into an Asset Acquisition Agreement, as amended on December 29,
1997, (the "Affiliation Agreement") with U.S. PHYSICIANS, Inc. ("USP"). Under
the terms of the Affiliation Agreement, USP and its affiliated professional
corporation acquired the majority of the assets and liabilities of the Company
in exchange for cash, notes, convertible notes and shares of USP Common Stock,
subject to adjustment, as defined. The Affiliation Agreement contains a
repurchase provision that allows the selling owner, in the event that an initial
public offering ("IPO") has not been completed by USP by May 14, 1998 (the
"Repurchase Date"), to repurchase the net assets of her practice for a defined
period of time (the "Repurchase Period") by returning all of the consideration
received excluding the initial cash payment. If the selling owner does not
exercise her rights under the repurchase provision during the Repurchase Period,
the provision terminates.

In accordance with Accounting Principles Board Opinion No. 16, the
Affiliation Agreement is not considered effective for applying purchase
accounting until either the date that USP completes an IPO or the repurchase
provision terminates (the "Final Closing Date"). Pursuant to the Affiliation
Agreement, for the period of time between the Initial Closing Date and the Final
Closing Date, USP is responsible for managing the Company, including cash
management, and receives a management fee equal to the income earned by the
Company. Accordingly, the statement of operations includes a management fee
charge for the income earned by the Company for the period from the Initial
Closing Date to September 30, 1997, and the balance sheet as of September 30,
1997 reflects a Due to U.S. PHYSICIANS, Inc. account to reflect the net cash
activity for the same period.

2. SIGNIFICANT ACCOUNTING POLICIES:

Principles of Combination

The financial statements combine the accounts of both the Center for
Women's Healthcare, PC and Corazon G. Gemil, M.D., PC practices. Prior to the
merger, these companies were unrelated, and there were no transactions between
the entities.

Interim Financial Statements

The financial statements for the nine months ended September 30, 1996 and
1997, are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of September 30, 1997, and the results
of their operations for the nine months ended September 30, 1996 and 1997. The
results of operations for the nine-month period are not necessarily indicative
of the results to be expected for the entire year.

Use of Estimates

F-53
<PAGE>

CENTER FOR WOMEN'S HEALTHCARE, PC AND
CORAZON G. GEMIL, M.D., PC

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Fair Value of Financial Instruments

Net Revenues

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.

Accounts Receivable

Accounts receivable primarily consists of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and other estimated bad debts.

Concentration of Credit Risk

Property and Equipment

Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation and amortization are
provided over the estimated useful lives of the applicable assets ranging from
five to seven years for equipment, furniture and fixtures and the remaining
lease term for leasehold improvements and are computed using the straight-line
method.

Deferred Service Revenues

During 1995, the Company committed to provide limited administrative
services at an area hospital and provide limited educational support to the
hospital and the community for a period of four years in exchange for the
settlement of a debt obligation of the Company to the hospital. The debt
reduction of $469,318 has been recorded as deferred service revenues in the
accompanying balance sheets and is being amortized ratably over the four years
as other income in the statements of operations. Other income in 1994 includes
payments for services at the area hospital.

F-54
<PAGE>

CENTER FOR WOMEN'S HEALTHCARE, PC AND
CORAZON G. GEMIL, M.D., PC

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Owner's Deficit

Owner's deficit includes the capital stock, additional paid-in capital and
accumulated losses of The Center for Women's Healthcare, PC and Corazon G.
Gemil, M.D., PC.

Income Taxes

The Company has elected treatment as an "S" Corporation for both federal
and state income tax purposes, and accordingly is not taxed as a separate
entity. The Company's taxable income or loss is allocated to the owner and
recognized on her individual tax return. Accordingly, no provision for income
taxes has been reflected in the accompanying financial statements.

The Company reports certain income and expense items for income tax
purposes on a different basis than reflected in the accompanying financial
statements. The primary differences are due to the cash basis of accounting for
income tax purposes. The cumulative amount of these differences as of December
31, 1996 was approximately $300,000. If the S Corporation status is terminated,
then a deferred income tax liability of approximately $72,000 related to these
cumulative differences would need to be reflected in the accompanying financial
statements.

Statements of Cash Flows Information

For the years ended December 31, 1994, 1995 and 1996, the Company paid
interest of $4,923, $3,592 and $548, respectively. Amounts paid for taxes were
not significant.

3. SHORT TERM NOTES PAYABLE:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
------- -------
<S> <C> <C>
Demand note payable to bank, interest at prime plus 1%,
repaid March 1997......................................... $ -- $40,000
Demand note payable to shareholder, no stated interest rate
or repayment terms........................................ 46,712 23,316
Other....................................................... 27,066 --
------- -------
$73,778 $63,316
======= =======
</TABLE>

4. EMPLOYEE BENEFIT PLAN:

The Company maintains a profit sharing plan covering substantially all full
time employees who are at least 21 years of age and have completed 2 years of
service. Contributions to the plan are discretionary and are determined by the
Company on an annual basis. Employees vest in company contributions immediately.
For the years ended December 31, 1994, 1995 and 1996 discretionary
contribution's made by the Company were $20,000, $45,000 and $15,000.

F-55
<PAGE>

CENTER FOR WOMEN'S HEALTHCARE, PC AND
CORAZON G. GEMIL, M.D., PC

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

5. COMMITMENTS AND CONTINGENCIES:

Lease Obligations

Future minimum lease payments for property under noncancellable operating
leases primarily for office space as of December 31, 1996 are as follows:

1997............................................... $40,049
1998............................................... 26,696

Rent expense under noncancellable operating leases for the years ended
December 31, 1994, 1995 and 1996 was approximately $91,817, $71,750 and $40,049,
respectively.

Insurance Policies

The Pennsylvania Medical Professional Liability Catastrophic Loss Fund (the
"CAT Fund"), an agency fund of the Commonwealth of Pennsylvania, acts as a
service agent to facilitate the payment of medical malpractice claims exceeding
the primary layer of professional liability insurance carried by the physicians
and other health care providers practicing in Pennsylvania. The CAT Fund
policies are retrospectively rated on a claims-made basis. The CAT Fund levies
health care provider surcharges, as a percentage of insurance premiums for basic
coverage, to pay claims and administrative expenses on behalf of CAT Fund
participants.

The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.

Health Care Regulatory Environment and Reliance on Government Programs

F-56
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Cesare, Metzger, Coyle and Henzes, Inc.:

We have audited the accompanying balance sheets of Cesare, Metzger, Coyle and
Henzes, Inc. (a Pennsylvania corporation) as of December 31, 1995 and 1996, and
the related statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. 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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cesare, Metzger, Coyle and
Henzes, Inc. as of December 31, 1995 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Philadelphia, Pa.,
August 22, 1997

F-57
<PAGE>

CESARE, METZGER, COYLE AND HENZES, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 1,996 $ 2,784 $ --
Accounts receivable, net of allowance of $379,932,
$371,578 and $363,471................................. 540,763 462,184 487,477
Prepaid expenses and other............................... 9,880 5,296 14,428
Due from shareholder..................................... -- 5,470 --
-------- -------- --------
Total current assets................................ 552,639 475,734 501,905
-------- -------- --------
Property and equipment:
Equipment, furniture and fixtures........................ 123,643 137,152 137,152
Leasehold improvements................................... 108,390 108,390 116,881
-------- -------- --------
232,033 245,542 254,033
Less -- Accumulated depreciation and amortization........ (137,035) (158,995) (173,608)
-------- -------- --------
94,998 86,547 80,425
-------- -------- --------
Cash surrender value of life insurance
(face value of $1,100,000)............................... 124,852 134,958 139,866
-------- -------- --------
$772,489 $697,239 $722,196
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit........................................... $ 47,000 $ 40,000 $ 89,299
Accounts payable......................................... 32,636 12,590 24,665
Accrued compensation..................................... 79,694 99,034 51,755
Deferred income taxes.................................... 106,056 86,768 72,715
Due to U.S. PHYSICIANS, Inc.............................. -- -- 30,051
-------- -------- --------
Total current liabilities........................... 265,386 238,392 268,485
-------- -------- --------
Deferred income taxes...................................... 5,454 7,870 5,499
-------- -------- --------
Commitments and contingencies (Note 6)
Shareholders' equity:
Common Stock, $1 par value; 100,000 shares authorized;
4,000, 5,000 and 5,000 issued; 3,000, 4,000 and 4,000
outstanding........................................... 4,000 5,000 5,000
Additional paid-in capital............................... 61,748 66,218 66,218
Retained earnings........................................ 446,901 390,759 387,994
Treasury stock (1,000 shares at cost).................... (11,000) (11,000) (11,000)
-------- -------- --------
Total shareholders' equity.......................... 501,649 450,977 448,212
-------- -------- --------
$772,489 $697,239 $722,196
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-58
<PAGE>

CESARE, METZGER, COYLE AND HENZES, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................... $1,945,552 $2,342,162 $2,185,229 $1,566,663 $1,832,333
---------- ---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits............. 1,234,258 1,575,985 1,560,865 1,257,228 1,242,359
Pharmaceuticals and medical supplies..... 69,409 54,219 53,294 37,064 40,050
General and administrative............... 560,537 595,144 618,290 431,325 449,261
Management fee due U.S. PHYSICIANS,
Inc.................................... -- -- -- -- 84,193
Depreciation and amortization............ 12,493 20,484 21,960 17,047 14,613
---------- ---------- ---------- ---------- ----------
Income (loss) from operations.............. 68,855 96,330 (69,180) (176,001) 1,857
Interest expense, net...................... 7,607 5,168 2,280 2,533 3,110
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.......... 61,248 91,162 (71,460) (178,534) (1,253)
Income tax provision (benefit)............. 18,933 23,725 (15,318) (43,384) 1,512
---------- ---------- ---------- ---------- ----------
Net income (loss).......................... $ 42,315 $ 67,437 $ (56,142) $ (135,150) $ (2,765)
========== ========== ========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-59
<PAGE>

CESARE, METZGER, COYLE AND HENZES, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED TREASURY SHAREHOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
------ ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993.................... $3,000 $20,000 $337,149 $(11,000) $349,149
Net income.................................. -- -- 42,315 -- 42,315
Contribution of property and equipment...... -- 38,650 -- -- 38,650
------ ------- -------- -------- --------
Balance, December 31, 1994.................... 3,000 58,650 379,464 (11,000) 430,114
Issuance of Common Stock.................... 1,000 3,098 -- -- 4,098
Net income.................................. -- -- 67,437 -- 67,437
------ ------- -------- -------- --------
Balance, December 31, 1995.................... 4,000 61,748 446,901 (11,000) 501,649
Issuance of Common Stock.................... 1,000 4,470 -- -- 5,470
Net loss.................................... -- -- (56,142) -- (56,142)
------ ------- -------- -------- --------
Balance, December 31, 1996.................... 5,000 66,218 390,759 (11,000) 450,977
Net loss (unaudited)........................ -- -- (2,765) -- (2,765)
------ ------- -------- -------- --------
Balance, September 30, 1997 (unaudited)....... $5,000 $66,218 $387,994 $(11,000) $448,212
====== ======= ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-60
<PAGE>

CESARE, METZGER, COYLE AND HENZES, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ --------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)........................... $ 42,315 $ 67,437 $ (56,142) $(135,150) $ (2,765)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities --
Depreciation and amortization........... 12,493 20,484 21,960 17,047 14,613
Deferred income taxes................... 17,390 12,392 (16,872) (43,384) (16,424)
Changes in assets and liabilities --
Accounts receivable.................. (62,904) (63,462) 78,579 110,756 (25,293)
Prepaid expenses and other........... 11,579 (1,100) (5,522) (9,000) (14,040)
Due from shareholder................. -- -- -- -- 5,470
Accounts payable..................... 20,120 (3,889) (20,046) 2,170 12,075
Accrued compensation................. 10,105 19,620 19,340 149,690 (47,279)
Due to U.S. PHYSICIANS, Inc.......... -- -- -- -- 30,051
---------- ---------- ---------- --------- --------
Net cash provided by (used in)
operating activities............. 51,098 51,482 21,297 92,129 (43,592)
---------- ---------- ---------- --------- --------
Investing activities:
Purchases of property and equipment......... (10,998) (16,252) (13,509) (13,209) (8,491)
---------- ---------- ---------- --------- --------
Financing activities:
Net (payments) borrowings on line of
credit.................................... (6,000) (38,000) (7,000) (6,000) 49,299
Proceeds from long-term debt................ (43,994) -- -- -- --
Repayments on long-term debt................ 21,610 -- -- -- --
Proceeds from issuance of stock............. -- 4,098 -- -- --
Repayment of advance........................ (15,000) -- -- -- --
---------- ---------- ---------- --------- --------
Net cash (used in) provided by
financing activities............. (43,384) (33,902) (7,000) (6,000) 49,299
---------- ---------- ---------- --------- --------
Net (decrease) increase in cash and cash
equivalents................................. (3,284) 1,328 788 72,920 (2,784)
Cash and cash equivalents, beginning of
period...................................... 3,952 668 1,996 1,996 2,784
---------- ---------- ---------- --------- --------
Cash and cash equivalents, end of period...... $ 668 $ 1,996 $ 2,784 $ 74,916 $ --
========== ========== ========== ========= ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-61
<PAGE>

CESARE, METZGER, COYLE AND HENZES, INC.

NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

1. ORGANIZATION AND BUSINESS:

Cesare, Metzger, Coyle and Henzes, Inc. (the "Company") is a
physician-owned medical practice serving the Scranton, Pennsylvania area. The
Company was formed in 1974 for the purpose of rendering orthopedic surgical
services.

On July 30, 1997, (the "Initial Closing Date") the Company and the selling
owners entered into a Stock Acquisition Agreement (the "Affiliation Agreement")
with U.S. PHYSICIANS, Inc. ("USP"). Under the terms of the Affiliation
Agreement, USP and its affiliated professional corporation acquired the
outstanding stock of the Company in exchange for cash, notes, convertible notes
and shares of USP Common Stock, subject to adjustment, as defined. The
Affiliation Agreement contains a repurchase provision that allows the selling
owners, in the event that an initial public offering ("IPO") has not been
completed by USP by March 30, 1998 (the "Repurchase Date"), to repurchase the
net assets of their practice for a defined period of time (the "Repurchase
Period") by returning all of the consideration received, excluding the initial
cash payment.

In accordance with Accounting Principles Board Opinion No. 16, the
Affiliation Agreement is not considered effective for applying purchase
accounting until either the date that USP completes an IPO or the repurchase
provision terminates (the "Final Closing Date"). Pursuant to the Affiliation
Agreement, for the period of time between the Initial Closing Date and the Final
Closing Date, USP is responsible for managing the Company, including cash
management, and receives a management fee equal to the income earned by the
Company. Accordingly, the statement of operations includes a management fee
charge for the income earned by the Company for the period from the Initial
Closing Date to September 30, 1997, and the balance sheet as of September 30,
1997 reflects a Due to U.S. PHYSICIANS, Inc. account to reflect the net cash
activity for the same period.

2. SIGNIFICANT ACCOUNTING POLICIES:

Interim Financial Statements

Use of Estimates

Fair Value of Financial Instruments

F-62
<PAGE>

CESARE, METZGER, COYLE AND HENZES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Net Revenues

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.

Accounts Receivable

Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.

Concentration of Credit Risk

Property and Equipment

Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation and amortization are
provided over the estimated useful life of each class of depreciable asset
ranging from five to seven years for equipment, furniture and fixtures and over
the remaining lease term for leasehold improvements and are computed using the
straight-line method.

Due from Shareholder

Amounts due from shareholder represents a promissory note from a
shareholder in conjunction with the issuance of stock.

Income Taxes

Statements of Cash Flows Information

For the years ended December 31, 1994, 1995 and 1996, the Company paid
interest of $8,686, $7,078 and $3,936, respectively. Amounts paid for taxes were
not significant.

On December 31, 1994, the Company's shareholders contributed to the Company
fixed assets with a net book value of $38,650. Additional paid-in-capital was
increased by this amount.

F-63
<PAGE>

CESARE, METZGER, COYLE AND HENZES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

On October 1, 1996, the Company entered into an agreement with a physician
for the purchase of 1,000 shares of the Company's Common stock for $5,470. The
purchase price was represented by a promissory note receivable which was paid in
full during 1997.

3. LINE OF CREDIT:

In 1993, the Company entered into a credit agreement (the "Agreement") with
a local bank for a $100,000 line of credit. Interest is accrued on the
outstanding balance at the bank's prime rate plus 1.5% (9.75% at December 31,
1996). Outstanding borrowings plus any unpaid interest, fees or expenses are
guaranteed by the shareholders.

4. EMPLOYEE BENEFIT PLAN:

The Company provides a 401(k) profit sharing plan that covers all qualified
employees, as defined by the plan agreement. Employees vest immediately in all
contributions. The Company makes contributions of 5% of an employee's salary.
For the years ended December 31, 1994, 1995 and 1996, contributions to the plan
were $36,192, $57,032 and $62,698, respectively.

5. INCOME TAXES:

The components of the income tax provision (benefit) are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Current:
Federal............................................ $ 926 $ 6,800 $ 932
State.............................................. 617 4,533 622
------- ------- --------
1,543 11,333 1,554
------- ------- --------
Deferred:
Federal............................................ 10,434 7,435 (10,123)
State.............................................. 6,956 4,957 (6,749)
------- ------- --------
17,390 12,392 (16,872)
------- ------- --------
$18,933 $23,725 $(15,318)
======= ======= ========
</TABLE>

The provision (benefit) for income taxes differs from the amount computed
by applying the U.S. Federal income tax rate (34%) because of the effect of the
following items:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate................... $20,824 $30,995 $(24,296)
Tax impact of Federal rate differential for graduated
rates.............................................. (10,727) (18,245) 13,685
State income taxes, net of federal benefit........... 6,731 8,500 (7,073)
Non-deductible travel and entertainment.............. 2,105 2,475 2,366
------- ------- --------
$18,933 $23,725 $(15,318)
======= ======= ========
</TABLE>

F-64
<PAGE>

CESARE, METZGER, COYLE AND HENZES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

5. INCOME TAXES: -- (CONTINUED)

The components of the net deferred tax liability, measured under SFAS No.
109, are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
-------- -------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment.................................... $ 5,454 $ 7,870
Cash to accrual adjustments............................... 106,056 86,768
-------- -------
Net deferred tax liability.................................. $111,510 $94,638
======== =======
</TABLE>

6. COMMITMENTS AND CONTINGENCIES:

Lease Obligations

The Company leases its office space from entities affiliated with several
of the owners of the Company. Future minimum lease payments for noncancelable
operating leases primarily for office space as of December 31, 1996, are as
follows:

<TABLE>
<CAPTION>
RELATED-PARTY
LEASES OTHER LEASES
------------- ------------
<S> <C> <C>
1997..................................................... $ 87,262 $31,240
1998..................................................... 87,262 14,702
1999..................................................... 87,262 3,936
2000..................................................... 87,262 --
2001..................................................... 87,262 --
Thereafter............................................... 283,600 --
</TABLE>

Rent expense on related-party operating leases was $84,908, $86,673 and
$87,262 for the years ended December 31, 1994, 1995 and 1996, respectively. Rent
expense on nonrelated-party operating leases was $9,998, $15,845 and $32,133 for
the years ended December 31, 1994, 1995 and 1996, respectively.

Insurance Policies

The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.

F-65
<PAGE>

CESARE, METZGER, COYLE AND HENZES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

6. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)

Health Care Regulatory Environment and Reliance on Government Programs

F-66

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Family Care of Lancaster, Inc.:

We have audited the accompanying balance sheets of Family Care of Lancaster,
Inc. (a Pennsylvania corporation) as of December 31, 1995 and 1996 and the
related statements of operations and retained earnings, and cash flows for each
of the three years in the period ended December 31, 1996. 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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Family Care of Lancaster, Inc.
as of December 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Philadelphia, Pa.,
June 13, 1997

F-67

<PAGE>

FAMILY CARE OF LANCASTER, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents................................ $ 13,258 $ 3,078 $ --
Accounts receivable, net of allowance of $0, $0 and
$60,677............................................... 99,150 98,470 71,212
Prepaid expenses and other............................... 15,748 9,637 17,463
-------- -------- --------
Total current assets................................ 128,156 111,185 88,675
-------- -------- --------
Property and equipment:
Equipment, furniture and fixtures........................ 120,444 125,813 141,136
Leasehold improvements................................... 16,513 16,513 16,513
-------- -------- --------
136,957 142,326 157,649
Less -- Accumulated depreciation and amortization........ (87,213) (101,280) (113,109)
-------- -------- --------
49,744 41,046 44,540
-------- -------- --------
Deferred income taxes...................................... 1,206 4,683 7,727
-------- -------- --------
Intangible assets.......................................... 82,081 72,023 60,397
-------- -------- --------
$261,187 $228,937 $201,339
======== ======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY

Current liabilities:
Line of credit........................................... $ 22,307 $ 22,000 $ --
Current maturities of long-term debt..................... 8,713 9,284 11,023
Accounts payable......................................... 14,977 21,411 25,533
Accrued compensation..................................... 30,998 40,834 --
Deferred income taxes.................................... 31,035 22,058 16,036
Due to related parties................................... 1,782 16,700 --
Due to U.S. PHYSICIANS, Inc.............................. -- -- 29,931
-------- -------- --------
Total current liabilities........................... 109,812 132,287 82,523
-------- -------- --------
Long-term debt............................................. 52,593 43,309 36,529
-------- -------- --------
Commitments and contingencies (Note 10)
Shareholder's equity:
Common Stock, $10 par value, 30,000 shares authorized,
755 shares issued and outstanding..................... 7,550 7,550 7,550
Retained earnings........................................ 91,232 45,791 74,737
-------- -------- --------
Total shareholder's equity.......................... 98,782 53,341 82,287
-------- -------- --------
$261,187 $228,937 $201,339
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-68

<PAGE>

FAMILY CARE OF LANCASTER, INC.

STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ---------------------
1994 1995 1996 1996 1997
-------- ---------- ---------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues...................................... $931,011 $1,283,589 $1,248,634 $993,316 $1,099,562
-------- ---------- ---------- -------- ----------
Operating expenses:
Salaries, wages and benefits.................... 562,858 867,942 882,865 625,843 899,200
Pharmaceuticals and medical supplies............ 99,360 119,267 111,696 53,947 29,555
General and administrative...................... 205,263 251,000 287,503 268,502 161,301
Management fee credit from
U.S. PHYSICIANS, Inc.......................... -- -- -- -- (54,633)
Depreciation and amortization................... 22,488 22,477 24,125 21,157 23,455
-------- ---------- ---------- -------- ----------
Income (loss) from operations..................... 41,042 22,903 (57,555) 23,867 40,684
Interest expense, net............................. 3,402 2,919 2,360 2,246 2,089
-------- ---------- ---------- -------- ----------
Income (loss) before income taxes................. 37,640 19,984 (59,915) 21,621 38,595
Income tax provision (benefit).................... 9,390 5,007 (14,474) 7,187 9,649
-------- ---------- ---------- -------- ----------
Net income (loss)................................. 28,250 14,977 (45,441) 14,434 28,946
Retained earnings, beginning of period............ 48,005 76,255 91,232 91,232 45,791
-------- ---------- ---------- -------- ----------
Retained earnings, end of period.................. $ 76,255 $ 91,232 $ 45,791 $105,666 $ 74,737
======== ========== ========== ======== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-69

<PAGE>

FAMILY CARE OF LANCASTER, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss).................................... $28,250 $14,977 $(45,441) $14,434 $28,946
Adjustments to reconcile net income (loss) to net
cash provided by operating activities --
Depreciation and amortization.................... 22,488 22,477 24,125 21,157 23,455
Deferred income taxes............................ 9,309 5,050 (12,454) 7,187 (9,066)
Changes in assets and liabilities --
Accounts receivable........................... (23,151) (22,861) 680 (28,695) 27,258
Prepaid expenses and other.................... (396) (6,548) 6,111 7,401 (7,826)
Accounts payable.............................. 7,323 251 6,434 3,839 4,122
Accrued compensation costs.................... 4,879 (9,679) 9,836 (2,107) (40,834)
Due to related parties........................ (1,931) 1,782 14,918 (1,782) (16,700)
Amount due to U.S. PHYSICIANS, Inc............ -- -- -- -- 29,931
------- ------- -------- ------- -------
Net cash provided by operating activities... 46,771 5,449 4,209 21,434 39,286
------- ------- -------- ------- -------
Investing activities:
Purchases of property and equipment.................. (36,785) -- (5,369) -- (15,323)
------- ------- -------- ------- -------
Financing activities:
Net borrowings (repayments) on line of credit........ 11,577 10,730 (307) (20,418) (22,000)
Repayments on long-term debt......................... (27,585) (5,672) (8,713) (5,309) (5,041)
------- ------- -------- ------- -------
Net cash (used in) provided by financing
activities................................ (16,008) 5,058 (9,020) (25,727) (27,041)
------- ------- -------- ------- -------
Net increase (decrease) in cash and cash equivalents... (6,022) 10,507 (10,180) (4,293) (3,078)
Cash and cash equivalents, beginning of period......... 8,773 2,751 13,258 13,258 3,078
------- ------- -------- ------- -------
Cash and cash equivalents, end of period............... $ 2,751 $13,258 $ 3,078 $ 8,965 $ --
======= ======= ======== ======= =======
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-70

<PAGE>

FAMILY CARE OF LANCASTER, INC.

NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

1. ORGANIZATION AND BUSINESS:

Family Care of Lancaster, Inc. (the "Company") is engaged in the business
of providing health care services in the areas of pediatrics, obstetrics,
gynecology, surgery and psychiatry.

On May 5, 1997 (the "Initial Closing Date"), the Company and the selling
owner entered into a Stock Acquisition Agreement, as amended on December 12,
1997, (the "Affiliation Agreement") with U.S. PHYSICIANS, Inc. ("USP"). Under
the terms of the Affiliation Agreement, USP and its affiliated professional
corporation acquired the outstanding stock of the Company in exchange for cash,
notes, convertible notes and shares of USP Common Stock, subject to adjustment,
as defined. The Affiliation Agreement contains a repurchase provision that
allows the selling owner, in the event that an initial public offering ("IPO")
has not been completed by USP by May 14, 1998 (the "Repurchase Date"), to
repurchase the net assets of his practice for a defined period of time (the
"Repurchase Date") by returning all of the consideration received, excluding the
initial cash payment. If the selling owner does not exercise his rights under
the repurchase provision during the Repurchase Period, the provision terminates.

In accordance with Accounting Principles Board Opinion No. 16, the
Affiliation Agreement is not considered effective for applying purchase
accounting until either the date that USP completes an IPO or the repurchase
provision terminates (the "Final Closing Date"). Pursuant to the Affiliation
Agreement, for the period of time between the Initial Closing Date and the Final
Closing Date, USP is responsible for managing the Company, including cash
management, and receives a management fee equal to the income earned by the
Company. Accordingly, the statement of operations includes a management fee
charge for the income earned by the Company for the period from the Initial
Closing Date to September 30, 1997, and the balance sheet as of September 30,
1997 reflects a Due to U.S. PHYSICIANS, Inc. account to reflect the net cash
activity for the same period.

2. SIGNIFICANT ACCOUNTING POLICIES:

Interim Financial Statements

Use of Estimates

Fair Value of Financial Instruments

F-71

<PAGE>

FAMILY CARE OF LANCASTER, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Net Revenues

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.

Accounts Receivable

Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.

Concentration of Credit Risk

Property and Equipment

Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation and amortization are
provided over the estimated useful lives of the applicable assets ranging from
five to seven years for equipment, furniture and fixtures and the remaining
lease term for leasehold improvements and is computed using the straight-line
method.

Intangible Assets

Intangible assets include the excess of cost over the net asset value of an
acquired physician practice, patient lists and a covenant not to compete and are
being amortized over 15 years, 15 years and 10 years, respectively. The Company
continually evaluates whether later events and circumstances have occurred that
indicate the remaining estimated useful life of intangible assets may warrant
revision or that the remaining balance may not be recoverable. When factors
indicate that intangible assets should be evaluated for possible impairment, the
Company uses an estimate of the related undiscounted operating income over the
remaining life of the intangible asset in measuring whether the intangible asset
is recoverable. As of December 31, 1996, management believes that no revision to
the remaining useful lives or write-down of intangible assets is required.

Income Taxes

F-72

<PAGE>

FAMILY CARE OF LANCASTER, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Statements of Cash Flows Information

For the years ended December 31, 1994, 1995 and 1996, the Company paid
interest of $3,402, $2,919 and $2,360, respectively. Amounts paid for taxes were
not significant.

3. ACQUISITION OF PHYSICIAN PRACTICE:

In 1993, the Company purchased substantially all of the fixed assets and
patient lists of a medical practice for total consideration of $95,000 which was
payable with a note of $50,000 (see Note 6) and cash of $45,000. The acquisition
was accounted for using the purchase method of accounting. The excess purchase
price over the fair value of the tangible assets acquired was $75,000 of which
$50,000 was recorded as goodwill and $25,000 was recorded as patient lists. In
addition, the seller signed a 10 year noncompete agreement which was payable
with a note payable of $30,000 (see Note 6). The selling physician is currently
employed by the Company.

4. INTANGIBLE ASSETS:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
-------- --------
<S> <C> <C>
Excess of cost over net asset value of acquired physician
practice.................................................. $ 50,000 $ 50,000
Covenant not to compete..................................... 25,272 25,272
Patient lists............................................... 25,000 25,000
Other....................................................... 3,073 3,073
-------- --------
103,345 103,345
Less -- Accumulated amortization............................ (21,264) (31,322)
-------- --------
$ 82,081 $ 72,023
======== ========
</TABLE>

Amortization expense for each of the years ended December 31, 1994, 1995
and 1996 was $7,798, $9,409 and $10,058, respectively.

5. LINE OF CREDIT:

In July 1994, the Company obtained a $75,000 line of credit with a bank.
The line of credit bears interest at the bank's prime rate plus 0.5% (8.75% at
December 31, 1996) and expires on November 30, 1997. The shareholder and his
wife guarantee the line. As of December 31, 1995 and 1996, the Company had
$22,307 and $22,000 outstanding on this line.

F-73

<PAGE>

FAMILY CARE OF LANCASTER, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

6. LONG-TERM DEBT:

DECEMBER 31,
-----------------
1995 1996
------- -------
Note payable issued in connection with medical practice
acquisition, interest rate at 6.371%, monthly payments
of $531 plus interest through July 2003................... $37,885 $33,814
Note payable issued in connection with covenant not to
compete, interest rate at 6.371%, monthly payments of
$500 plus interest through June 2000...................... 23,421 18,779
------- -------
61,306 52,593
Less -- Current maturities.................................. (8,713) (9,284)
------- -------
$52,593 $43,309
======= =======

Future maturities of long-term debt at December 31, 1996 are as follows:

1997............................................... $ 9,284
1998............................................... 9,868
1999............................................... 10,515
2000............................................... 8,168
2001............................................... 5,564
2002 and thereafter................................ 9,194
-------
$52,593
=======

7. EMPLOYEE BENEFIT PLAN:

The Company has a profit sharing plan (Section 401(k)) in which all
employees are eligible to participate after completion of one year of service
and 1,000 hours, as defined by the plan agreement. Employees vest pro rata over
five years. Contributions to the plan are discretionary and are determined by
management on an annual basis. The Company contributed $4,800 to the plan for
each of the years ended December 31, 1994, 1995 and 1996.

8. RELATED-PARTY TRANSACTIONS:

The Company leases both of its facilities from the Company's shareholder.
Payments under these leases were $76,605, $91,358 and $89,311 for the years
ended December 31, 1994, 1995 and 1996, respectively. Minimum annual rental
commitments under these leases, which represent all non-cancelable operating
leases having terms in excess of one year, as of December 31, 1996, are as
follows:

1997.............................................. $108,000
1998.............................................. 108,000
1999.............................................. 108,000
2000.............................................. 108,000
2001.............................................. 108,000
2002 and thereafter............................... 126,000

F-74

<PAGE>

FAMILY CARE OF LANCASTER, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

9. INCOME TAXES:

The components of the income tax provision (benefit) are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1995 1996
------ ------ --------
<S> <C> <C> <C>
Current:
Federal................................................. $ 49 $ (26) $ (1,212)
State................................................... 32 (17) (808)
------ ------ --------
81 (43) (2,020)
------ ------ --------
Deferred:
Federal................................................. 5,585 3,030 (7,472)
State................................................... 3,724 2,020 (4,982)
------ ------ --------
9,309 5,050 (12,454)
------ ------ --------
$9,390 $5,007 $(14,474)
====== ====== ========
</TABLE>

The provision (benefit) for income taxes differs from the amount computed
by applying the U.S. Federal income tax rate (34%) because of the effect of the
following items:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
------- ------ --------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate....................... $12,797 $6,795 $(20,371)
Tax impact of Federal rate differential for graduated
rates.................................................. (7,163) (3,791) 11,687
State income taxes, net of federal benefit............... 3,756 2,003 (5,790)
------- ------ --------
$ 9,390 $5,007 $(14,474)
======= ====== ========
</TABLE>

The components of the net deferred tax liability, measured under SFAS No.
109, are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
-------- --------
<S> <C> <C>
Deferred tax assets --
Property and equipment.................................... $ 1,206 $ 4,683
Net operating loss carryforward........................... 13 399
-------- --------
1,219 5,082
-------- --------
Deferred tax liabilities --
Deferred compensation..................................... (11,684) (11,684)
Cash to accrual adjustments............................... (19,364) (10,773)
-------- --------
(31,048) (22,457)
-------- --------
Net deferred tax liability.................................. $(29,829) $(17,375)
======== ========
</TABLE>

F-75

<PAGE>

FAMILY CARE OF LANCASTER, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

10. COMMITMENTS AND CONTINGENCIES:

Insurance Policies

The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.

Health Care Regulatory Environment and Reliance on Government Programs

F-76

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Network Medical, Inc.:

We have audited the accompanying balance sheets of Network Medical, Inc. (a
Pennsylvania corporation) as of September 30, 1996 and 1997, and the related
statements of operations, shareholders' deficit and cash flows for each of the
three years in the period ended September 30, 1997. 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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Network Medical, Inc. as of
September 30, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1997, in
conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has experienced a net loss for the three years
ended September 30, 1997 and has a substantial debt obligation that is payable
upon demand. These matters raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The accompanying financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classifications of liabilities that might
be necessary should the Company be unable to continue as a going concern.

ARTHUR ANDERSEN LLP

Philadelphia, Pa.,
January 16, 1998

F-77

<PAGE>

NETWORK MEDICAL, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1996 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 17,385 $ --
Accounts receivable....................................... 5,066 13,291
Prepaid expenses and other................................ 1,209 --
-------- --------
Total current assets................................... 23,660 13,291
-------- --------
Investments................................................. -- 50,000
-------- --------
Property and equipment:
Equipment, furniture and fixtures......................... 8,931 8,931
Less -- Accumulated depreciation.......................... (2,164) (4,839)
-------- --------
6,767 4,092
-------- --------
$ 30,427 $ 67,383
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Line of credit............................................ $350,000 $500,000
Short-term note payable................................... 12,500 --
Accounts payable.......................................... 27,903 --
Accrued compensation...................................... 32,282 14,003
Due to U.S. PHYSICIANS, Inc............................... -- 171,414
-------- --------
Total current liabilities.............................. 422,685 685,417
-------- --------
Commitments and contingencies
Shareholders' deficit:
Common Stock, $1 par value; authorized 10,000,000 shares
of Class A; 10,000,000 shares of Class B; and 51,000
Founders shares; outstanding -- 51,000 Founders
shares................................................. 51,000 51,000
Additional paid-in capital................................ 136,500 136,500
Accumulated deficit....................................... (567,258) (805,534)
Stock subscriptions receivable............................ (12,500) --
-------- --------
Total shareholders' deficit............................ (392,258) (618,034)
-------- --------
$ 30,427 $ 67,383
======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-78

<PAGE>

NETWORK MEDICAL, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues.................................................... $ 10,111 $ 11,236 $ 42,269
--------- --------- ---------
Operating expenses:
Salaries, wages and benefits.............................. 66,054 183,418 126,747
General and administrative................................ 50,220 275,424 112,398
Depreciation.............................................. 433 1,731 2,675
--------- --------- ---------
Loss from operations........................................ (106,596) (449,337) (199,551)
Interest expense, net....................................... -- 8,169 38,725
--------- --------- ---------
Net loss.................................................... $(106,596) $(457,506) $(238,276)
========= ========= =========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-79

<PAGE>

NETWORK MEDICAL, INC.

STATEMENTS OF SHAREHOLDERS' DEFICIT

<TABLE>
<CAPTION>
ADDITIONAL STOCK
COMMON PAID-IN ACCUMULATED SUBSCRIPTIONS
STOCK CAPITAL DEFICIT RECEIVABLE TOTAL
------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1994........... $ -- $ -- $ (3,156) $ -- $ (3,156)
Issuance of Common Stock.............. 51,000 136,500 -- (88,500) 99,000
Net loss.............................. -- -- (106,596) -- (106,596)
------- -------- --------- -------- ---------
Balance at September 30, 1995........... 51,000 136,500 (109,752) (88,500) (10,752)
Payment of stock subscriptions........ -- -- -- 76,000 76,000
Net loss.............................. -- -- (457,506) -- (457,506)
------- -------- --------- -------- ---------
Balance at September 30, 1996........... 51,000 136,500 (567,258) (12,500) (392,258)
Payment of stock subscriptions........ -- -- -- 12,500 12,500
Net loss.............................. -- -- (238,276) -- (238,276)
------- -------- --------- -------- ---------
Balance at September 30, 1997........... $51,000 $136,500 $(805,534) $ -- $(618,034)
======= ======== ========= ======== =========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-80

<PAGE>

NETWORK MEDICAL, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net loss.................................................. $(106,596) $(457,506) $(238,276)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation......................................... 433 1,731 2,675
Changes in assets and liabilities --
Accounts receivable................................ (1,154) (3,912) (8,225)
Prepaid expenses and other......................... -- (1,209) 1,209
Accounts payable................................... 15,992 8,091 (27,903)
Accrued compensation............................... 4,858 27,424 (18,279)
Other.............................................. (13,905) -- --
Due to U.S. PHYSICIANS, Inc........................ -- -- 171,414
--------- --------- ---------
Net cash used in operating activities............ (100,372) (425,381) (117,385)
--------- --------- ---------
Investing activities:
Purchases of property and equipment....................... (8,554) (377) --
Investments............................................... -- -- (50,000)
--------- --------- ---------
Net cash used in investing activities............ (8,554) (377) (50,000)
--------- --------- ---------
Financing activities:
Net borrowings from line of credit........................ -- 350,000 150,000
Net borrowings (repayments) on short-term note payable.... -- 12,500 (12,500)
Proceeds from issuance of stock........................... 99,000 -- --
Proceeds from stock subscriptions......................... -- 76,000 12,500
--------- --------- ---------
Net cash provided by financing activities........ 99,000 438,500 150,000
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ (9,926) 12,742 (17,385)
Cash and cash equivalents, beginning of period.............. 14,569 4,643 17,385
--------- --------- ---------
Cash and cash equivalents, end of period.................... $ 4,643 $ 17,385 $ --
========= ========= =========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-81

<PAGE>

NETWORK MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND BUSINESS:

Network Medical, Inc. (the "Company") assists physicians in delivering
health care services for workers' compensation injuries and administers a
network of physicians, employers, and third party administrators for the purpose
of providing high quality, cost effective care in a managed care environment.

On January 27, 1997 (the "Initial Closing Date"), the Company and the
selling owners entered into a Stock Acquisition Agreement, (the "Affiliation
Agreement") with U.S. PHYSICIANS, Inc. ("USP"). Under the terms of the
Affiliation Agreement, USP acquired 85% of the outstanding stock of the Company
in exchange for notes and convertible notes. The notes issued pursuant to the
Affiliation Agreement contain a repurchase provision that allows the selling
owners, in the event that an initial public offering ("IPO") has not been
completed by USP by December 31, 1997 (the "Repurchase Date"), and certain other
defined events do not occur by the Repurchase Date, to repurchase the stock of
the Company for a defined period of time (the "Repurchase Period") by returning
all of the notes received and, at the election of USP, by either delivering to
USP certificates representing 15% of the outstanding stock of the Company or by
delivering to USP promissory notes in the aggregate principal amount of USP's
capital contribution to the Company. On January 16, 1998, the Repurchase Period
ended as the selling owners did not exercise their rights to repurchase their
shares.

In accordance with Accounting Principles Board Opinion No. 16, the
Affiliation Transaction is considered effective for applying purchase accounting
as the repurchase provision lapsed (the "Final Closing Date"). In addition,
pursuant to the Affiliation Agreement, for the period of time between the
Initial Closing Date and the Final Closing Date, USP was responsible for
managing the Company, including cash management. Accordingly, the balance sheet
as of September 30, 1997 reflects a Due to U.S. PHYSICIANS, Inc. account to
reflect the net cash activity for the same period.

Going Concern

The Company has experienced a net loss for the three years ended September
30, 1997 and has a substantial debt obligation that is payable upon demand.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are described in
the following paragraph. The accompanying financial statements do not include
any adjustments related to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.

For the year ended September 30, 1997, the Company reported a net loss of
$238,276, and as of September 30, 1997 had a total shareholders' deficiency of
$618,034. The Company is highly leveraged, with a line of credit due on demand
totaling $500,000 at September 30, 1997. In the event that the line of credit is
called by the bank, the shareholders of the Company who personally guaranteed
the debt would be required to satisfy the obligation. With the purchase of 85%
of the stock by USP in January 1997, management has implemented a plan to
control costs by reducing staff and is focusing on aggressively marketing its
products to increase revenues. There can be no assurances that the bank will not
demand payment on the line of credit or that the Company will be successful in
its attempts to control costs and raise revenues.

2. SIGNIFICANT ACCOUNTING POLICIES:

Use of Estimates

F-82

<PAGE>

NETWORK MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Fair Value of Financial Instruments

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.

Property and Equipment

Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation is provided over the
estimated useful lives of the applicable assets ranging from five to ten years
and are computed using the straight-line method.

Income Taxes

Statements of Cash Flows Information

For the years ended September 30, 1995, 1996 and 1997, the Company paid
interest of $0, $8,169 and $38,725, respectively. Amounts paid for taxes were
insignificant.

3. INVESTMENTS:

In November 1996, the Company acquired 15% of the outstanding stock of
Preferred Care Life Insurance Company ("PCLIC") for a purchase price of
$100,000. Of the purchase price, $50,000 was paid at acquisition and the balance
will be paid at the time PCLIC meets certain covenants contained in the purchase
agreement. The purchase entitles the Company to receive 95% of the net profits
generated by PCLIC in the Lancaster, Pennsylvania region, as defined.

4. LINE OF CREDIT:

The Company has a line of credit totaling $500,000, bearing interest at the
bank's prime rate (8.5% at September 30, 1997). The line is due on demand and is
collateralized by the personal guarantees of certain of the selling owners. At
September 30, 1997, the balance outstanding on the line of credit was $500,000.

5. SHORT-TERM NOTE PAYABLE:

In 1996, the Company borrowed $12,500 from a bank, bearing interest at the
bank's prime rate (8.25% at September 30, 1996). The loan was guaranteed by a
shareholder and was repaid with the proceeds from the shareholder's stock
subscription receivable on November 29, 1996.

F-83

<PAGE>

NETWORK MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

6. RELATED PARTY TRANSACTIONS:

The Company rents its property from a related entity. Rent expense amounted
to $950, $12,350 and $11,400 for the years ended September 30, 1995, 1996 and
1997, respectively. The lease expires in 1998. In addition, the Company owed
$13,905 for expense reimbursements to an entity related through common ownership
at September 30, 1994. This amount was paid in fiscal year 1995. Accounts
receivable as of September 30, 1996 includes $1,833 from providers who are also
shareholders.

7. INCOME TAXES:

The components of the income tax benefit are as follows:

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------
1995 1996 1997
------- -------- -------
<S> <C> <C> <C>
Current:
Federal............................................... $ -- $ -- $ --
State................................................. -- -- --
------- -------- -------
-- -- --
------- -------- -------
Deferred:
Federal............................................... (16,022) (68,494) (33,732)
State................................................. (10,682) (45,663) (16,614)
------- -------- -------
(26,704) (114,157) (50,346)
------- -------- -------
Increase in valuation allowance......................... 26,704 114,157 50,346
------- -------- -------
$ -- $ -- $ --
======= ======== =======
</TABLE>

The provision (benefit) for income taxes differs from the amount computed
by applying the U.S. Federal income tax rate (34%) because of the effect of the
following items:

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1995 1996 1997
-------- --------- --------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate.................... $(36,243) $(152,775) $(67,232)
Tax impact of Federal rate differential for graduated
rates............................................... 20,197 84,136 36,429
State income taxes, net of federal benefit............ (10,660) (45,751) (19,774)
Other................................................. 2 233 231
Valuation allowance................................... 26,704 114,157 50,346
-------- --------- --------
$ -- $ -- $ --
======== ========= ========
</TABLE>

F-84

<PAGE>

NETWORK MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

7. INCOME TAXES: -- (CONTINUED)

The components of the net deferred tax asset, measured under SFAS No. 109,
are as follows:

<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1996 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward........................... $140,131 $178,153
Accrued expenses.......................................... 1,675 13,695
-------- --------
141,806 191,848
Gross deferred tax liabilities.............................. (304) --
Less valuation allowance.................................... (141,502) (191,848)
-------- --------
Net deferred tax asset...................................... $ -- $ --
======== ========
</TABLE>

8. STOCK SPLIT:

During the year ended September 30, 1996, the stockholders approved a
30-for-1 stock split for its existing shares and authorized 10,000,000 shares of
Class A and 10,000,000 shares of Class B Common Stock. All amounts in these
financial statements have been restated to reflect the stock split.

F-85

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Orthopaedic and Sports Medicine Specialists of the Main Line, Inc.:

We have audited the accompanying balance sheets of Orthopaedic and Sports
Medicine Specialists of the Main Line, Inc. (a Pennsylvania corporation) as of
December 31, 1995 and 1996 and the related statements of operations and retained
earnings and cash flows for each of the three years in the period ended December
31, 1996. 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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Orthopaedic and Sports Medicine
Specialists of the Main Line, Inc. as of December 31, 1995 and 1996, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.

ARTHUR ANDERSEN LLP

Philadelphia, Pa.,
May 30, 1997

F-86

<PAGE>

ORTHOPAEDIC AND SPORTS MEDICINE SPECIALISTS OF
THE MAIN LINE, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents................................ $ 28,779 $ 10,337 $ 26,625
Accounts receivable, net of allowance of $509,004,
$848,707 and $973,493................................. 549,606 456,996 600,507
Prepaid expenses and other............................... 69,322 -- 10,889
-------- -------- --------
Total current assets................................ 647,707 467,333 638,021
-------- -------- --------
Property and equipment:
Equipment, furniture and fixtures........................ 223,047 243,082 243,082
Leasehold improvements................................... 21,526 21,526 21,526
-------- -------- --------
244,573 264,608 264,608
Less -- Accumulated depreciation and amortization........ (119,584) (149,097) (167,452)
-------- -------- --------
124,989 115,511 97,156
-------- -------- --------
$772,696 $582,844 $735,177
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Line of credit........................................... $ -- $ 15,000 $ --
Current maturities of long-term debt..................... 62,388 1,438 1,384
Accounts payable......................................... 10,914 9,190 7,682
Accrued compensation..................................... 85,659 106,405 88,151
Due to U.S. PHYSICIANS, Inc.............................. -- -- 68,376
Deferred income taxes.................................... 145,593 104,344 142,913
-------- -------- --------
Total current liabilities........................... 304,554 236,377 308,506
-------- -------- --------
Long-term debt............................................. -- 7,062 6,074
-------- -------- --------
Deferred income taxes...................................... 14,356 15,806 14,605
-------- -------- --------
Commitments and contingencies (Note 8)
Shareholders' equity:
Common Stock, $1 par value, 1,000 shares authorized,
100 shares issued and outstanding..................... 100 100 100
Retained earnings........................................ 453,686 323,499 405,892
-------- -------- --------
Total shareholders' equity.......................... 453,786 323,599 405,992
-------- -------- --------
$772,696 $582,844 $735,177
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-87

<PAGE>

ORTHOPAEDIC AND SPORTS MEDICINE SPECIALISTS OF
THE MAIN LINE, INC.

STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................... $1,696,165 $2,123,495 $1,961,309 $1,499,065 $1,702,723
---------- ---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits............. 1,148,236 1,426,695 1,654,870 1,114,175 896,281
Pharmaceuticals and medical supplies..... 39,836 32,543 37,282 26,029 24,394
General and administrative............... 448,755 462,116 410,569 307,609 382,559
Management fee due U.S. PHYSICIANS,
Inc.................................... -- -- -- -- 270,665
Depreciation and amortization............ 29,363 29,641 29,513 22,135 18,355
---------- ---------- ---------- ---------- ----------
Income (loss) from operations.............. 29,975 172,500 (170,925) 29,117 110,469
Interest (expense) income, net............. (8,644) (3,707) (506) (1,201) 686
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.......... 21,331 168,793 (171,431) 27,916 111,155
Income tax provision (benefit)............. 6,817 42,517 (41,244) 6,784 28,762
---------- ---------- ---------- ---------- ----------
Net income (loss).......................... 14,514 126,276 (130,187) 21,132 82,393
Retained earnings, beginning of period..... 312,896 327,410 453,686 453,686 323,499
---------- ---------- ---------- ---------- ----------
Retained earnings, end of period........... $ 327,410 $ 453,686 $ 323,499 $ 474,818 $ 405,892
========== ========== ========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-88

<PAGE>

ORTHOPAEDIC AND SPORTS MEDICINE SPECIALISTS OF
THE MAIN LINE, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1994 1995 1996 1996 1997
------- -------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)................................ $14,514 $126,276 $(130,187) $ 21,132 $ 82,393
Adjustments to reconcile net income (loss) to net
cash provided by operating activities --
Depreciation and amortization................ 29,363 29,641 29,513 22,135 18,355
Deferred income taxes........................ 7,726 39,590 (39,799) 6,784 37,368
Accounts receivable.......................... (12,328) (98,306) 92,610 139,247 (143,511)
Prepaid expenses and other................... 3,000 (69,322) 69,322 51,991 (10,889)
Due to U.S. PHYSICIANS, Inc.................. -- -- -- -- 68,376
Accounts payable............................. (5,828) 3,054 (1,724) (1,236) (18,254)
Accrued compensation......................... 7,371 4,288 20,746 7,566 (1,508)
------- -------- --------- -------- --------
Net cash provided by operating
activities.............................. 43,818 35,221 40,481 247,619 32,330
------- -------- --------- -------- --------
Investing activities:
Purchases of property and equipment.............. (31,207) (6,595) (20,035) (11,554) --
------- -------- --------- -------- --------
Financing activities:
Net borrowings (repayments) on line of credit.... 17,000 (17,000) 15,000 -- (15,000)
Proceeds from long-term debt..................... 81,291 139,519 8,500 (62,388) 635
Repayments on long-term debt..................... (74,304) (84,118) (62,388) -- (1,677)
Repayments on shareholder loans.................. (39,800) (40,200) -- -- --
------- -------- --------- -------- --------
Net cash used in financing activities..... (15,813) (1,799) (38,888) (62,388) (16,042)
------- -------- --------- -------- --------
Net (decrease) increase in cash and cash
equivalents...................................... (3,202) 26,827 (18,442) 173,677 16,288
Cash and cash equivalents, beginning of period..... 5,154 1,952 28,779 28,779 10,337
------- -------- --------- -------- --------
Cash and cash equivalents, end of period........... $ 1,952 $ 28,779 $ 10,337 $202,456 $ 26,625
======= ======== ========= ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-89

<PAGE>

ORTHOPAEDIC AND SPORTS MEDICINE SPECIALISTS OF
THE MAIN LINE, INC.

NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

1. ORGANIZATION AND BUSINESS:

Orthopaedic and Sports Medicine Specialists of the Main Line, Inc. (the
"Company") is a physician owned medical practice serving the Philadelphia,
Pennsylvania area. The Company is engaged in the business of rendering health
care services in the area of orthopedic, surgical and related support services.

On March 17, 1997, (the "Initial Closing Date"), the Company and the
selling owners entered into a Stock Acquisition Agreement, as amended on
December 28, 1997, (the "Affiliation Agreement") with U.S. PHYSICIANS, Inc.
("USP"). Under the terms of the Affiliation Agreement, USP and its affiliated
professional corporation acquired the outstanding stock of the Company in
exchange for cash, notes, convertible notes and shares of USP Common Stock,
subject to adjustment, as defined. The Affiliation Agreement contains a
repurchase provision that allows the selling owners, in the event that an
initial public offering ("IPO") has not been completed by USP by May 14, 1998
(the "Repurchase Date"), to repurchase the stock of their practice for a defined
period of time (the "Repurchase Period") by returning all of the consideration
received, excluding the initial cash payment. If the selling owners do not
exercise their rights under the repurchase provision during the Repurchase
Period, the provision terminates.

In accordance with Accounting Principles Board Opinion No. 16, the
Affiliation Agreement is not considered effective for applying purchase
accounting until either the date that USP completes an IPO or the repurchase
provision terminates (the "Final Closing Date"). Pursuant to the Affiliation
Agreement, for the period of time between the Initial Closing Date and the Final
Closing Date, USP is responsible for managing the Company, including cash
management, and receives a management fee equal to the income earned by the
Company. Accordingly, the statement of operations includes a management fee
charge for the income earned by the Company for the period from the Initial
Closing Date to September 30, 1997, and the balance sheet as of September 30,
1997 reflects a Due to U.S. PHYSICIANS, Inc. account to reflect the net cash
activity for the same period.

2. SIGNIFICANT ACCOUNTING POLICIES:

Interim Financial Statements

Use of Estimates

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

Fair Value of Financial Instruments

F-90

<PAGE>

ORTHOPAEDIC AND SPORTS MEDICINE SPECIALISTS OF
THE MAIN LINE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Net Revenues

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.

Accounts Receivable

Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.

Concentration of Credit Risk

Property and Equipment

Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation and amortization are
provided over the estimated useful lives of the applicable assets ranging from
five to seven years for equipment, furniture and fixtures and the remaining
lease term for leasehold improvements and are computed using the straight-line
method.

Income Taxes

Statements of Cash Flows Information

For the years ended December 31, 1994, 1995 and 1996, the Company paid
interest of $8,683, $3,763 and $2,114, respectively. Amounts paid for taxes were
not significant.

3. LINE OF CREDIT:

At December 31, 1996, the Company had a $55,000 line of credit. The line is
secured by substantially all of the Company's assets and bears interest at the
bank's prime rate plus 1% (9.5% at December 31, 1996). At December 31, 1995 and
1996, the Company had $0 and $15,000 outstanding under the line, respectively.
The line expires on December 31, 1997.

4. LONG-TERM DEBT:

The Company has financed all or a portion of its malpractice insurance
premiums with a bank with one-year notes. In January 1994, January 1995 and
December 1995, the Company borrowed $81,291, $77,131 and

F-91

<PAGE>

ORTHOPAEDIC AND SPORTS MEDICINE SPECIALISTS OF
THE MAIN LINE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

4. LONG-TERM DEBT: -- (CONTINUED)

$62,388, respectively. The interest rate on these notes for the years ended
December 31, 1994, 1995 and 1996, was 7.0%, 8.5% and 8.5%, respectively.

In December 1996, the Company entered into an agreement with a bank to
borrow $8,500 for the purchase of new equipment, payable monthly through
December 2001. The note bears an interest rate of 9.5%.

5. EMPLOYEE BENEFIT PLAN:

The Company maintains a profit sharing plan covering substantially all
full-time employees who are at least 21 years of age and completed one year of
service in which at least 1,000 hours are worked. Employer contributions vest
ratably in 20% increments over five years commencing after the second year of
employment. The Company's contributions to the plan totaled $71,075, $74,977 and
$86,173 for the years ended December 31, 1994, 1995 and 1996.

6. RELATED-PARTY TRANSACTIONS:

The Company paid $85,000 each year during the years ended December 31,
1994, 1995 and 1996, respectively, for the lease of office space from a
shareholder. The lease agreement expires on December 31, 1997.

7. INCOME TAXES:

The components of the income tax provision (benefit) are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
------ ------- --------
<S> <C> <C> <C>
Current:
Federal............................................. $ (545) $ 1,756 $ (867)
State............................................... (364) 1,171 (578)
------ ------- --------
(909) 2,927 (1,445)
------ ------- --------
Deferred:
Federal............................................. 4,636 23,754 (23,879)
State............................................... 3,090 15,836 (15,920)
------ ------- --------
7,726 39,590 (39,799)
------ ------- --------
$6,817 $42,517 $(41,244)
====== ======= ========
</TABLE>

The provision (benefit) for income taxes differs from the amount computed
by applying the U.S. Federal income tax rate (34%) because of the effect of the
following items:

F-92

<PAGE>

ORTHOPAEDIC AND SPORTS MEDICINE SPECIALISTS OF
THE MAIN LINE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

7. INCOME TAXES: -- (CONTINUED)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
------ -------- --------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate................... $7,253 $ 57,390 $(58,286)
Tax impact of Federal rate differential for graduated
rates.............................................. (3,917) (32,510) 32,788
State income taxes, net of federal benefit........... 2,224 16,587 (16,999)
Non-deductible travel and entertainment.............. 1,257 1,050 1,253
------ -------- --------
$6,817 $ 42,517 $(41,244)
====== ======== ========
</TABLE>

The components of the net deferred tax liability, measured under SFAS No.
109, are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
-------- --------
<S> <C> <C>
Deferred tax liabilities --
Property and equipment............................. $ 14,356 $ 15,806
Cash to accrual adjustments........................ 145,593 104,344
-------- --------
Net deferred tax liability........................... $159,949 $120,150
======== ========
</TABLE>

8. COMMITMENTS AND CONTINGENCIES:

Lease Obligations

Minimum annual rental commitments for noncancelable operating leases having
terms in excess of one year as of December 31, 1996, are as follows:

RELATED OTHER
PARTY OPERATING
LEASES LEASES
------- ---------
1997........................................... $85,000 $89,221

Rental expense, including related party leases (see Note 6), under
noncancelable operating leases for the years ended December 31, 1994, 1995 and
1996 was $209,298, $218,045 and $203,879, respectively.

Insurance Policies

The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.

F-93

<PAGE>

ORTHOPAEDIC AND SPORTS MEDICINE SPECIALISTS OF
THE MAIN LINE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

8. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)

Health Care Regulatory Environment and Reliance on Government Programs

F-94

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Orthopaedic Surgery and Sports Medicine, Inc.:

We have audited the accompanying balance sheets of Orthopaedic Surgery and
Sports Medicine, Inc. (a Pennsylvania corporation) as of December 31, 1995 and
1996, and the related statements of operations and retained earnings and cash
flows for each of the three years in the period ended December 31, 1996. 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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Orthopaedic Surgery and Sports
Medicine, Inc. as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Philadelphia, Pa.,
April 1, 1997

F-95

<PAGE>

ORTHOPAEDIC SURGERY AND SPORTS MEDICINE, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents................................ $134,074 $ 59,096 $ 864
Accounts receivable, net of allowance of $381,012,
$546,021 and $637,155................................. 413,820 632,261 624,239
Due from shareholders.................................... 21,676 -- --
Due from U.S. PHYSICIANS, Inc............................ -- -- 234,026
Prepaid expenses and other............................... 5,663 5,813 6,208
-------- -------- --------
Total current assets................................ 575,233 697,170 865,337
-------- -------- --------
Property and equipment:
Equipment, furniture and fixtures........................ 128,118 123,760 123,760
Leasehold improvements................................... 81,680 81,680 81,680
-------- -------- --------
209,798 205,440 205,440
Less -- accumulated depreciation and amortization........ (186,225) (192,002) (194,433)
-------- -------- --------
23,573 13,438 11,007
-------- -------- --------
Patient list, net.......................................... 63,750 46,750 34,000
-------- -------- --------
Other assets............................................... 2,500 2,500 2,500
-------- -------- --------
$665,056 $759,858 $912,844
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Line of credit........................................... $240,177 $212,428 $249,428
Note payable............................................. 21,250 -- --
Accounts payable......................................... 142,586 161,754 10,840
Accrued compensation..................................... 146,858 9,927 168,810
-------- -------- --------
Total current liabilities........................... 550,871 384,109 429,078
-------- -------- --------
Commitments and contingencies (Note 6)
Shareholders' equity:
Common Stock, no par value; 100 shares authorized, issued
and outstanding....................................... 200 200 200
Retained earnings........................................ 113,985 375,549 483,566
-------- -------- --------
Total shareholders' equity.......................... 114,185 375,749 483,766
-------- -------- --------
$665,056 $759,858 $912,844
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-96

<PAGE>

ORTHOPAEDIC SURGERY AND SPORTS MEDICINE, INC.

STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................... $2,843,679 $2,733,804 $2,993,431 $2,199,743 $2,345,074
---------- ---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits............. 2,223,869 2,466,886 2,124,375 1,661,776 1,697,050
Pharmaceuticals and medical supplies..... 29,421 21,357 58,380 47,306 43,965
General and administrative............... 668,042 400,714 507,050 283,647 367,757
Management fee due
U.S. PHYSICIANS, Inc................... -- -- -- -- 109,607
Depreciation and amortization............ 21,159 20,219 22,777 16,601 15,181
---------- ---------- ---------- ---------- ----------
Income (loss) from operations.............. (98,812) (175,372) 280,849 190,413 111,514
Interest expense, net...................... 14,784 16,167 19,285 14,687 3,497
---------- ---------- ---------- ---------- ----------
Net income (loss).......................... (113,596) (191,539) 261,564 175,726 108,017
Retained earnings, beginning of period..... 419,120 305,524 113,985 113,985 375,549
---------- ---------- ---------- ---------- ----------
Retained earnings, end of period........... $ 305,524 $ 113,985 $ 375,549 $ 289,711 $ 483,566
========== ========== ========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-97

<PAGE>

ORTHOPAEDIC SURGERY AND SPORTS MEDICINE, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- -------------------
1994 1995 1996 1996 1997
--------- --------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)............................... $(113,596) $(191,539) $261,564 $175,726 $108,017
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities --
Depreciation and amortization............... 21,159 20,219 22,777 16,601 15,181
Changes in assets and liabilities --
Accounts receivable...................... 34,646 154,074 (218,441) (101,029) 8,022
Due from shareholders.................... 45,863 17,477 21,676 45,356 --
Due from U.S. PHYSICIANS, Inc............ -- -- -- -- (234,026)
Prepaid expenses and other............... 19,336 1,725 (150) 200 (395)
Accounts payable......................... 120,053 (92,242) 19,168 (8,212) (150,914)
Accrued compensation..................... (95,479) 111,262 (136,931) (113,075) 158,883
--------- --------- -------- -------- --------
Net cash provided by (used in)
operating activities................. 31,982 20,976 (30,337) 15,567 (95,232)
--------- --------- -------- -------- --------
Investing activities:
Purchases of property and equipment............. (19,504) (5,608) -- -- --
Sale of property and equipment.................. -- -- 4,358 4,358 --
Purchase of patient list........................ (10,625) -- -- -- --
--------- --------- -------- -------- --------
Net cash (used in) provided by
investing activities................. (30,129) (5,608) 4,358 4,358 --
--------- --------- -------- -------- --------
Financing activities:
Net borrowings (payments) on line of credit..... 5,571 74,365 (27,749) (36,749) 37,000
Repayments on long-term debt.................... (10,625) (42,500) (21,250) (21,250) --
--------- --------- -------- -------- --------
Net cash (used in) provided by
financing activities................. (5,054) 31,865 (48,999) (57,999) 37,000
--------- --------- -------- -------- --------
Net (decrease) increase in cash and cash
equivalents..................................... (3,201) 47,233 (74,978) (38,074) (58,232)
Cash and cash equivalents, beginning of period.... 90,042 86,841 134,074 134,074 59,096
--------- --------- -------- -------- --------
Cash and cash equivalents, end of period.......... $ 86,841 $ 134,074 $ 59,096 $ 96,000 $ 864
========= ========= ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-98

<PAGE>

ORTHOPAEDIC SURGERY AND SPORTS MEDICINE, INC.

NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

1. ORGANIZATION AND BUSINESS:

Orthopaedic Surgery and Sports Medicine, Inc. (the "Company") is a
physician-owned medical practice serving the Philadelphia, Pennsylvania area.
The Company was formed in July 1978 for the purpose of rendering professional
medical orthopaedic and rehabilitative services.

On March 31, 1997 (the "Initial Closing Date"), the Company and the selling
owners entered into a Stock Acquisition Agreement, as amended on December 19,
1997, (the "Affiliation Agreement") with U.S. PHYSICIANS, Inc. ("USP"). Under
the terms of the Affiliation Agreement, USP at its affiliated professional
corporation acquired the outstanding stock of the Company in exchange for cash,
notes, convertible notes and shares of USP Common Stock, subject to adjustment,
as defined. The Affiliation Agreement contains a repurchase provision that
allows the selling owners, in the event that an initial public offering ("IPO")
has not been completed by USP by May 14, 1998 (the "Repurchase Date"), to
repurchase the stock of their practice for a defined period of time (the
"Repurchase Period") by returning all of the consideration received, excluding
the initial cash payment. If the selling owners do not exercise their rights
under the repurchase provision during the Repurchase Period, the provision
terminates.

2. SIGNIFICANT ACCOUNTING POLICIES:

Interim Financial Statements

Use of Estimates

Fair Value of Financial Instruments

F-99

<PAGE>

ORTHOPAEDIC SURGERY AND SPORTS MEDICINE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Net Revenues

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.

Accounts Receivable

Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.

Concentration of Credit Risk

Property and Equipment

Property and equipment are stated at cost. Repairs and maintenance are
charged to expense as incurred. Depreciation and amortization are provided over
the estimated useful lives of the applicable assets ranging from five to seven
years for equipment, furniture and fixtures and the remaining lease term for
leasehold improvements and are computed using the straight-line method.

Patient List

The patient list represents the value assigned to patient relationships
obtained from other physicians. The patient list is being amortized on a
straight-line basis over five years. For the years ended December 31, 1994, 1995
and 1996 amortization expense was $4,250, $17,000 and $17,000, respectively.

Due from Shareholders

Due from shareholders represent advances to shareholders which are repaid
in subsequent periods.

Income Taxes

The Company has elected treatment as an "S" Corporation for both federal
and state income tax purposes, and accordingly is not taxed as a separate
entity. The Company's taxable income or loss is allocated to each owner and
recognized on their individual tax return. Accordingly, no provision for income
taxes has been reflected in the accompanying financial statements.

The Company reports certain income and expense items for income tax
purposes on a different basis than that reflected in the accompanying financial
statements. The primary differences are due to the cash basis of accounting for
income tax purposes. The cumulative amount of these differences as of December
31, 1996 was approximately $470,000. If the S Corporation status is terminated,
then a deferred income tax liability of approximately $115,000 related to these
cumulative differences would need to be reflected in the accompanying financial
statements.

F-100

<PAGE>

ORTHOPAEDIC SURGERY AND SPORTS MEDICINE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Statements of Cash Flows Information

For the years ended December 31, 1994, 1995 and 1996, the Company paid
interest of $14,784, $16,167 and $19,285, respectively.

In September 1994, the Company purchased a patient list for total
consideration of $85,000 consisting of a note for $74,375 and cash of $10,625
(see Note 4).

Reclassification

Certain previously reported amounts have been reclassified to conform with
the current period presentation.

3. LINE OF CREDIT:

In June 1993, the Company entered into a credit agreement (the "Agreement")
with a local bank for a $250,000 line of credit. Under the terms of the
Agreement, the Company must maintain a zero balance for a period of at least 30
consecutive days for each 12-month period. Interest is accrued on the
outstanding balance at the bank's prime rate plus .25% (8.50% at December 31,
1996). Outstanding borrowings plus any unpaid interest, fees or expenses are
guaranteed by an owning physician and his spouse.

4. NOTE PAYABLE:

In September 1994, the Company signed a note payable for the purchase of a
patient list. The $74,375 note is payable in quarterly principal payments of
$10,625 plus interest at 6%. The balance was paid off in June 1996.

5. EMPLOYEE BENEFIT PLAN:

The Company provides a 401(k) profit sharing plan that covers all qualified
employees, as defined by the plan agreement. Employees vest pro rata over five
years beginning after their first year as a participant. Contributions to the
plan are discretionary and are determined by the Company on an annual basis. For
the years ended December 31, 1994, 1995 and 1996, contributions to the plan were
$88,445, $0 and $0, respectively.

6. COMMITMENTS AND CONTINGENCIES:

Lease Obligations

The Company leases some of its office space from entities affiliated with
certain of the owners of medical groups affiliated with the Company. Future
minimum lease payments for noncancellable operating leases primarily for office
space as of December 31, 1996, are as follows:

<TABLE>
<CAPTION>
RELATED-PARTY NONRELATED-PARTY
LEASES LEASES
------------- ----------------
<S> <C> <C>
1997........................................... $133,552 $29,843
1998........................................... 139,048 10,243
1999........................................... 55,935 7,111
2000........................................... 59,292 6,604
2001........................................... -- 3,812
</TABLE>

F-101

<PAGE>

ORTHOPAEDIC SURGERY AND SPORTS MEDICINE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

6. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)

Rent expense on related-party operating leases was $119,079, $128,304 and
$110,420 for the years ended December 31, 1994, 1995 and 1996, respectively.
Rent expense on nonrelated-party operating leases was $76,708, $41,309 and
$99,582 for the years ended December 31, 1994, 1995 and 1996, respectively.

Employment Agreements

The Company has employment agreements with two employees that require
minimum levels of compensation. The following table summarizes the aggregate
minimum annual compensation due under the agreements as of December 31, 1996:

1997...................................................... $253,500
1998...................................................... 170,000
1999...................................................... 202,500
2000...................................................... 235,000
2001 and thereafter....................................... 125,000

Insurance Policies

The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.

Health Care Regulatory Environment and Reliance on Government Programs

F-102

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To RJK Medical Associates, Ltd.:

We have audited the accompanying balance sheet of RJK Medical Associates, Ltd.
(a Pennsylvania corporation) as of December 31, 1996 and the related statements
of operations and retained earnings and cash flows for the year ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of RJK Medical Associates, Ltd. as
of December 31, 1996, and the results of its operations and its cash flows for
the year ended December 31, 1996, in conformity with generally accepted
accounting principles.

ARTHUR ANDERSEN LLP

Philadelphia, Pa.,
October 24, 1997

F-103
<PAGE>

RJK MEDICAL ASSOCIATES, LTD.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents................................. $ 30,332 $ 5,936
Accounts receivable, net of allowance of $308,605 and
$391,381............................................... 221,973 284,495
Prepaid expenses and other................................ 2,719 2,249
-------- --------
Total current assets................................. 255,024 292,680
-------- --------
Property and equipment:
Equipment, furniture and fixtures......................... 144,933 145,075
Less -- Accumulated depreciation.......................... (104,998) (108,171)
-------- --------
39,935 36,904
-------- --------
Deferred income taxes....................................... -- 32,776
-------- --------
$294,959 $362,360
======== ========

LIABILITIES AND RETAINED EARNINGS

Current liabilities:
Accounts payable.......................................... $ 28,748 $ 3,821
Accrued compensation...................................... 15,253 22,421
Deferred income taxes..................................... 3,149 46,416
Due to U.S. PHYSICIANS, Inc............................... -- 52,969
-------- --------
Total current liabilities............................ 47,150 125,627
-------- --------
Deferred income taxes....................................... 9,417 --
-------- --------
Commitments and contingencies (Note 5)
Retained earnings........................................... 238,392 236,733
-------- --------
$294,959 $362,360
======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-104
<PAGE>

RJK MEDICAL ASSOCIATES, LTD.

STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------ -------------------
1996 1996 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Net revenues............................................... $943,045 $745,502 $654,914
-------- -------- --------
Operating expenses:
Salaries, wages and benefits............................. 717,654 531,246 541,598
General and administrative............................... 162,885 88,877 23,888
Management fee due U.S. PHYSICIANS, Inc.................. -- -- 86,844
Depreciation............................................. 3,356 2,752 3,173
-------- -------- --------
Income (loss) before income taxes.......................... 59,150 122,627 (589)
Income tax provision....................................... 14,989 29,798 1,070
-------- -------- --------
Net income (loss).......................................... 44,161 92,829 (1,659)
Retained earnings, beginning of period..................... 194,231 194,231 238,392
-------- -------- --------
Retained earnings, end of period........................... $238,392 $287,060 $236,733
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-105
<PAGE>

RJK MEDICAL ASSOCIATES, LTD.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------ -------------------
1996 1996 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Operating activities:
Net income (loss)........................................ $ 44,161 $ 92,829 $ (1,659)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities --
Depreciation........................................ 3,356 2,752 3,173
Deferred income taxes............................... 11,527 29,798 1,074
Changes in assets and liabilities --
Accounts receivable.............................. (12,471) (2,503) (62,522)
Prepaid expenses and other....................... (418) (344) 470
Accounts payable................................. (12,158) (38,510) (24,927)
Accrued compensation............................. (21,004) (7,270) 7,168
Due to U.S. PHYSICIANS, Inc...................... -- -- 52,969
-------- -------- --------
Net cash provided by (used in) operating
activities.................................. 12,993 76,752 (24,254)
-------- -------- --------
Investing activities:
Purchases of property and equipment...................... (2,500) (1,000) (142)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents....... 10,493 75,752 (24,396)
Cash and cash equivalents, beginning of period............. 19,839 19,839 30,332
-------- -------- --------
Cash and cash equivalents, end of period................... $ 30,332 $ 95,591 $ 5,936
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-106
<PAGE>

RJK MEDICAL ASSOCIATES, LTD.

NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

1. ORGANIZATION AND BUSINESS:

RJK Medical Associates, Ltd. (the "Company") is a physician owned medical
practice serving the Philadelphia, Pennsylvania area. The Company was formed in
1980 for the purpose of rendering professional medical orthopedic and
rehabilitative services and related medical services to the general public.

On January 13, 1997 (the "Initial Closing Date"), the Company and the
selling owner entered into an Asset Acquisition Agreement, as amended on
November 22, 1997, (the "Affiliation Agreement") with U.S. PHYSICIANS, Inc.
("USP"). Under the terms of the Affiliation Agreement, USP and its affiliated
professional corporation acquired the majority of the assets of the Company in
exchange for cash, notes, convertible notes and shares of USP Common Stock,
subject to adjustment, as defined. The Affiliation Agreement contains a
repurchase provision that allows the selling owner, in the event that an initial
public offering ("IPO") has not been completed by USP by May 14, 1998 (the
"Repurchase Date"), to repurchase the net assets of his practice for a defined
period of time (the "Repurchase Period") by returning all of the consideration
received, excluding the initial cash payment. If the selling owner does not
exercise his rights under the repurchase provision during the Repurchase Period,
the provision terminates.

In accordance with Accounting Principles Board Opinion No. 16, the
Affiliation Agreement is not considered effective for applying purchase
accounting until either the date that USP completes an IPO or the repurchase
provision terminates (the "Final Closing Date"). Pursuant to the Affiliation
Agreement, for the period of time between the Initial Closing Date and the Final
Closing Date, USP is responsible for managing the Company, including cash
management, and receives a management fee equal to the income earned by the
Company. Accordingly, the statement of operations includes a management fee
charge for the income earned by the Company for the period from the Initial
Closing Date to September 30, 1997, and the balance sheet as of September 30,
1997 reflects a Due to U.S. PHYSICIANS, Inc. account to reflect the net cash
activity for the same period.

2. SIGNIFICANT ACCOUNTING POLICIES:

Interim Financial Statements

Use of Estimates

F-107
<PAGE>

RJK MEDICAL ASSOCIATES, LTD.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Fair Value of Financial Instruments

Financial instruments consist of cash and cash equivalents, accounts
receivable and certain current liabilities. The carrying amounts reported in the
balance sheets for these items approximate fair value.

Net Revenues

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.

Accounts Receivable

Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.

Concentration of Credit Risk

Property and Equipment

Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation is provided over the
estimated useful lives of the applicable assets ranging from five to seven years
and is computed using the straight-line method.

Income Taxes

Statements of Cash Flows Information

Amounts paid for interest and taxes were not significant.

3. EMPLOYEE BENEFIT PLAN:

The Company provides a 401(k) profit sharing plan that covers all qualified
employees, as defined by the plan agreement. Employees vest pro rata over five
years beginning after their first year as a participant. Contributions to the
plan are discretionary and are determined by the Company on an annual basis. For
the year ended December 31, 1996, contributions to the plan were $30,000.

F-108
<PAGE>

RJK MEDICAL ASSOCIATES, LTD.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

4. INCOME TAXES:

The components of the income tax provision are as follows as of December
31, 1996:

<TABLE>
<S> <C>
Current:
Federal................................................. $ 2,077
State................................................... 1,385
-------
3,462
-------
Deferred:
Federal................................................. 6,916
State................................................... 4,611
-------
11,527
-------
$14,989
=======
</TABLE>

Income tax expense differs from the amount currently payable or receivable
because certain expense, primarily depreciation and accruals, are reported in
different periods for financial reporting and income tax purposes. The Company
is on a cash basis of accounting for income tax purposes.

The provision for income taxes differs from the amount computed by applying
the U.S. Federal income tax rate (34%) because of the effect of the following
items as of December 31, 1996:

<TABLE>
<S> <C>
Tax at U.S. Federal statutory rate........................ $ 20,111
Tax impact of Federal rate differential for graduated
rates................................................... (11,758)
State income taxes, net of federal benefit................ 5,569
Non-deductible travel and entertainment................... 1,067
--------
$ 14,989
========
</TABLE>

The components of the net deferred tax liability, measured under SFAS No.
109, are as follows as of December 31, 1996:

<TABLE>
<S> <C>
Deferred tax liabilities:
Property and equipment..................................... $ 9,417
Cash to accrual adjustments................................ 3,149
-------
$12,566
=======
</TABLE>

5. COMMITMENTS AND CONTINGENCIES:

Lease Obligations

The Company has verbal leases for office space from the hospitals where the
Company has operations. Rent expense on operating leases was $12,456 for the
year ended December 31, 1996.

Insurance Policies

F-109
<PAGE>

RJK MEDICAL ASSOCIATES, LTD.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

5. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)

The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.

Health Care Regulatory Environment and Reliance on Government Programs

F-110
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To South Shore Orthopedics, PA:

We have audited the accompanying balance sheets of South Shore Orthopedics, PA
(a New Jersey corporation) as of March 31, 1996 and 1997, and the related
statements of operations and retained earnings and cash flows for each of the
three years in the period ended March 31, 1997. 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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of South Shore Orthopedics, PA as
of March 31, 1996 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 1997, in conformity
with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Philadelphia, Pa.,
May 28, 1997

F-111
<PAGE>

SOUTH SHORE ORTHOPEDICS, PA

BALANCE SHEETS

<TABLE>
<CAPTION>
MARCH 31,
--------------------- SEPTEMBER 30,
1996 1997 1997
-------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 70,149 $ 123,856 $ 397
Accounts receivable, net of allowance of $599,990,
$780,468 and $471,227............................... 733,320 878,773 493,539
Due from U.S. PHYSICIANS, Inc.......................... -- -- 195,598
Prepaid expenses and other............................. 20,871 2,771 5,802
-------- ---------- --------
Total current assets.............................. 824,340 1,005,400 695,336
-------- ---------- --------
Property and equipment:
Equipment, furniture and fixtures...................... 161,331 161,331 161,331
Leasehold improvements................................. 27,051 27,051 27,051
-------- ---------- --------
188,382 188,382 188,382
Less -- Accumulated depreciation and amortization...... (136,946) (154,972) (160,770)
-------- ---------- --------
51,436 33,410 27,612
-------- ---------- --------
Deferred income taxes.................................... 29,075 -- --
-------- ---------- --------
$904,851 $1,038,810 $722,948
======== ========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit......................................... $ 48,500 $ 27,843 $ --
Current maturities of long-term debt................... 30,000 -- --
Accounts payable....................................... 12,649 10,267 39,297
Accrued compensation................................... 74,096 292,424 17,870
Deferred income taxes.................................. 176,243 196,574 164,464
Due to U.S. PHYSICIANS, Inc............................ -- 8,559 --
-------- ---------- --------
Total current liabilities......................... 341,488 535,667 221,631
-------- ---------- --------
Long-term debt........................................... 110,000 -- --
-------- ---------- --------
Commitments and contingencies (Note 8)
Shareholders' equity:
Common Stock, no par value, 100 shares authorized,
issued and outstanding.............................. 2,000 2,000 2,000
Retained earnings...................................... 451,363 501,143 499,317
-------- ---------- --------
Total shareholders' equity........................ 453,363 503,143 501,317
-------- ---------- --------
$904,851 $1,038,810 $722,948
======== ========== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-112
<PAGE>

SOUTH SHORE ORTHOPEDICS, PA

STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------------------ ---------------------
1995 1996 1997 1996 1997
---------- ---------- ---------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues................................. $1,722,240 $1,804,697 $2,443,359 $1,234,011 $708,321
---------- ---------- ---------- ---------- --------
Operating expenses:
Salaries, wages and benefits............... 1,160,411 1,236,400 1,569,334 694,782 377,134
Pharmaceuticals and medical supplies....... 32,890 44,784 41,733 33,811 10,133
General and administrative................. 486,628 591,906 699,395 306,983 147,903
Management fee due U.S. PHYSICIANS, Inc.... -- -- 19,665 -- 167,328
Depreciation and amortization.............. 10,530 14,811 18,026 11,838 5,798
---------- ---------- ---------- ---------- --------
Income (loss) from operations................ 31,781 (83,204) 95,206 186,597 25
Interest expense, net........................ 1,820 11,821 17,946 2,016 25
---------- ---------- ---------- ---------- --------
Income (loss) before income taxes............ 29,961 (95,025) 77,260 184,581 --
Income tax provision (benefit)............... 8,388 (19,854) 27,480 44,853 1,826
---------- ---------- ---------- ---------- --------
Net income (loss)............................ 21,573 (75,171) 49,780 139,728 (1,826)
Retained earnings, beginning of period....... 504,961 526,534 451,363 451,363 501,143
---------- ---------- ---------- ---------- --------
Retained earnings, end of period............. $ 526,534 $ 451,363 $ 501,143 $ 591,091 $499,317
========== ========== ========== ========== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-113
<PAGE>

SOUTH SHORE ORTHOPEDICS, PA

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
----------------------------- -------------------
1995 1996 1997 1996 1997
------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)................................. $21,573 $(75,171) $ 49,780 $139,728 $ (1,826)
Adjustments to reconcile net income (loss)
to net cash (used in) provided by
operating activities --
Depreciation and amortization................. 10,530 14,811 18,026 11,838 5,798
Deferred income taxes......................... 10,010 (15,237) 49,406 44,853 (32,110)
Changes in assets and liabilities --
Accounts receivable........................ (51,964) (31,840) (145,453) (129,781) 385,234
Due from U.S. PHYSICIANS, Inc.............. -- -- -- -- (195,598)
Prepaid expenses and other................. 19,661 (10,282) 18,100 6,471 (3,031)
Accounts payable........................... (8,214) 3,966 (2,382) 6,174 29,030
Accrued compensation....................... (6,369) 9,017 218,328 14,617 (274,554)
Due to U.S. PHYSICIANS, Inc................ -- -- 8,559 -- (8,559)
------- -------- -------- -------- --------
Net cash (used in) provided by operating
activities............................. (4,773) (104,736) 214,364 93,900 (95,616)
------- -------- -------- -------- --------
Investing activities:
Purchases of property and equipment............... (5,560) (37,241) -- -- --
------- -------- -------- -------- --------
Financing activities:
Net borrowings (payments) on line of credit....... -- 48,500 (20,657) (15,000) (27,843)
Proceeds from long-term debt...................... -- 150,000 -- -- --
Repayments on long-term debt...................... -- (10,000) (140,000) (15,000) --
------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities............................. -- 188,500 (160,657) (30,000) (27,843)
------- -------- -------- -------- --------
Net (decrease) increase in cash and cash
equivalents....................................... (10,333) 46,523 53,707 63,900 (123,459)
Cash and cash equivalents, beginning of period...... 33,959 23,626 70,149 70,149 123,856
------- -------- -------- -------- --------
Cash and cash equivalents, end of period............ $23,626 $ 70,149 $123,856 $134,049 $ 397
======= ======== ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-114
<PAGE>

SOUTH SHORE ORTHOPEDICS, PA

NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

1. ORGANIZATION AND BACKGROUND:

South Shore Orthopedics, P.A. (the "Company") is a physician-owned medical
practice serving the southern New Jersey area. The Company is engaged in the
business of rendering health care services in the area of orthopedic, medical,
surgical and related support services.

On March 10, 1997 (the "Initial Closing Date"), the Company and the selling
owners entered into a Stock Acquisition Agreement, as amended on January 12,
1998, (the "Affiliation Agreement") with U.S. PHYSICIANS, Inc. ("USP"). Under
the terms of the Affiliation Agreement, USP and its affiliated professional
corporation acquired the outstanding stock of the Company in exchange for cash,
notes, convertible notes and shares of USP Common Stock, subject to adjustment,
as defined. The Affiliation Agreement contains a repurchase provision that
allows the selling owners, in the event that an initial public offering ("IPO")
has not been completed by USP by May 14, 1998 (the "Repurchase Date"), to
repurchase the stock of their practice for a defined period of time (the
"Repurchase Period") by returning all of the consideration received, excluding
the initial cash payment. If the selling owners do not exercise their rights
under the repurchase provision during the Repurchase Period, the provision
expires.

In accordance with Accounting Principles Board Opinion No. 16, the
affiliation transaction is not considered effective for applying purchase
accounting until either the date that USP completes an IPO or the repurchase
provision lapses (the "Final Closing Date"). Pursuant to the Affiliation
Agreement, for the period of time between the Initial Closing Date and the Final
Closing Date, USP is responsible for managing the Company, including cash
management, and receives a management fee equal to the income earned by the
Company. Accordingly, the statement of operations includes a management fee
charge for the income earned by the Company for the period from the Initial
Closing Date to September 30, 1997, and the balance sheets as of March 31, 1997
and September 30, 1997 reflects a Due to or from U.S. PHYSICIANS, Inc. account
to reflect the net cash activity for the same period.

2. SIGNIFICANT ACCOUNTING POLICIES:

Interim Financial Statements

The financial statements for the six months ended September 30, 1996 and
1997, are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of September 30, 1997, and the results
of its operations for the six months ended September 30, 1996 and 1997. The
results of operations for the six-month period are not necessarily indicative of
the results to be expected for the entire year.

Use of Estimates

Fair Value of Financial Instruments

F-115
<PAGE>

SOUTH SHORE ORTHOPEDICS, PA

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Net Revenues

Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period that services are rendered. Contractual adjustments
represent the difference between charges at established rates and the estimated
amount to be reimbursed.

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.

Accounts Receivable

Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and other estimated bad debts.

Concentration of Credit Risk

Property and Equipment

Property and equipment are stated at cost. Expenditures for maintenance are
charged to expense as incurred. Depreciation is provided using the straight-line
method over the estimated useful life of each class of depreciable asset ranging
from five to seven years for equipment, furniture and fixtures and over the
remaining lease term for leasehold improvements.

Income Taxes

Statements of Cash Flows Information

For the years ended March 31, 1995, 1996 and 1997, the Company paid
interest of $0, $9,656 and $16,334, respectively. Amounts paid for taxes were
not significant.

3. LINE OF CREDIT:

In May 1995, the Company entered into a credit agreement (the "Agreement")
with a local bank for a $50,000 line of credit. The line is unsecured and bears
interest at the bank's prime rate plus 1%. Under the terms of the Agreement, the
Company must maintain a zero balance for a period of at least 30 consecutive
days for each 12-month period. Borrowings under the line are secured by
substantially all of the Company's assets. At March 31, 1996 and 1997, the
Company had $48,500 and $27,843 outstanding against the line, respectively. The
line expires on June 30, 1997.

F-116
<PAGE>

SOUTH SHORE ORTHOPEDICS, PA

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

4. LONG-TERM DEBT:

In December 1995, the Company entered into an agreement with a bank to
borrow $150,000 for the costs associated with employing an additional physician
and establishing a new facility. The note was payable monthly in 60 equal
installments of $2,500 plus interest equal to the Bank's prime rate plus 1%
(9.75% and 9.5% at March 31, 1996 and 1997, respectively). In December 1996, the
physician's employment was terminated and the operations of the additional
facility were transferred to the departing physician. In consideration for this
transaction, the physician assumed the $122,500 remaining balance of the loan.

5. EMPLOYEE BENEFIT PLAN:

The Company maintains a profit sharing plan covering substantially all
full-time employees who are at least 21 years of age and have completed one year
of service. The Company's contributions to the plan totaled $59,561, $61,815 and
$58,818 for the years ended March 31, 1995, 1996 and 1997.

6. RELATED-PARTY TRANSACTIONS:

For the years ended March 31, 1995, 1996 and 1997, the Company paid $34,800
for the lease of office space in a building owned by a shareholder of the
Company. There is no formal lease agreement for this space.

The Company also leases office space from a partnership in which the
shareholders of the Company hold a cumulative 22.22% interest. The monthly rent
is negotiated annually. For the years ended March 31, 1995, 1996 and 1997, the
Company paid rent of $37,643, $58,586 and $46,543, respectively.

7. INCOME TAXES:

The components of the income tax provision (benefit) are as follows:

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Current:
Federal........................................... $ (973) $ (2,770) $(13,156)
State............................................. (649) (1,847) (8,770)
------- -------- --------
(1,622) (4,617) (21,926)
------- -------- --------
Deferred:
Federal........................................... 6,006 (9,142) 29,644
State............................................. 4,004 (6,095) 19,762
------- -------- --------
10,010 (15,237) 49,406
------- -------- --------
$ 8,388 $(19,854) $ 27,480
======= ======== ========
</TABLE>

F-117
<PAGE>

SOUTH SHORE ORTHOPEDICS, PA

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

7. INCOME TAXES: -- (CONTINUED)

The provision (benefit) for income taxes differs from the amount computed
by applying the U.S. Federal income tax rate (34%) because of the effect of the
following items:

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------
1995 1996 1997
------- -------- -------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate................... $10,187 $(32,308) $26,268
Tax impact of Federal rate differential for graduated
rates.............................................. (5,450) 18,747 (11,391)
State income taxes, net of federal benefit........... 3,158 (9,041) 9,919
Non-deductible travel and entertainment.............. 493 2,748 2,684
------- -------- -------
$ 8,388 $(19,854) $27,480
======= ======== =======
</TABLE>

The components of the net deferred tax liability, measured under SFAS No.
109, are as follows:

<TABLE>
<CAPTION>
MARCH 31,
------------------------
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets --
Net operating loss carryforward........................... $ 31,549 $ --
--------- ---------
Deferred tax liabilities --
Property and equipment.................................... (2,474) --
Cash to accrual adjustments............................... (176,243) (196,574)
--------- ---------
(178,717) (196,574)
--------- ---------
Net deferred tax liability.................................. $(147,168) $(196,574)
========= =========
</TABLE>

8. COMMITMENTS AND CONTINGENCIES:

Lease Obligations

Total minimum annual rental commitments for noncancellable operating leases
having terms in excess of one year as of March 31, 1997, are as follows:

Rental expense, including related party leases (see Note 6), under
noncancellable operating leases for the years ended March 31, 1995, 1996 and
1997, was $89,528, $165,586 and $154,972, respectively.

Insurance Policies

Health Care Regulatory Environment and Reliance on Government Programs

F-118

<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Sports Medicine & Rehabilitation Center, Inc.:

We have audited the accompanying combined balance sheets of Sports Medicine &
Rehabilitation Center, Inc. and related companies identified in Note 1 as of
December 31, 1995 and 1996 and the related combined statements of operations,
owner's equity and cash flows for each of the three years in the period ended
December 31, 1996. These combined financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
combined 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 combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Sports
Medicine & Rehabilitation Center, Inc. and related companies identified in Note
1 as of December 31, 1995 and 1996, and the combined results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Philadelphia, Pa.,
October 20, 1997

F-119
<PAGE>

SPORTS MEDICINE & REHABILITATION CENTER, INC.
AND RELATED COMPANIES (SEE NOTE 1)

COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1995 1996 1997
-------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents.............................. $233,206 $ 269,759 $ --
Accounts receivable, net of allowance of $683,288,
$780,467 and $1,608,915............................. 615,822 718,260 1,118,776
Prepaid expenses and other............................. 36,749 13,328 20,414
-------- ---------- ----------
Total current assets.............................. 885,777 1,001,347 1,139,190
-------- ---------- ----------
Property and equipment:
Equipment, furniture and fixtures...................... 298,629 356,437 366,334
Leasehold improvements................................. 29,622 29,622 42,492
-------- ---------- ----------
328,251 386,059 408,826
Less -- Accumulated depreciation and amortization...... (230,672) (285,483) (313,296)
-------- ---------- ----------
97,579 100,576 95,530
-------- ---------- ----------
$983,356 $1,101,923 $1,234,720
======== ========== ==========
LIABILITIES AND OWNER'S EQUITY

Current liabilities:
Accounts payable....................................... $ 33,881 $ 37,319 $ 7,914
Accrued compensation................................... 32,174 52,780 --
Due to U.S. PHYSICIANS. Inc............................ -- -- 52,517
-------- ---------- ----------
Total current liabilities......................... 66,055 90,099 60,431
-------- ---------- ----------
Commitments and contingencies (Note 4)
Owner's equity........................................... 917,301 1,011,824 1,174,289
-------- ---------- ----------
$983,356 $1,101,923 $1,234,720
======== ========== ==========
</TABLE>

The accompanying notes are an integral part of these combined financial
statements.

F-120
<PAGE>

SPORTS MEDICINE & REHABILITATION CENTER, INC.
AND RELATED COMPANIES (SEE NOTE 1)

COMBINED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................... $2,613,545 $2,862,909 $3,206,586 $2,675,384 $2,750,820
---------- ---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits............. 1,714,569 1,621,785 1,895,690 1,248,523 1,883,343
Pharmaceuticals and medical supplies..... 54,728 52,987 104,346 48,773 42,874
General and administrative............... 850,506 1,054,387 975,285 700,356 433,734
Management fee due
U.S. PHYSICIANS, Inc................... -- -- -- -- 200,591
Depreciation and amortization............ 39,500 56,672 54,811 43,498 27,813
---------- ---------- ---------- ---------- ----------
Income (loss) from operations.............. (45,758) 77,078 176,454 634,234 162,465
Interest income............................ 2,809 3,874 -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss).......................... $ (42,949) $ 80,952 $ 176,454 $ 634,234 $ 162,465
========== ========== ========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these combined financial
statements.

F-121
<PAGE>

SPORTS MEDICINE & REHABILITATION CENTER, INC.
AND RELATED COMPANIES (SEE NOTE 1)

COMBINED STATEMENTS OF OWNER'S EQUITY

<TABLE>
<S> <C>
Balance, December 31, 1993.................................. $ 879,298

Net loss.................................................. (42,949)
----------

Balance, December 31, 1994.................................. 836,349

Net income................................................ 80,952
----------

Balance, December 31, 1995.................................. 917,301

Distributions............................................. (81,931)

Net income................................................ 176,454
----------

Balance, December 31, 1996.................................. 1,011,824

Net income (unaudited).................................... 162,465
----------

Balance, September 30, 1997 (unaudited)..................... $1,174,289
==========
</TABLE>

The accompanying notes are an integral part of these combined financial
statements.

F-122
<PAGE>

SPORTS MEDICINE & REHABILITATION CENTER, INC.
AND RELATED COMPANIES (SEE NOTE 1)

COMBINED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)................................ $(42,949) $ 80,952 $176,454 $634,234 $162,465
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities --
Depreciation and amortization................ 39,500 56,672 54,811 43,498 27,813
Changes in assets and liabilities --
Accounts receivable....................... 74,865 (111,864) (102,438) (316,509) (400,516)
Prepaid expenses and other................ (1,724) (15,525) 14,246 16,628 (7,086)
Accounts payable.......................... 4,483 17,150 3,759 796 (29,405)
Accrued compensation...................... 2,922 6,415 20,606 (1,816) (52,780)
Due to U.S. PHYSICIANS, Inc............... -- -- -- -- 52,517
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities............................ 77,097 33,800 167,438 376,831 (246,992)
-------- -------- -------- -------- --------
Investing activities:
Purchases of property and equipment.............. (60,305) (50,548) (73,749) (68,249) (22,767)
-------- -------- -------- -------- --------
Financing activities:
Distributions.................................... -- -- (57,136) (57,136) --
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents...................................... 16,792 (16,748) 36,553 251,446 (269,759)
Cash and cash equivalents, beginning of period..... 233,162 249,954 233,206 233,206 269,759
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period........... $249,954 $233,206 $269,759 $484,652 $ --
======== ======== ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these combined financial
statements.

F-123
<PAGE>

SPORTS MEDICINE & REHABILITATION CENTER, INC.
AND RELATED COMPANIES (SEE NOTE 1)

NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

1. ORGANIZATION AND BUSINESS:

Sports Medicine & Rehabilitation Center, Inc. and related companies (the
"Company") provide physiatry care and related medical services to the general
public. The combined financial statements include the combined accounts of
Sports Medicine & Rehabilitation Center, Inc. (a Pennsylvania professional
corporation), Industrial Rehabilitation (a Pennsylvania partnership), James
Bonner - PT Testing (a Pennsylvania sole proprietorship), James Bonner - PT (a
Pennsylvania sole proprietorship) and James Bonner Physical Medicine (a
Pennsylvania sole proprietorship). Effective January 1, 1996, the net assets of
Industrial Rehabilitation were distributed to the partners and the operations
became part of Sports Medicine & Rehabilitation Center, Inc.

On April 4, 1997 (the Initial Closing Date), the Company and the selling
owner entered into an Asset Acquisition Agreement, as amended on December 31,
1997, (the "Affiliation Agreement") with U.S. PHYSICIANS, Inc. ("USP"). Under
the terms of the Affiliation Agreement, USP and its affiliated professional
corporation acquired the majority of the assets and liabilities of the Company
in exchange for cash, notes, convertible notes and shares of USP Common Stock,
subject to adjustment, as defined. The Affiliation Agreement contains a
repurchase provision that allows the selling owner, in the event that an initial
public offering ("IPO") has not been completed by USP by May 14, 1998 (the
"Repurchase Date"), to repurchase the net assets of his practice for a defined
period of time (the "Repurchase Period") by returning all of the consideration
received excluding the initial cash payment. If the selling owner does not
exercise his rights under the repurchase provision during the Repurchase Period,
the provision terminates.

In accordance with Accounting Principles Board Opinion No. 16, the
Affiliation Agreement is not considered effective for applying purchase
accounting until either the date that USP completes an IPO or the repurchase
provision terminates (the "Final Closing Date"). Pursuant to the Affiliation
Agreement, for the period of time between the Initial Closing Date and the Final
Closing Date, USP is responsible for managing the Company, including cash
management, and receives a management fee equal to the income earned by the
Company. Accordingly, the statement of operations includes a management fee
charge for the income earned by the Company for the period from the Initial
Closing Date to September 30, 1997, and the balance sheet as of September 30,
1997 reflects a Due to U.S. PHYSICIANS, Inc. account to reflect the net cash
activity for the same period.

2. SIGNIFICANT ACCOUNTING POLICIES:

Principles of Combination

The combined financial statements include the accounts of Sports Medicine &
Rehabilitation Center, Inc. and related companies (see Note 1). The related
companies are controlled by the sole shareholder of Sports Medicine &
Rehabilitation Center, Inc. All material intercompany accounts and transactions
have been eliminated in combination.

Interim Financial Statements

The financial statements for the nine months ended September 30, 1996 and
1997, are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of September 30, 1997, and the results
of their operations for the nine months ended September 30, 1996 and 1997. The
results of operations for the nine-month period are not necessarily indicative
of the results to be expected for the entire year.

F-124
<PAGE>

SPORTS MEDICINE & REHABILITATION CENTER, INC.
AND RELATED COMPANIES (SEE NOTE 1)

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Use of Estimates

Fair Value of Financial Instruments

Net Revenues

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.

Accounts Receivable

Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.

Concentration of Credit Risk

The Company extends credit to patients covered by programs such as
Medicare, Medicaid and private insurers. The Company manages credit risk with
the various public and private insurance providers, as appropriate. Allowances
for bad debt have been made for potential losses when appropriate.

Property and Equipment

Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation and amortization are
provided over the estimated useful life of each class of depreciable asset
ranging from five to seven years and are computed using the straight-line
method.

Income Taxes

Sports Medicine & Rehabilitation Center, Inc. and related companies have
elected treatment as either an "S" Corporation, partnership or sole
proprietorship for both federal and state income tax purposes, and accordingly
are not taxed as separate entities. The companies' taxable income or loss is
allocated to the owner and recognized on his individual tax return. Accordingly,
no provision for income taxes has been reflected in the accompanying financial
statements.

F-125
<PAGE>

SPORTS MEDICINE & REHABILITATION CENTER, INC.
AND RELATED COMPANIES (SEE NOTE 1)

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

The Company reports certain income and expense items for income tax
purposes on a different basis than that reflected in the accompanying financial
statements. The primary differences are due to the cash basis of accounting for
income tax purposes. The cumulative amount of these differences as of December
31, 1996, was approximately $1,025,000. If the S Corporation, partnership and
sole proprietorship status is terminated, then a deferred income tax liability
of approximately $250,000 related to these cumulative differences would need to
be reflected in the accompanying financial statements.

Owner's Equity

Owner's equity includes the capital stock, partners capital and retained
earnings of the Company.

Statements of Cash Flows Information

Amounts paid for interest and taxes were not significant.

Effective January 1, 1996, the net assets of Industrial Rehabilitation were
distributed to the partners including cash of $57,136, property of $15,941 and
other net assets of $8,854.

3. RELATED-PARTY TRANSACTIONS:

The Company paid $13,403 during the year ended December 31, 1996 for the
lease of office space from the shareholder. The Company is leasing the space on
a month to month basis.

4. COMMITMENTS AND CONTINGENCIES:

Lease Obligations

Rent expense under all noncancellable operating leases for the years ended
December 31, 1994, 1995 and 1996 was $113,428, $142,771 and $184,973,
respectively. The Company leases office space and equipment under noncancellable
operating leases. Future minimum lease payments under the Company's leases as of
December 31, 1996, are as follows:

Insurance Policies

F-126
<PAGE>

SPORTS MEDICINE & REHABILITATION CENTER, INC.
AND RELATED COMPANIES (SEE NOTE 1)

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

4. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)

The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.

Health Care Regulatory Environment and Reliance on Government Programs

F-127
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Steel Valley Orthopedic Association, Inc.:

We have audited the accompanying balance sheets of Steel Valley Orthopedic
Association, Inc. (a Pennsylvania corporation) as of February 29, 1996 and
February 28, 1997, and the related statements of operations and retained
earnings and cash flows for each of the three years in the period ended February
28, 1997. 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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Steel Valley Orthopedic
Association, Inc. as of February 29, 1996 and February 28, 1997, and the results
of its operations and its cash flows for each of the three years in the period
ended February 28, 1997, in conformity with generally accepted accounting
principles.

ARTHUR ANDERSEN LLP

Philadelphia, Pa.,
October 17, 1997

F-128

<PAGE>

STEEL VALLEY ORTHOPEDIC ASSOCIATION, INC.
BALANCE SHEETS

<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28, SEPTEMBER 30,
1996 1997 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents........................... $ 66,388 $ 64,645 $ 1,820
Accounts receivable, net of allowance of $337,981,
$349,747 and $397,493............................ 346,279 369,459 285,814
Prepaid expenses and other.......................... 101,503 33,273 66,315
-------- -------- --------
Total current assets........................... 514,170 467,377 353,949
-------- -------- --------
Property and equipment:
Equipment, furniture and fixtures................... 446,592 512,105 625,386
Leasehold improvements.............................. 26,801 26,801 40,369
-------- -------- --------
473,393 538,906 665,755
Less -- Accumulated depreciation and amortization... (372,242) (408,878) (409,886)
-------- -------- --------
101,151 130,028 255,869
-------- -------- --------
Deferred income taxes................................. -- 315 20,776
-------- -------- --------
Other assets.......................................... 1,216 1,216 --
-------- -------- --------
$616,537 $598,936 $630,594
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Line of credit...................................... $ -- $ 46,659 $175,000
Current maturities of capitalized lease
obligations...................................... 10,742 12,246 10,742
Accounts payable.................................... 48,353 42,690 7,609
Accrued compensation................................ 157,389 173,614 31,699
Deferred income taxes............................... 57,053 52,789 88,510
Due to U.S. PHYSICIANS, Inc......................... -- -- 4,490
-------- -------- --------
Total current liabilities...................... 273,537 327,998 318,050
-------- -------- --------
Deferred income taxes................................. 10,175 -- --
-------- -------- --------
Capitalized lease obligations......................... 29,610 17,363 12,945
-------- -------- --------
Commitments and contingencies (Note 7)
Shareholders' equity:
Common Stock, $10 par value, 1,000 shares
authorized, 500 shares issued and outstanding.... 5,000 5,000 5,000
Retained earnings................................... 298,215 248,575 294,599
-------- -------- --------
Total shareholders' equity..................... 303,215 253,575 299,599
-------- -------- --------
$616,537 $598,936 $630,594
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-129

<PAGE>

STEEL VALLEY ORTHOPEDIC ASSOCIATION, INC.

STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS ENDED
------------------------------------------ SEPTEMBER 30,
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, -----------------------
1995 1996 1997 1996 1997
------------ ------------ ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues.......................... $2,908,863 $2,867,209 $2,911,760 $1,722,766 $1,614,529
---------- ---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits........ 2,121,542 2,137,832 2,238,063 1,131,517 957,015
Pharmaceuticals and medical
supplies.......................... 86,501 76,147 89,760 53,999 34,464
General and administrative.......... 654,669 632,530 614,449 464,460 478,132
Management fee due U.S. PHYSICIANS,
Inc............................... -- -- -- -- 54,599
Depreciation and amortization....... 30,012 38,270 36,636 26,569 19,228
Loss on disposal of fixed assets.... -- -- -- -- 8,581
---------- ---------- ---------- ---------- ----------
Income (loss) from operations......... 16,139 (17,570) (67,148) 46,221 62,510
Interest income (expense), net........ (8,863) (3,400) 1,912 (1,194) (820)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes..... 7,276 (20,970) (65,236) 45,027 61,690
Income tax provision (benefit)........ 3,028 (4,966) (15,596) 10,941 15,666
---------- ---------- ---------- ---------- ----------
Net income (loss)..................... 4,248 (16,004) (49,640) 34,086 46,024
Retained earnings, beginning of
period.............................. 309,971 314,219 298,215 298,215 248,575
---------- ---------- ---------- ---------- ----------
Retained earnings, end of period...... $ 314,219 $ 298,215 $ 248,575 $ 332,301 $ 294,599
========== ========== ========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-130

<PAGE>

STEEL VALLEY ORTHOPEDIC ASSOCIATION, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS ENDED
------------------------------------------ SEPTEMBER 30,
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, -------------------
1995 1996 1997 1996 1997
------------ ------------ ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)...................... $ 4,248 $(16,004) $(49,640) $ 34,085 $ 46,024
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities --
Loss on disposal of property and
equipment....................... -- -- -- -- 8,581
Depreciation and amortization...... 30,012 38,270 36,636 26,569 19,228
Deferred income taxes.............. 5,268 (5,480) (14,754) 10,941 15,260
Changes in assets and
liabilities --
Accounts receivable............. 416 69,685 (23,180) (24,897) 83,645
Prepaid expenses and other...... 3,444 (18,377) 68,230 41,553 (31,826)
Accounts payable................ 4,798 16,615 (5,663) 23,950 (35,081)
Accrued compensation............ (20,622) 20,264 16,225 74,563 (141,915)
Due to U.S. PHYSICIANS, Inc..... -- -- -- -- 4,490
------- -------- -------- -------- --------
Net cash provided by (used in)
operating activities........ 27,564 104,973 27,854 186,764 (31,594)
------- -------- -------- -------- --------
Investing activities:
Purchases of property and equipment.... (11,161) (8,005) (65,513) (3,175) (153,650)
------- -------- -------- -------- --------
Financing activities:
Net proceeds (repayments) on line of
credit............................... 40,000 (40,000) 46,659 -- 128,341
Payment on short-term debt............. (36,210) -- -- -- --
Payments on capitalized lease
obligations.......................... (8,947) (8,683) (10,743) (7,004) (5,922)
------- -------- -------- -------- --------
Net cash (used in) provided by
financing activities........ (5,157) (48,683) 35,916 (7,004) 122,419
------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents............................ 11,246 48,285 (1,743) 176,585 (62,825)
Cash and cash equivalents, beginning of
period................................. 6,857 18,103 66,388 66,388 64,645
------- -------- -------- -------- --------
Cash and cash equivalents, end of
period................................. $18,103 $ 66,388 $ 64,645 $242,973 $ 1,820
======= ======== ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-131

<PAGE>

STEEL VALLEY ORTHOPEDIC ASSOCIATION, INC.

NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE SEVEN MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

1. ORGANIZATION AND BUSINESS:

Steel Valley Orthopedic Association, Inc. (the "Company") is a
physician-owned medical practice serving the Pittsburgh, Pennsylvania, area. The
Company was formed in 1971 for the purpose of rendering orthopedic surgical
services. The Company has a fiscal year end as of the last day in February;
herein referred to as "fiscal year end."

On August 27, 1997, (the "Initial Closing Date") the Company and the
selling owners entered into a Stock Acquisition Agreement (the "Affiliation
Agreement") with U.S. PHYSICIANS, Inc. ("USP"). Under the terms of the
Affiliation Agreement, USP and its affiliated professional corporation acquired
the majority of the assets of the Company in exchange for cash, notes,
convertible notes and shares of USP Common Stock, subject to adjustment, as
defined. The Affiliation Agreement contains a repurchase provision that allows
the selling owners, in the event that an initial public offering ("IPO") has not
been completed by USP by March 30, 1998, (the "Repurchase Date"), to repurchase
the net assets of their practice for a defined period of time (the "Repurchase
Period") by returning all of the consideration received excluding the initial
cash payment.

In accordance with Accounting Principles Board Opinion No. 16, the
Affiliation Agreement is not considered effective for applying purchase
accounting until either the date that USP completes an IPO or the repurchase
provision terminates (the "Final Closing Date"). Pursuant to the Affiliation
Agreement, for the period of time between the Initial Closing Date and the Final
Closing Date, USP is responsible for managing the Company, including cash
management, and receives a management fee equal to the income earned by the
Company. Accordingly, the statement of operations includes a management fee
charge for the income earned by the Company for the period from the Initial
Closing Date to September 30, 1997, and the balance sheet as of September 30,
1997 reflects a Due to U.S. PHYSICIANS, Inc. account to reflect the net cash
activity for the same period.

2. SIGNIFICANT ACCOUNTING POLICIES:

Interim Financial Statements

The financial statements for the seven months ended September 30, 1996 and
1997, are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of September 30, 1997, and the results
of its operations for the seven months ended September 30, 1996 and 1997. The
results of operations for the seven-month period are not necessarily indicative
of the results to be expected for the entire year.

Use of Estimates

Fair Value of Financial Instruments

F-132
<PAGE>

STEEL VALLEY ORTHOPEDIC ASSOCIATION, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE SEVEN MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Net Revenues

In September 1996, the Company entered into an agreement with a third party
to provide medical services to subscribing participants. Under this agreement
the Company receives monthly capitation payments based on the number of
participants, regardless of services actually provided by the Company. Total
revenues received under this agreement for the year ended February 28, 1997 were
$429,220.

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.

Accounts Receivable

Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.

Concentration of Credit Risk

Property and Equipment

Property and equipment are stated at cost. Repairs and maintenance are
charged to expense as incurred. Depreciation is provided over the estimated
useful lives of the applicable assets ranging from five to seven years for
equipment, furniture and fixtures and the remaining lease term for leasehold
improvements and are computed using the straight-line method.

Income Taxes

F-133
<PAGE>

STEEL VALLEY ORTHOPEDIC ASSOCIATION, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE SEVEN MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Statements of Cash Flows Information

For the fiscal years ended 1995, 1996 and 1997, the Company paid interest
of $10,901, $6,561 and $4,683, respectively. Amounts paid for taxes were not
significant.

3. LINE OF CREDIT:

In fiscal year 1996, the Company entered into a credit agreement with a
local bank for $150,000. The line has no specified expiration date. Interest is
accrued on the outstanding balance at the bank's prime rate plus .25%.

4. EMPLOYEE BENEFIT PLAN:

The Company maintains a defined contribution money purchase pension plan
that covers all qualified employees, as defined by the plan agreement.
Contributions to the plan are discretionary and are determined by the Company on
an annual basis. Employees are fully vested in Company contributions after seven
years. For the fiscal years 1995, 1996 and 1997, contributions to the plan were
$48,540, $55,540 and $83,934, respectively.

5. RELATED PARTY:

The Company has an operating lease for a piece of equipment from an entity
affiliated with owners of the Company. The lease is a month to month lease with
monthly payments of $1,514.

6. INCOME TAXES:

The components of the income tax provision (benefit) are as follows:

<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal................................... $(1,344) $ 308 $ (505)
State..................................... (896) 206 (337)
------- ------- --------
(2,240) 514 (842)
------- ------- --------
Deferred:
Federal................................... 3,161 (3,288) (8,852)
State..................................... 2,107 (2,192) (5,902)
------- ------- --------
5,268 (5,480) (14,754)
------- ------- --------
$ 3,028 $(4,966) $(15,596)
======= ======= ========
</TABLE>

F-134
<PAGE>

STEEL VALLEY ORTHOPEDIC ASSOCIATION, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE SEVEN MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

6. INCOME TAXES: -- (CONTINUED)

The provision (benefit) for income taxes differs from the amount computed
by applying the U.S. Federal income tax rate (34%) because of the effect of the
following items:

<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate.......... $ 2,474 $(7,130) $(22,180)
Tax impact of Federal rate differential for
graduated rates........................... (1,047) 3,907 12,521
State income taxes, net of federal
benefit................................... 951 (2,148) (6,439)
Non-deductible travel and entertainment..... 650 405 502
------- ------- --------
$ 3,028 $(4,966) $(15,596)
======= ======= ========
</TABLE>

The components of the net deferred tax liability, measured under SFAS No.
109, are as follows:

<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax assets --
Net operating loss carryforward................ $ -- $ 7,419
-------- --------
Deferred tax liabilities --
Property and equipment......................... (10,175) (7,104)
Cash to accrual adjustments.................... (57,053) (52,789)
-------- --------
(67,228) (59,893)
-------- --------
Net deferred tax liability....................... $(67,228) $(52,474)
======== ========
</TABLE>

7. COMMITMENTS AND CONTINGENCIES:

Lease Obligations

Future minimum lease payments under the Company's leases as of February 28,
1997 are as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
- ----------- -------- ---------
<S> <C> <C>
1998................................................. $ 15,425 $133,328
1999................................................. 18,778 135,211
2000................................................. -- 93,367
2001................................................. -- 82,466
2002................................................. -- 78,832
Thereafter........................................... -- 328,340
--------
Total........................................... 34,203

Less -- Amounts representing interest................ (4,594)
--------
Present value of future minimum lease payments....... 29,609
Less -- Current maturities........................... (12,246)
--------
$ 17,363
========
</TABLE>

F-135
<PAGE>

STEEL VALLEY ORTHOPEDIC ASSOCIATION, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE SEVEN MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

7. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)

Rent expense under noncancelable operating leases for the fiscal years
1995, 1996 and 1997 was $79,013, $93,051 and $102,267, respectively. The cost of
assets capitalized under capitalized lease obligations aggregated $59,235 as of
February 28, 1997 and accumulated depreciation was $38,503.

Insurance Policies

The CAT fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.

Health Care Regulatory Environment and Reliance on Government Programs

F-136

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Valley Forge Facial Plastic Surgery/Ear, Nose & Throat Associates, Ltd.:

We have audited the accompanying balance sheets of Valley Forge Facial Plastic
Surgery/Ear, Nose & Throat, Ltd. (a Pennsylvania corporation) as of September
30, 1996 and 1997 and the related statements of operations and retained earnings
and cash flows for each of the three years in the period ended September 30,
1997. 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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Valley Forge Facial Plastic
Surgery/Ear, Nose & Throat Associates, Ltd. as of September 30, 1996 and 1997,
and the results of its operations and its cash flows for each of the three years
in the period ended September 30, 1997, in conformity with generally accepted
accounting principles.

ARTHUR ANDERSEN LLP

Philadelphia, Pa.,

December 20, 1997

F-137

<PAGE>

VALLEY FORGE FACIAL PLASTIC SURGERY/
EAR, NOSE & THROAT ASSOCIATES, LTD.

BALANCE SHEETS

<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1996 1997
-------- --------
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents................................. $ -- $ 84,554
Accounts receivable, net of allowance of $482,604 and
$369,328............................................... 405,891 349,551
Due from U.S. PHYSICIANS, Inc............................. -- 41,910
Prepaid expenses and other................................ 37,590 1,012
-------- --------
Total current assets................................. 443,481 477,027
-------- --------
Property and equipment:
Equipment, furniture and fixtures......................... 232,347 183,898
Leasehold improvements.................................... 34,540 34,540
-------- --------
266,887 218,438
Less -- Accumulated depreciation and amortization......... (244,792) (213,064)
-------- --------
22,095 5,374
-------- --------
$465,576 $482,401
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable.......................................... $ 35,407 $ 22,311
Accrued compensation...................................... 103,606 62,949
Deferred income taxes..................................... 81,752 87,869
-------- --------
Total current liabilities............................ 220,765 173,129
-------- --------
Commitments and contingencies (Note 6)
Shareholders' equity:
Common Stock, $10 par value, 1,000 shares authorized, 100
shares issued and outstanding.......................... 1,000 1,000
Retained earnings......................................... 243,811 308,272
-------- --------
Total shareholders' equity........................... 244,811 309,272
-------- --------
$465,576 $482,401
======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-138

<PAGE>

VALLEY FORGE FACIAL PLASTIC SURGERY/
EAR, NOSE & THROAT ASSOCIATES, LTD.

STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues................................................ $1,945,585 $2,049,394 $2,173,755
---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits.............................. 1,302,642 1,243,634 1,287,027
Pharmaceuticals and medical supplies...................... 133,858 160,871 160,896
General and administrative................................ 498,626 493,519 441,105
Management fee due U.S. PHYSICIANS, Inc................... -- -- 195,609
Depreciation and amortization............................. 4,152 12,732 3,235
---------- ---------- ----------
Income from operations...................................... 6,307 138,638 85,883
Interest income, net........................................ 1,152 1,761 1,100
---------- ---------- ----------
Income before income taxes.................................. 7,459 140,399 86,983
Income tax provision........................................ 4,143 35,598 22,522
---------- ---------- ----------
Net income.................................................. 3,316 104,801 64,461
Retained earnings, beginning of period...................... 135,694 139,010 243,811
---------- ---------- ----------
Retained earnings, end of period............................ $ 139,010 $ 243,811 $ 308,272
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-139

<PAGE>

VALLEY FORGE FACIAL PLASTIC SURGERY/
EAR, NOSE & THROAT ASSOCIATES, LTD.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------
1995 1996 1997
------- -------- -------
<S> <C> <C> <C>
Operating activities:
Net income................................................ $ 3,316 $104,801 $64,461
Adjustments to reconcile net income to net cash (used in)
provided by operating activities --
Depreciation and amortization......................... 4,152 12,732 3,235
Deferred income taxes................................. 4,251 25,180 6,117
Changes in assets and liabilities --
Accounts receivable................................ (19,337) (135,128) 56,340
Due from U.S. PHYSICIANS, Inc...................... -- -- (41,910)
Prepaid expenses and other......................... 1,325 (8,273) 36,578
Accounts payable................................... 7,255 12,582 (13,096)
Accrued compensation............................... (26,170) (11,823) (40,657)
------- -------- -------
Net cash (used in) provided by operating
activities..................................... (25,208) 71 71,068
------- -------- -------
Investing activities:
Purchases of property and equipment....................... -- (8,580) --
Sale of property and equipment............................ -- -- 13,486
------- -------- -------
Net cash (used in) provided by investing
activities.................................... -- (8,580) 13,486
------- -------- -------
Net (decrease) increase in cash and cash equivalents........ (25,208) (8,509) 84,554
Cash and cash equivalents, beginning of period.............. 33,717 8,509 --
------- -------- -------
Cash and cash equivalents, end of period.................... $ 8,509 $ -- $84,554
======= ======== =======
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-140

<PAGE>

VALLEY FORGE FACIAL PLASTIC SURGERY/
EAR, NOSE & THROAT ASSOCIATES, LTD.

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND BUSINESS:

Valley Forge Facial Plastic Surgery/Ear, Nose & Throat Associates, Ltd.
(the "Company") is a physician owned medical practice serving the Philadelphia,
Pennsylvania area. The Company is engaged in the business of rendering health
care services in the area of otolaryngology, as well as facial plastic surgery.

On May 29, 1997 (the "Initial Closing Date"), the Company and the selling
owners entered into a Stock Acquisition Agreement, as amended on December 19,
1997, (the "Affiliation Agreement") with U.S. PHYSICIANS, Inc. ("USP"). Under
the terms of the Affiliation Agreement, USP and its affiliated professional
corporation acquired the outstanding stock of the Company in exchange for cash,
notes, convertible notes and shares of USP Common Stock, subject to adjustment,
as defined. The Affiliation Agreement contains a repurchase provision that
allows the selling owners, in the event that an initial public offering ("IPO")
has not been completed by USP by March 31, 1998 (the "Repurchase Date"), to
repurchase the stock of their practice for a defined period of time (the
"Repurchase Period") by returning all of the consideration received, excluding
the initial cash payment. If the selling owners do not exercise their rights
under the repurchase provision during the Repurchase Period, the provision
expires. The Repurchase Date can be extended to May 14, 1998 if USP makes a
payment, as defined, in prepayment of the principal amount due under the
convertible notes isued at the Initial Closing Date.

In accordance with Accounting Principles Board Opinion No. 16, the
affiliation transaction is not considered effective for applying purchase
accounting until either the date that USP completes an IPO or the repurchase
provision lapses (the "Final Closing Date"). Pursuant to the Affiliation
Agreement, for the period of time between the Initial Closing Date and the Final
Closing Date, USP is responsible for managing the Company, including cash
management, and receives a management fee equal to the income earned by the
Company. Accordingly, the statement of operations includes a management fee
charge for the income earned by the Company for the period from the Initial
Closing Date to September 30, 1997, and the balance sheet as of September 30,
1997 reflects a Due from U.S. PHYSICIANS, Inc. account to reflect the net cash
activity for the same period.

2. SIGNIFICANT ACCOUNTING POLICIES:

Use of Estimates

Fair Value of Financial Instruments

Net Revenues

F-141

<PAGE>

VALLEY FORGE FACIAL PLASTIC SURGERY/
EAR, NOSE & THROAT ASSOCIATES, LTD.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.

Accounts Receivable

Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.

Concentration of Credit Risk

The Company extends credit to its patients, covered by programs such as
Medicare, Medicaid and private insurers. The Company manages credit risk with
the various public and private insurance providers, as appropriate. Allowances
for bad debts have been made for potential losses when appropriate.

Property and Equipment

Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation and amortization are
provided over the estimated useful life of each class of depreciable asset
ranging from five to seven years for equipment, furniture and fixtures and over
the related lease term for leasehold improvements and are computed using the
straight-line method.

Income Taxes

Statements of Cash Flows Information

Amounts paid for interest and taxes were not significant.

3. EMPLOYEE BENEFIT PLAN:

The Company maintains a profit sharing plan covering substantially all
full-time employees who are at least 21 years of age and completed one year of
service in which at least 1,000 are worked. The Company's contributions to the
plan totaled $103,132, $26,963, and $0 for the years ended September 30, 1995,
1996 and 1997, respectively. The Company intends to terminate the profit sharing
plan in connection with the anticipated sale (see Note 1).

4. RELATED-PARTY TRANSACTIONS:

The Company paid $118,500, $118,500 and $101,250 during the years ended
September 30, 1995, 1996 and 1997, respectively, for the lease of office space
from the shareholders.

F-142

<PAGE>

VALLEY FORGE FACIAL PLASTIC SURGERY/
EAR, NOSE & THROAT ASSOCIATES, LTD.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

5. INCOME TAXES:

The components of the income tax provision are as follows:

YEAR ENDED SEPTEMBER 30,
--------------------------------
1995 1996 1997
------ ------- -------

Current:
Federal............................... $ (65) $ 6,251 $ 9,843
State................................. (43) 4,167 6,562
------ ------- -------
(108) 10,418 16,405
------ ------- -------
Deferred
Federal............................... 2,551 15,108 3,670
State................................. 1,700 10,072 2,447
------ ------- -------
4,251 25,180 6,117
------ ------- -------
$4,143 $35,598 $22,522
====== ======= =======

Income tax expense differs from the amount currently payable or receivable
because certain expenses, primarily depreciation and accruals, are reported in
different periods for financial reporting and income tax purposes. The Company
is on a cash basis of accounting for income tax purposes.

The provision for income taxes differs from the amount computed by applying
the U.S. Federal income tax rate (34%) because of the effect of the following
items:

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate............ $2,536 $47,735 $27,981
Tax impact of Federal rate differential for
graduated rates............................. (1,402) (28,237) (15,636)
State income taxes, net of federal benefit.... 757 12,998 8,230
Non-deductible travel and entertainment....... 2,252 3,102 1,947
------ ------- -------
$4,143 $35,598 $22,522
====== ======= =======
</TABLE>

The components of the net deferred tax liability, measured under SFAS No.
109, are as follows:

SEPTEMBER 30,
---------------------
1996 1997
------- -------

Deferred tax liabilities:
Cash to accrual adjustments..................... $81,752 $87,869
------- -------
Net deferred tax liabilities...................... $81,752 $87,869
======= =======

F-143

<PAGE>

VALLEY FORGE FACIAL PLASTIC SURGERY/
EAR, NOSE & THROAT ASSOCIATES, LTD.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

6. COMMITMENTS AND CONTINGENCIES:

Lease Obligations

Rental expense, including related party leases (see Note 4), under
noncancellable operating leases for the years ended September 30, 1995, 1996 and
1997 was $175,562, $141,254 and $119,218, respectively. There are no annual
rental commitments for noncancellable operating leases having terms in excess of
one year as of September 30, 1997.

Insurance Policies

The Company is subject to certain claims and legal actions that have arisen
in the ordinary course of its business. The Company has insurance coverage that
includes malpractice insurance. The Company believes that the ultimate
liability, if any, with respect to these claims and legal actions, will not have
a material effect on the financial position or results of operations of the
Company.

The Pennsylvania Medical Professional Liability Catastrophic Loss Fund (the
"CAT Fund"), an agency of the Commonwealth of Pennsylvania, acts as a service
agent to facilitate the payment of medical malpractice claims exceeding the
primary layer of professional liability insurance carried by physicians and
other health care providers practicing in Pennsylvania. The CAT Fund policies
are retrospectively rated on a claims-made basis. The CAT Fund levies health
care provider surcharges, as a percentage of insurance premiums for basic
coverage, to pay claims and administrative expenses on behalf of CAT Fund
participants.

The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and other CAT Fund participants received a surcharge assessment during
fiscal 1996. No provision has been made for any future CAT Fund assessments in
the accompanying financial statements as the Company's portion of the CAT Fund
unfunded liability could not be reasonably estimated.

Health Care Regulatory Environment and Reliance on Government Programs

F-144

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Lehigh Valley Orthopedics, Inc.:

We have audited the accompanying balance sheets of Lehigh Valley Orthopedics,
Inc. (a Pennsylvania corporation) as of December 31, 1995 and 1996, and the
related statements of operations and retained earnings and cash flows for each
of the three years in the period ended December 31, 1996. 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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lehigh Valley Orthopedics, Inc.
as of December 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Philadelphia, Pa.,
August 26, 1997

F-145

<PAGE>

LEHIGH VALLEY ORTHOPEDICS, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents............................. $ 35,524 $ 94,936 $ 28,193
Accounts receivable, net of allowance of $573,764,
$846,105 and $681,842.............................. 681,484 734,509 600,448
Due from shareholders................................. -- -- 55
Prepaid expenses and other............................ 18,969 18,089 79,043
---------- ---------- ----------
Total current assets............................. 735,977 847,534 707,739
---------- ---------- ----------
Property and equipment:
Equipment, furniture and fixtures..................... 576,194 519,871 559,903
Leasehold improvements................................ 56,804 65,510 65,510
---------- ---------- ----------
632,998 585,381 625,413
Less -- Accumulated depreciation and amortization..... (378,872) (370,394) (408,913)
---------- ---------- ----------
254,126 214,987 216,500
---------- ---------- ----------
Deferred income taxes................................... 81,427 40,793 44,452
---------- ---------- ----------
Other assets............................................ 14,227 17,619 1,152
---------- ---------- ----------
$1,085,757 $1,120,933 $ 969,843
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Line of credit........................................ $ 100,000 $ 100,000 $ 100,000
Short-term notes...................................... -- -- 43,533
Current maturities of long-term debt.................. 99,290 99,882 105,922
Accounts payable...................................... 84,006 77,001 54,757
Accrued compensation.................................. 60,051 90,941 53,993
Deferred income taxes................................. 131,284 138,409 121,309
Due to shareholders................................... 25,000 530 --
---------- ---------- ----------
Total current liabilities........................ 499,631 506,763 479,514
---------- ---------- ----------
Long-term debt.......................................... 533,796 433,914 383,970
---------- ---------- ----------
Commitments and contingencies (Note 7)
Shareholders' equity:
Common Stock, no par value; $10 stated value; 5,000
shares authorized, 100 shares issued and
outstanding........................................ 1,000 1,000 1,000
Retained earnings..................................... 51,330 179,256 105,359
---------- ---------- ----------
Total shareholders' equity....................... 52,330 180,256 106,359
---------- ---------- ----------
$1,085,757 $1,120,933 $ 969,843
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-146

<PAGE>

LEHIGH VALLEY ORTHOPEDICS, INC.

STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................... $2,800,418 $4,318,868 $4,974,776 $3,750,437 $3,138,439
---------- ---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits............. 2,094,784 3,179,119 3,633,826 2,693,266 2,455,641
Pharmaceuticals and medical supplies..... 60,110 100,478 111,677 83,636 53,987
General and administrative............... 619,661 1,055,481 953,909 731,108 638,182
Depreciation and amortization............ 46,109 48,526 37,646 33,171 38,519
---------- ---------- ---------- ---------- ----------
Income (loss) from operations.............. (20,246) (64,736) 237,718 209,256 (47,890)
Interest expense, net...................... 12,050 45,612 62,664 48,204 47,394
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.......... (32,296) (110,348) 175,054 161,052 (95,284)
Income tax provision (benefit)............. (5,767) (23,236) 47,128 36,199 (21,387)
---------- ---------- ---------- ---------- ----------
Net income (loss).......................... (26,529) (87,112) 127,926 124,853 (73,897)
Retained earnings, beginning of period..... 164,971 138,442 51,330 51,330 179,256
---------- ---------- ---------- ---------- ----------
Retained earnings, end of period........... $ 138,442 $ 51,330 $ 179,256 $ 176,183 $ 105,359
========== ========== ========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-147

<PAGE>

LEHIGH VALLEY ORTHOPEDICS, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)................................ $(26,529) $(87,112) $127,926 $124,853 $(73,897)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities --
Depreciation and amortization................ 46,109 48,526 37,646 33,171 38,519
Deferred income taxes........................ (6,274) (20,508) 47,759 36,199 (20,759)
Loss on disposal of fixed assets............. -- (31,894) -- -- --
Changes in assets and liabilities --
Accounts receivable....................... (15,583) (330,525) (53,025) (105,551) 134,061
Prepaid expenses and other................ 43,275 12,498 (2,512) (52,970) (44,487)
Accounts payable.......................... (14,927) 58,243 (7,005) 17,756 (22,244)
Due to/from shareholders, net............. (6,306) 62,755 (24,470) (21,068) (585)
Accrued compensation...................... 15,257 (128,745) 30,890 88,905 (36,948)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities............................ 35,022 (416,762) 157,209 121,295 (26,340)
-------- -------- -------- -------- --------
Investing activities:
Purchases of property and equipment.............. (2,644) (242,552) (17,800) (16,786) (40,032)
Sale of property and equipment................... -- 59,958 19,293 -- --
-------- -------- -------- -------- --------
Net cash (used in) provided by investing
activities............................ (2,644) (182,594) 1,493 (16,786) (40,032)
-------- -------- -------- -------- --------
Financing activities:
Net borrowings on line of credit................. 99,491 509 -- -- --
Proceeds from long-term debt..................... 23,473 782,496 152,494 152,494 326,078
Repayment of long-term debt...................... (130,584) (172,883) (251,784) (215,980) (326,449)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities............................ (7,620) 610,122 (99,290) (63,486) (371)
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents...................................... 24,758 10,766 59,412 41,023 (66,743)
Cash and cash equivalents, beginning of period..... -- 24,758 35,524 35,524 94,936
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period........... $ 24,758 $ 35,524 $ 94,936 $ 76,547 $ 28,193
======== ======== ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-148

<PAGE>

LEHIGH VALLEY ORTHOPEDICS, INC.

NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

1. ORGANIZATION AND BUSINESS:

Lehigh Valley Orthopedics, Inc. (the "Company") is a physician-owned
medical practice serving the Lehigh Valley, Pennsylvania area. The Company was
formed in 1978 for the purpose of rendering professional medical orthopedic and
rehabilitative services.

On August 1, 1997, the Company and the selling owners entered into a Stock
Acquisition Agreement (the "Affiliation Agreement") with U.S. PHYSICIANS, Inc.
("USP") (the "Initial Closing Date"). Under the terms of the Affiliation
Agreement, USP and its affiliated professional corporation acquired the
outstanding stock of the Company effective as of November 7, 1997 in exchange
for cash, notes, convertible notes and shares of USP Common Stock, subject to
adjustment, as defined. The Affiliation Agreement contains a repurchase
provision that allows the selling owners, in the event that an initial public
offering ("IPO") has not been completed by USP by March 31, 1998 (the
"Repurchase Date"), to repurchase the stock of their practice for a defined
period of time (the "Repurchase Period") by returning all of the consideration
received excluding the initial cash payment.

2. SIGNIFICANT ACCOUNTING POLICIES:

Interim Financial Statements

Use of Estimates

Fair Value of Financial Instruments

Net Revenues

F-149

<PAGE>

LEHIGH VALLEY ORTHOPEDICS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.

Accounts Receivable

Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.

Concentration of Credit Risk

Property and Equipment

Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation and amortization are
provided over the estimated useful lives of the applicable assets ranging from
five to seven years for equipment, furniture and fixtures and the related lease
term for leasehold improvements and are computed using the straight-line method.

Due to/from Shareholders

Amounts due to/from shareholders represent advances to or from shareholders
which are repaid in subsequent periods.

Income Taxes

Statements of Cash Flows Information

For the years ended December 31, 1994, 1995 and 1996, the Company paid
interest of $12,581, $46,250 and $62,673, respectively. Amounts paid for taxes
were not significant.

3. LINE OF CREDIT:

The Company has a credit agreement with a local bank for a $100,000 line of
credit. Interest is accrued on the outstanding balance at the bank's prime rate
plus .50% through April 1995 and the bank's prime rate plus .25% from April 1995
forward (8.5% at December 31, 1996). Outstanding borrowings plus any unpaid
interest, fees or expenses are guaranteed by the shareholders.

F-150

<PAGE>

LEHIGH VALLEY ORTHOPEDICS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

4. LONG-TERM DEBT:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
-------- --------
<S> <C> <C>
Note payable to a bank, interest at bank's prime rate plus
.25%, principal payments of $7,738 per month through June
2002...................................................... $603,572 $510,714
Note payable to a bank, interest at 8.85%, monthly payments
of principal and interest of $732 through December 1999... 29,514 23,082
-------- --------
633,086 533,796
Less-Current maturities..................................... (99,290) (99,882)
-------- --------
$533,796 $433,914
======== ========
</TABLE>

Future maturities of long-term debt at December 31, 1996 are as follows:

1997........................................................ $ 99,882
1998........................................................ 100,531
1999........................................................ 101,238
2000........................................................ 92,857
2001........................................................ 92,857
2002 and thereafter......................................... 46,431
--------
$533,796
========

5. EMPLOYEE BENEFIT PLAN:

The Company provides a 401(k) profit sharing plan that covers all qualified
employees, as defined by the plan agreement. Employees vest immediately.
Contributions to the plan are discretionary and are determined by the Company on
a September 30 plan year-end basis. Effective October 1, 1994, the Company no
longer contributes to the plan. For the years ended December 31, 1994, 1995 and
1996, contributions to the plan were $110,701, $0 and $0, respectively.

6. INCOME TAXES:

The components of the income tax provision (benefit) are as follows:

YEAR ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
-------- -------- --------

Current:
Federal............................... $ 304 $ (1,637) $ (379)
State................................. 203 (1,091) (252)
-------- -------- --------
507 (2,728) (631)
-------- -------- --------
Deferred:
Federal............................... (3,764) (12,305) 28,655
State................................. (2,510) (8,203) 19,104
-------- -------- --------
(6,274) (20,508) 47,759
-------- -------- --------
$ (5,767) $(23,236) $ 47,128
======== ======== ========

F-151

<PAGE>

LEHIGH VALLEY ORTHOPEDICS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

6. INCOME TAXES: -- (CONTINUED)

The provision (benefit) for income taxes differs from the amount computed
by applying the U.S. Federal income tax rate (34%) because of the effect of the
following items:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate................ $(10,981) $(37,518) $ 59,518
Tax impact of Federal rate differential for
graduated rates................................. 6,061 21,375 (33,165)
State income taxes, net of federal benefit........ (3,280) (10,762) 17,569
Non-deductible travel and entertainment........... 2,433 3,669 3,206
-------- -------- --------
$ (5,767) $(23,236) $ 47,128
======== ======== ========
</TABLE>

The components of the net deferred tax liability, measured under SFAS No.
109, are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
----------- ---------
<S> <C> <C>
Deferred tax assets --
Net operating loss carryforward........................... $ 82,902 $ 50,427
----------- ---------
Deferred tax liabilities --
Property and equipment.................................... (1,336) (9,565)
Cash to accrual adjustments............................... (131,423) (138,478)
----------- ---------
(132,759) (148,043)
----------- ---------
Net deferred tax liability.................................. $ (49,857) $ (97,616)
=========== =========
</TABLE>

7. COMMITMENTS AND CONTINGENCIES:

Lease Obligations

Future minimum lease payments for noncancelable operating leases primarily
for office space as of December 31, 1996, are as follows:

1997............................................. $214,308
1998............................................. 206,279
1999............................................. 182,584
2000............................................. 6,018

Rent expense on operating leases was $125,484, $176,212 and $233,477 for
the years ended December 31, 1994, 1995 and 1996, respectively.

Insurance Policies

The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis for all of the physicians except one in amounts
management believes to be adequate. The remaining physician has a malpractice
insurance policy on a claims basis. Management is not aware of any outstanding
claims which would have a material impact on the Company's financial position or
results of operations.

F-152

<PAGE>

LEHIGH VALLEY ORTHOPEDICS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

7. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)

other health care providers practicing in Pennsylvania. The CAT Fund policies
are retrospectively rated on a claims-made basis. The CAT Fund levies health
care provider surcharges, as a percentage of insurance premiums for basic
coverage, to pay claims and administrative expenses on behalf of CAT Fund
participants.

The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.

Health Care Regulatory Environment and Reliance on Government Programs

F-153

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Associates in Urology, PC:

We have audited the accompanying balance sheets of Associates in Urology, PC as
of December 31, 1995 and 1996 and September 30, 1997 and the related statements
of operations and retained earnings and cash flows for each of the two years in
the period ended December 31, 1996, and the nine months ended September 30,
1997. 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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Associates in Urology, PC as of
December 31, 1995 and 1996 and September 30, 1997, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1996, and the nine months ended September 30, 1997, in conformity
with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Philadelphia, Pa.,

January 28, 1998

F-154

<PAGE>

ASSOCIATES IN UROLOGY, PC

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1995 1996 1997
-------- ---------- -------------
<S> <C> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents.............................. $ 50 $ 67 $ 65,820
Accounts receivable, net of allowance of $515,408,
$682,188 and $920,628............................... 683,215 904,295 1,220,368
Prepaid expenses and other............................. 39,835 22,195 23,068
-------- ---------- ----------
Total current assets.............................. 723,100 926,557 1,309,256
-------- ---------- ----------
Property and equipment:
Equipment, furniture and fixtures...................... 248,321 272,945 302,832
Leasehold improvements................................. 11,399 18,899 18,899
-------- ---------- ----------
259,720 291,844 321,731
Less -- Accumulated depreciation and amortization...... (202,292) (230,178) (255,064)
-------- ---------- ----------
59,428 61,666 66,667
-------- ---------- ----------
$782,528 $ 988,223 $1,375,923
======== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Line of credit......................................... $ -- $ 87,000 $ --
Accounts payable....................................... 75,283 84,844 220,981
Accrued compensation................................... 136,527 85,236 114,183
Deferred income taxes.................................. 217,224 298,328 385,131
-------- ---------- ----------
Total current liabilities......................... 429,034 555,408 720,295
-------- ---------- ----------
Deferred income taxes.................................... 7,220 7,828 2,305
-------- ---------- ----------
Commitments and contingencies (Note 6)
Shareholders' equity:
Common Stock, $50 par value,
100 shares authorized and issued, 1 share
outstanding......................................... 5,000 5,000 5,000
Retained earnings...................................... 361,074 439,787 668,123
Treasury stock, 99 shares at cost...................... (19,800) (19,800) (19,800)
-------- ---------- ----------
Total shareholders' equity........................ 346,274 424,987 653,323
-------- ---------- ----------
$782,528 $ 988,223 $1,375,923
======== ========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-155

<PAGE>

ASSOCIATES IN UROLOGY, PC

STATEMENTS OF OPERATIONS

AND RETAINED EARNINGS

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------- ------------------------
1995 1996 1996 1997
---------- ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues........................................... $3,235,260 $3,453,780 $2,588,038 $2,423,536
---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits......................... 2,205,206 1,953,539 1,311,162 1,107,810
Pharmaceuticals and medical supplies................. 602,748 782,477 670,680 523,509
General and administrative........................... 506,553 542,230 414,858 380,750
Depreciation and amortization........................ 16,171 29,886 22,362 24,886
---------- ---------- ---------- ----------
Income (loss) before income taxes...................... (95,418) 145,648 168,976 386,581
Income tax provision (benefit)......................... (33,634) 66,935 69,675 158,245
---------- ---------- ---------- ----------
Net income (loss)...................................... (61,784) 78,713 99,301 228,336
Retained earnings, beginning of period................. 422,858 361,074 361,074 439,787
---------- ---------- ---------- ----------
Retained earnings, end of period....................... $ 361,074 $ 439,787 $ 460,375 $ 668,123
========== ========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-156

<PAGE>

ASSOCIATES IN UROLOGY, PC

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- ------------------------
1995 1996 1996 1997
-------- -------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating activities:
Net income (loss)....................................... $(61,784) $ 78,713 $ 99,301 $ 228,336
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities --
Depreciation........................................ 16,171 29,886 22,362 24,886
Deferred income taxes............................... (36,775) 81,712 620 81,280
Changes in assets and liabilities --
Accounts receivable.............................. 138,219 (211,080) (214,581) (316,073)
Prepaid expenses and other....................... (5,417) 17,640 35,295 (873)
Accounts payable................................. (48,185) 9,561 382,464 136,137
Accrued compensation............................. 45,500 (61,291) (81,110) 28,947
-------- -------- ---------- ----------
Net cash provided by (used in) operating
activities................................... 47,729 (54,859) 244,351 182,640
-------- -------- ---------- ----------
Investing activities:
Purchases of property and equipment..................... (48,054) (32,124) (31,234) (29,887)
-------- -------- ---------- ----------
Financing activities:
Net borrowings (repayments) on line of credit........... -- 87,000 -- (87,000)
-------- -------- ---------- ----------
Net increase (decrease) in cash and cash equivalents...... (325) 17 213,117 65,753
Cash and cash equivalents, beginning of period............ 375 50 50 67
-------- -------- ---------- ----------
Cash and cash equivalents, end of period.................. $ 50 $ 67 $ 213,167 $ 65,820
======== ======== ========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-157

<PAGE>

ASSOCIATES IN UROLOGY, PC

NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

1. ORGANIZATION AND BUSINESS:

Associates in Urology, PC (the "Company") provides urological and
incontinence care services and related medical services to the general public.

On January 28, 1998, the Company entered into a Stock Acquisition Agreement
(the "Affiliation Agreement") with U.S. PHYSICIANS, Inc. ("USP"). Under the
terms of the Affiliation Agreement, USP and its affiliated professional
corporation will acquire the stock of the Company in exchange for cash and USP
Common Stock, subject to adjustment as defined. The closing, as defined in the
Affiliation Agreement, will occur upon the completion of an initial public
offering by USP. If the closing has not occurred prior to May 15, 1998, the
Affiliation Agreement may be terminated by either the Company or USP by written
notice to the other party.

2. SIGNIFICANT ACCOUNTING POLICIES:

Interim Financial Statements

The financial statements for the nine months ended September 30, 1996 are
unaudited, and in the opinion of management, include all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of the
results of their operations for the nine months ended September 30, 1996. The
results of operations for the nine-month period are not necessarily indicative
of the results to be expected for the entire year.

Use of Estimates

Fair Value of Financial Instruments

Net Revenues

Revenues from patients, third-party payors and others are recorded at
established rates, net of provision for bad debts and contractual adjustments,
in the period services are rendered. Contractual adjustments represent the
difference between charges at established rates and the estimated amount to be
reimbursed.

F-158

<PAGE>

ASSOCIATES IN UROLOGY, PC

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.

Accounts Receivable

Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.

Concentration of Credit Risk

The Company extends credit to patients covered by programs such as
Medicare, Medicaid and private insurers. The Company manages credit risk with
the various public and private insurance providers, as appropriate. Allowances
for bad debt have been made for potential losses when appropriate.

Property and Equipment

Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation and amortization are
provided over the estimated useful life of each class of depreciable asset
ranging from three to ten years and are computed using the straight-line method.

Income Taxes

Statements of Cash Flows Information

Amounts paid for interest and taxes were not significant.

3. LINE OF CREDIT:

At September 30, 1997, the Company had a $100,000 line of credit. The line
is secured by substantially all of the Company's assets and bears interest at
the bank's prime rate plus 1/2% (9.0% at September 30, 1997). At December 31,
1995 and 1996 and September 30, 1997, the Company had $0, $87,000 and $0
outstanding under the line, respectively. The line expires on May 31, 1998.

4. EMPLOYEE BENEFIT PLANS:

The Company maintains profit sharing and money purchase pension plans
covering substantially all full-time employees who have completed one year of
service. Employer contributions vest ratably in 20% increments over five years
commencing after the second year of employment. The Company's contributions to
the plans totaled $157,838, $166,342 and $124,756 for the years ended December
31, 1995 and 1996 and nine months ended September 30, 1997.

F-159

<PAGE>

ASSOCIATES IN UROLOGY, PC

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

5. INCOME TAXES:

The components of the income tax provision (benefit) are as follows:

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Current:
Federal.......................................... $ 2,670 $(12,561) $ 65,420
State............................................ 471 (2,216) 11,495
-------- -------- --------
3,141 (14,777) 76,965
-------- -------- --------
Deferred:
Federal.......................................... (31,259) 69,455 69,088
State............................................ 5,516 12,257 12,192
-------- -------- --------
(36,775) 81,712 81,280
-------- -------- --------
$(33,634) $ 66,935 $158,245
======== ======== ========
</TABLE>

The provision (benefit) for income taxes differs from the amount computed
by applying the U.S. Federal income tax rate (34%) because of the effect of the
following items:

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate................. $(33,510) $(49,520) $131,438
State income taxes, net of federal benefit......... (5,914) 9,619 23,195
Non-deductible travel and entertainment............ 5,790 7,796 3,612
-------- -------- --------
$(33,634) $ 66,935 $158,245
======== ======== ========
</TABLE>

The components of the net deferred tax liability, measured under SFAS No.
109, are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Deferred tax liabilities --
Property and equipment........................ $ 7,220 $ 7,828 $ 2,305
Cash to accrual adjustments................... 217,224 298,328 385,131
-------- -------- --------
Net deferred tax liability....................... $224,444 $306,156 $387,436
======== ======== ========
</TABLE>

6. COMMITMENTS AND CONTINGENCIES:

Lease Obligations

Rent expense under all noncancellable operating leases for the years ended
December 31, 1995 and 1996 and the nine months ended September 30, 1997 was
$140,534, $131,057 and $89,169, respectively. The Company leases office space
and equipment under noncancellable operating leases. Future minimum lease
payments under the Company's leases as of September 30, 1997, are as follows:

F-160

<PAGE>

ASSOCIATES IN UROLOGY, PC

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

6. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)

Remaining 1997.................................... $ 32,545
1998.............................................. 128,330
1999.............................................. 124,840
2000.............................................. 114,880
2001.............................................. 100,936
2002.............................................. 40,602

Insurance Policies

The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.

Health Care Regulatory Environment and Reliance on Government Programs

F-161

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Curamed, LLC:

We have audited the accompanying combined balance sheets of Curamed, LLC and
related companies identified in Note 1 as of December 31, 1995 and 1996 and
September 30, 1997 and the related combined statements of operations, owners'
equity and cash flows for each of the two years in the period ended December 31,
1996 and the nine month period ended September 30, 1997. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined 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 combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Curamed,
LLC and related companies identified in Note 1 as of December 31, 1995, 1996 and
September 30, 1997, and the combined results of their operations and their cash
flows for each of the two years in the period ended December 31, 1996 and the
nine month period ended September 30, 1997, in conformity with generally
accepted accounting principles.

ARTHUR ANDERSEN LLP

Philadelphia, Pa.,
December 31, 1997

F-162

<PAGE>

CURAMED, LLC
AND RELATED COMPANIES (SEE NOTE 1)

COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
---------- ---------- -------------
<S> <C> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents............................. $ 974 $ 21,746 $ 28,559
Management fee receivable............................. 1,528,560 1,906,303 2,353,627
Prepaid expenses and other............................ 34,339 40,808 50,467
---------- ---------- ----------
Total current assets............................. 1,563,873 1,968,857 2,432,653
---------- ---------- ----------
Property and equipment:
Equipment, furniture and fixtures..................... 794,519 806,799 806,799
Less -- Accumulated depreciation...................... (708,986) (755,571) (784,285)
---------- ---------- ----------
85,533 51,228 22,514
---------- ---------- ----------
$1,649,406 $2,020,085 $2,455,167
========== ========== ==========
LIABILITIES AND OWNERS' EQUITY

Current liabilities:
Due to affiliates..................................... $ 5,100 $ 28,115 $ 28,115
Accounts payable...................................... 130,826 136,565 173,541
Capital lease obligation.............................. 364,403 364,403 364,403
---------- ---------- ----------
Total current liabilities........................ 500,329 529,083 566,059
---------- ---------- ----------
Commitments and contingencies (Note 4)
Owners' equity.......................................... 1,149,077 1,491,002 1,889,108
---------- ---------- ----------
$1,649,406 $2,020,085 $2,455,167
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these combined
financial statements.

F-163

<PAGE>

CURAMED, LLC
AND RELATED COMPANIES (SEE NOTE 1)

COMBINED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these combined
financial statements.

F-164

<PAGE>

CURAMED, LLC
AND RELATED COMPANIES (SEE NOTE 1)

COMBINED STATEMENTS OF OWNERS' EQUITY

Balance, December 31, 1994.................................. $ 681,071

Distributions............................................. (15,220)

Net income................................................ 483,226
----------

Balance, December 31, 1995.................................. 1,149,077

Distributions............................................. (336,000)

Net income................................................ 677,925
----------

Balance, December 31, 1996.................................. 1,491,002

Distributions............................................. (170,050)

Net income................................................ 568,156
----------

Balance, September 30, 1997................................. $1,889,108
==========

The accompanying notes are an integral part of these combined
financial statements.

F-165

<PAGE>

CURAMED, LLC
AND RELATED COMPANIES (SEE NOTE 1)

COMBINED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- ----------------------
1995 1996 1996 1997
-------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating activities:
Net income................................................ $483,226 $677,925 $502,793 $568,156
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation.......................................... 51,857 46,585 35,343 28,714
Changes in assets and liabilities --
Management fee receivable.......................... (528,071) (377,743) (207,967) (447,324)
Prepaid expenses and other......................... 3,370 (6,469) 447 (9,659)
Accounts payable................................... 30,326 5,739 (35,974) 36,976
Due to affiliates.................................. (1,000) 23,015 -- --
-------- -------- -------- --------
Net cash provided by operating activities........ 39,708 369,052 294,642 176,863
-------- -------- -------- --------
Investing activities:
Purchases of property and equipment....................... (5,318) (12,280) (12,280) --
-------- -------- -------- --------
Financing activities:
Repayments on capital lease obligation.................... (19,914) -- -- --
Distributions............................................. (15,220) (336,000) (151,500) (170,050)
-------- -------- -------- --------
Net cash used in financing activities............ (35,134) (336,000) (151,500) (170,050)
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents........ (744) 20,772 130,862 6,813
Cash and cash equivalents, beginning of period.............. 1,718 974 974 21,746
-------- -------- -------- --------
Cash and cash equivalents, end of period.................... $ 974 $ 21,746 $131,836 $ 28,559
======== ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these combined
financial statements.

F-166

<PAGE>

CURAMED, LLC
AND RELATED COMPANIES (SEE NOTE 1)

NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

1. ORGANIZATION AND BUSINESS:

Curamed, LLC and related companies (the "Company") are physician practice
management companies providing services to physician practices located in New
Jersey specializing in providing pain management services care and related
medical services to the general public. The combined financial statements
include the combined accounts of Curamed, LLC (a New Jersey Limited Liability
Corporation) and Center for Neurodiagnostic Services of SJ, Inc., Center for
Neurodiagnostic Services, Inc., Center for Neurodiagnostic Services of West
Orange, Inc., Center for Neurodiagnostic Services of NJ, Inc., and Center for
Neurodiagnostic Services of PA, Inc (all New Jersey corporations).

On December 10, 1997, the Company and the selling owners entered into an
Asset Acquisition Agreement (the "Affiliation Agreement") with U.S. PHYSICIANS,
Inc. ("USP"). Under the terms of the Affiliation Agreement, USP and its
affiliated professional corporation acquired the majority of the assets and
liabilities of the Company in exchange for cash, notes and shares of USP Common
Stock, subject to adjustment, as defined. The closing, as defined in the
Affiliation Agreement, will occur upon the completion of an initial public
offering by USP. If the closing has not occured prior to May 14, 1998 the
Affiliation Agreement may be terminated by either the Company or USP by written
notice to the other party.

2. SIGNIFICANT ACCOUNTING POLICIES:

Principles of Combination

The combined financial statements include the accounts of Curamed, LLC and
related companies (see Note 1). The related companies are operated under common
control by the shareholders of Curamed, LLC. All material intercompany accounts
and transactions have been eliminated in combination.

Interim Financial Statements

The financial statements for the nine months ended September 30, 1996, are
unaudited, and in the opinion of management, include all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of the
results of their operations for the nine months ended September 30, 1996. The
results of operations for the nine-month period are not necessarily indicative
of the results to be expected for the entire year.

Use of Estimates

Fair Value of Financial Instruments

Financial instruments consist of cash and cash equivalents, management fee
receivable, certain current liabilities and debt obligations. The carrying
amounts reported in the balance sheets for these items approximate fair value.

F-167

<PAGE>

CURAMED, LLC
AND RELATED COMPANIES (SEE NOTE 1)

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Net Management Fee Revenue

The Company's revenue represents the contractual fees earned under its
management and administrative services agreements ("Management Agreements").
Under the Mangement Agreements, the Company is contractually responsible for
providing defined management services. The Management Agreements range from 1 to
5 years and provide for fees ranging from 50% to 100% of collected revenues, as
defined.

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.

Management Fee Receivable

Management fee receivable consists of amounts due from the managed
physician practices.

Concentration of Credit Risk

The managed physician practices extend credit to patients covered by
programs such as Medicare, Medicaid and private insurers. As the manager of the
physician practices, the Company manages credit risk with the various public and
private insurance providers, as appropriate.

Property and Equipment

Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation and amortization are
provided over the estimated useful life of each class of depreciable asset
ranging from five to seven years and are computed using the straight-line
method.

Income Taxes

Curamed, LLC and related companies have elected treatment as either an "S"
Corporation or partnership for both federal and state income tax purposes, and
accordingly are not taxed as separate entities. The companies' taxable income or
loss is allocated to the owner and recognized on his individual tax return.
Accordingly, no provision for income taxes has been reflected in the
accompanying financial statements.

The Company reports certain income and expense items for income tax
purposes on a different basis than that reflected in the accompanying financial
statements. The primary differences are due to the cash basis of accounting for
income tax purposes. The cumulative amount of these differences as of September
30, 1997, was approximately $2,210,000. If the S Corporation and partnership
status was terminated, then a deferred income tax liability of approximately
$884,000 related to these cumulative differences would need to be reflected in
the accompanying financial statements.

F-168

<PAGE>

CURAMED, LLC
AND RELATED COMPANIES (SEE NOTE 1)

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Owners' Equity

Owner's equity includes the capital stock and retained earnings of the
Company.

Statements of Cash Flows Information

Amounts paid for interest and taxes were not significant.

3. CAPITAL LEASE OBLIGATION:

In 1990, the Company entered into an agreement to lease certain equipment.
The agreement was amended in 1992 to restructure the payment terms. In 1994, the
Company defaulted on the agreement and has not made any payments subsequent to
September 1994. Marine Midland Bank ("Marine") filed suit against the Company in
1996 demanding payment of approximately $482,000, representing the past due
balance, costs of collection and reasonable attorney fees. The recorded
liability for the capital lease obligation represents the present value of the
future lease payments. The Company has been negotiating a settlement with Marine
and believes that the recorded amount is adequate to cover the final settlement.

4. COMMITMENTS AND CONTINGENCIES:

Lease Obligations

Rent expense under all noncancellable operating leases for the years ended
December 31, 1995 and 1996 and the nine months ended September 30, 1997 was
$123,031, $118,761 and $92,358, respectively. The Company leases office space
and equipment under noncancellable operating leases. Future minimum lease
payments for the year ended December 31, under the Company's leases as of
September 30, 1997, are as follows:

Remaining 1997.................................... $ 30,093
1998.............................................. 106,998
1999.............................................. 40,138
2000.............................................. 32,460

Insurance Policies

The Company maintains insurance in amounts management believes to be
adequate. Management is not aware of any outstanding claims which would have a
material impact on the Company's financial position or results of operations.

Health Care Regulatory Environment and Reliance on Government Programs

F-169

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Dennis James Bonner, M.D., Ltd.:

We have audited the accompanying balance sheets of Dennis James Bonner, M.D.,
Ltd. (a Pennsylvania Corporation) as of December 31, 1995 and 1996 and the
related statements of operations and retained earnings and cash flows for each
of the three years in the period ended December 31, 1996. 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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dennis James Bonner, M.D., Ltd.
as of December 31, 1995, and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Philadelphia, Pa.,
October 31, 1997

F-170
<PAGE>
DENNIS JAMES BONNER, M.D., LTD.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 31,485 $ 35,799 $ 46,982
Accounts receivable, net of allowance of $843,231,
$1,370,745 and $1,743,886.......................... 745,004 966,325 1,087,374
Prepaid expenses and other............................ 1,050 450 --
---------- ---------- ----------
Total current assets............................... 777,539 1,002,574 1,134,356
---------- ---------- ----------
Property and equipment:
Equipment, furniture and fixtures..................... 687,212 761,878 782,778
Less -- Accumulated depreciation...................... (593,428) (631,813) (659,491)
---------- ---------- ----------
93,784 130,065 123,287
---------- ---------- ----------
Other assets............................................ 2,498 8,689 7,289
---------- ---------- ----------
$ 873,821 $1,141,328 $1,264,932
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt.................. $ 10,285 $ 26,571 $ 26,571
Accounts payable...................................... 38,500 38,525 38,500
Accrued compensation.................................. 21,363 8,254 11,753
---------- ---------- ----------
Total current liabilities.......................... 70,148 73,350 76,824
---------- ---------- ----------
Long-term debt.......................................... 32,334 72,395 55,278
---------- ---------- ----------
Commitments and contingencies (Note 6)

Stockholder's equity:
Common Stock, $1 par, 1,000 shares authorized, issued
and outstanding.................................... 1,000 1,000 1,000
Additional paid-in capital............................ 79,578 79,578 79,578
Retained earnings..................................... 690,761 915,005 1,052,252
---------- ---------- ----------
Total stockholder's equity......................... 771,339 995,583 1,132,830
---------- ---------- ----------
$ 873,821 $1,141,328 $1,264,932
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-171
<PAGE>

DENNIS JAMES BONNER, M.D., LTD.

STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

Operating expenses:

Salaries, wages and benefits................ 1,649,949 1,455,969 1,426,883 1,251,327 1,040,470

Pharmaceuticals and medical supplies........ 75,901 93,730 101,190 72,018 51,782

General and administrative.................. 1,169,680 820,384 741,717 428,372 310,782

Depreciation and amortization............... 86,479 49,422 44,985 33,739 27,678
---------- ---------- ---------- ---------- ----------

Income (loss) from operations................. (95,805) 38,520 228,786 167,526 140,890

Interest expense, net......................... 4,767 4,801 4,542 3,403 3,643
---------- ---------- ---------- ---------- ----------

Net income (loss)............................. (100,572) 33,719 224,244 164,123 137,247

Retained earnings, beginning of period........ 757,614 657,042 690,761 690,761 915,005
---------- ---------- ---------- ---------- ----------

Retained earnings, end of period.............. $ 657,042 $ 690,761 $ 915,005 $ 854,884 $1,052,252
========== ========== ========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-172
<PAGE>

DENNIS JAMES BONNER, M.D., LTD.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------
1994 1995 1996 1996 1997
--------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss).................................. $(100,572) $ 33,719 $224,244 $164,123 $137,247
Adjustments to reconcile net income (loss) to net
cash provided by operating activities--
Depreciation and amortization.................. 86,479 49,422 44,985 33,739 27,678
Loss on disposal............................... -- 91,770 31,314 -- --
Changes in assets and liabilities--
Accounts receivable......................... 23,305 (11,295) (221,321) (80,477) (121,049)
Prepaid expenses and other.................. 15,440 150 (5,591) (4,341) 1,850
Accounts payable............................ -- -- 25 -- (25)
Accrued compensation........................ 15,361 1,485 (13,109) (20,217) 3,499
--------- -------- -------- -------- --------
Net cash provided by operating
activities.............................. 40,013 165,251 60,547 92,827 49,200
--------- -------- -------- -------- --------
Investing activities:
Purchases of property and equipment................ (12,360) (95,477) (112,580) (106,482) (20,900)
--------- -------- -------- -------- --------
Financing activities:
Proceeds from issuance of long-term debt........... -- -- 99,506 92,007 --
Repayment on long-term debt........................ (26,966) (39,902) (43,159) (30,233) (17,117)
--------- -------- -------- -------- --------
Net cash (used in) provided by financing
activities.............................. (26,966) (39,902) 56,347 61,774 (17,117)
--------- -------- -------- -------- --------
Net increase in cash and cash equivalents............ 687 29,872 4,314 48,119 11,183
Cash and cash equivalents, beginning of period....... 926 1,613 31,485 31,485 35,799
--------- -------- -------- -------- --------
Cash and cash equivalents, end of period............. $ 1,613 $ 31,485 $ 35,799 $ 79,604 $ 46,982
========= ======== ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-173
<PAGE>

DENNIS JAMES BONNER, M.D., LTD.

NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

1. ORGANIZATION AND BUSINESS:

Dennis James Bonner, M.D., Ltd. (the "Company") was formed in 1982 as a
physician owned medical practice engaged in the rendering of professional
medical rehabilitative services to the general public.

On October 20, 1997, the Company entered into an Asset Acquisition
Agreement (the "Affiliation Agreement") with U.S. PHYSICIANS ("USP"). Under the
terms of the Affiliation Agreement, USP and its affiliated professional
corporation will acquire the majority of the assets and liabilities of the
Company in exchange for cash, notes payable and USP Common Stock, subject to
adjustment as defined. The closing, as defined in the Affiliation Agreement,
will occur upon the completion of an initial public offering by USP. If the
closing has not occurred prior to March 31, 1998, the Affiliation Agreement may
be terminated by either the Company or USP by written notice to the other party.

2. SIGNIFICANT ACCOUNTING POLICIES:

Interim Financial Statements

Use of Estimates

Fair Value of Financial Instruments

Net Revenues

F-174
<PAGE>

DENNIS JAMES BONNER, M.D., LTD.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.

Accounts Receivable

Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.

Concentration of Credit Risk

Property and Equipment

Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation and amortization are
provided over the shorter of the estimated useful lives of the applicable assets
or the lease term and are computed using the straight-line method. The
depreciation lives for property and equipment range from five to seven years.

Income Taxes

The Company has elected treatment as an "S" Corporation for both federal
and state income tax purposes, and accordingly is not taxed as a separate
entity. The Company's taxable income or loss is allocated to each owner and
recognized on their individual tax return. Accordingly, no provision for income
taxes has been reflected in the accompanying financial statements.

The Company reports certain income and expense items for income tax
purposes on a different basis than that reflected in the accompanying financial
statements. The primary differences are due to the cash basis of accounting for
income tax purposes. The cumulative amount of these differences as of December
31, 1996 was approximately $900,000. If the S Corporation status is terminated,
then a deferred income tax liability of approximately $225,000 related to these
cumulative differences would need to be reflected in the accompanying financial
statements.

Statements of Cash Flows Information

For the years ended December 31, 1994, 1995 and 1996, the Company paid
interest of $4,967, $4,813 and $4,554, respectively.

F-175
<PAGE>

DENNIS JAMES BONNER, M.D., LTD.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

3. LONG-TERM DEBT:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
--------- ---------
<S> <C> <C>
Note payable to a bank, payable in monthly installments of
$602 plus interest at 8.25%, final payment due May
2001...................................................... $ -- $ 26,701
Note payable to a bank, payable in monthly installments of
$551 including interest at 7.5%, final payment due
December 2000............................................. -- 22,717
Note payable to a bank, payable in monthly installments of
$321 including interest at 9.0%, final payment due January
2000...................................................... -- 10,346
Note payable to a financial services company, payable in
monthly installments of $727 including interest at 7.9%,
final payment due April 2001.............................. -- 28,343
Note payable to a bank, payable in monthly installments of
$480, including interest, final payment due February
1999...................................................... 15,393 10,859
Note payable to a bank, payable in monthly installments of
$1,627 plus interest at 7.5%, final payment due December
1999 (repaid in 1996)..................................... 27,226 --
--------- ---------
42,619 98,966
Less -- Current maturities............................. (10,285) (26,571)
--------- ---------
$ 32,334 $ 72,395
========= =========
</TABLE>

Minimum principal repayments for long-term debt as of December 31, 1996,
are as follows:

4. EMPLOYEE BENEFIT PLAN:

The Corporation has a defined contribution profit sharing plan. For the
years ended December 31, 1994, 1995 and 1996, the Company has elected not to
make a contribution to the plan. The Corporation has also received written
approval from the Internal Revenue Service to begin termination of the profit
sharing plan and is still in the process of dissolving this plan.

5. RELATED-PARTY TRANSACTIONS:

The Company rents office space from T. Baxter, Inc. which is a corporation
related by common ownership. The Company also rents office space from Langhorne
Medical Building Partners, a partnership in which Dr. Bonner is a partner.

Rent expense on related-party operating leases was $127,766, $90,510 and
$81,106 for the years ended December 31, 1994, 1995 and 1996, respectively.

F-176
<PAGE>

DENNIS JAMES BONNER, M.D., LTD.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

6. COMMITMENTS AND CONTINGENCIES:

Lease Obligations

Future minimum lease payments for noncancellable operating leases primarily
for office space as of December 31, 1996, are as follows:

<TABLE>
<CAPTION>
NONRELATED-PARTY
LEASES
----------------
<S> <C>
1997......................................... $58,264
1998......................................... 33,764
1999......................................... 2,405
</TABLE>

Rent expense on nonrelated-party operating leases was $41,183, $60,694 and
$62,744 for the years ended December 31, 1994, 1995 and 1996, respectively.

Insurance Policies

The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
practice and the other CAT Fund participants received a surcharge assessment
during fiscal 1996. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the practice's portion
of the CAT Fund unfunded liability could not be reasonably estimated.

Health Care Regulatory Environment and Reliance on Government Programs

F-177
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Neil Chesen, M.D., PC:

We have audited the accompanying balance sheets of Neil Chesen, M.D., PC (a
Pennsylvania corporation) as of December 31, 1996 and September 30, 1997 and the
related statements of operations and retained earnings and cash flows for the
year ended December 31, 1996 and the nine months ended September 30, 1997. 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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Neil Chesen, M.D., PC as of
December 31, 1996 and September 30, 1997, and the results of its operations and
its cash flows for the year ended December 31, 1996 and the nine months ended
September 30, 1997, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Philadelphia, Pa.,
December 29, 1997

F-178
<PAGE>

NEIL CHESEN, M.D., PC

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents................................. $ -- $ 21,440
Accounts receivable, net of allowance of $50,210 and
$70,230................................................ 121,059 132,660
Inventories............................................... 15,558 17,481
Prepaid expenses and other................................ 3,466 2,786
-------- --------
Total current assets................................. 140,083 174,367
-------- --------
Property and equipment:
Equipment, furniture and fixtures......................... 272,225 290,165
Less -- Accumulated depreciation.......................... (159,205) (187,298)
-------- --------
113,020 102,867
-------- --------
Intangible assets, net...................................... 31,984 21,127
-------- --------
$285,087 $298,361
======== ========

LIABILITIES AND SHAREHOLDER'S EQUITY

Current liabilities:
Line of credit............................................ $ 50,000 $ 22,233
Currrent portion of long-term debt........................ 66,061 31,529
Accounts payable.......................................... 34,029 --
Accrued compensation...................................... -- 61,519
-------- --------
Total current liabilities............................ 150,090 115,281
-------- --------
Long-term debt.............................................. 142,502 117,438
-------- --------
Commitments and contingencies (Note 5)
Shareholder's equity (deficit):
Common Stock, $1 par value, 1,000 shares authorized, 100
shares issued and outstanding.......................... 100 100
Retained earnings (deficit)............................... (7,605) 65,542
-------- --------
Total shareholder's equity (deficit)................. (7,505) 65,642
-------- --------
$285,087 $298,361
======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-179

<PAGE>

NEIL CHESEN, M.D., PC

STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ----------------------
1996 1996 1997
------------ ----------- --------
(UNAUDITED)
<S> <C> <C> <C>
Net revenues.............................................. $837,206 $624,847 $860,972
-------- -------- --------
Operating expenses:
Salaries, wages and benefits............................ 499,853 413,320 489,470
Pharmaceuticals and supplies............................ 64,357 38,260 43,879
General and administrative.............................. 296,499 150,567 203,688
Depreciation and amortization........................... 35,992 27,001 38,950
-------- -------- --------
Income (loss) from operations............................. (59,495) (4,301) 84,985
Interest expense, net..................................... 10,614 3,586 11,838
-------- -------- --------
Net income (loss)......................................... (70,109) (7,887) 73,147
Retained earnings (deficit), beginning of period.......... 62,504 62,504 (7,605)
-------- -------- --------
Retained earnings (deficit), end of period................ $ (7,605) $ 54,617 $ 65,542
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-180
<PAGE>

NEIL CHESEN, M.D., PC

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, -------------------
1996 1996 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Operating activities:
Net income (loss)........................................ $(70,109) $ (7,887) $ 73,147
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities --
Depreciation and amortization....................... 35,992 27,001 38,950
Changes in assets and liabilities --
Accounts receivable.............................. (17,579) 12,871 (11,601)
Inventories...................................... 972 415 (1,923)
Prepaid expenses and other....................... (3,466) -- 680
Accounts payable................................. 34,029 -- (34,029)
Accrued compensation............................. (6,286) 25,149 61,519
-------- -------- --------
Net cash provided by (used in) operating
activities.................................. (26,447) 57,549 126,743
-------- -------- --------
Investing activities:
Purchases of property and equipment...................... (96,167) (77,631) (17,940)
Purchase of covenant not to compete...................... (25,000) -- --
-------- -------- --------
Net cash used in investing activities.......... (121,167) (77,631) (17,940)
-------- -------- --------
Financing activities:
Net borrowings (payments) on line of credit.............. (15,000) -- (27,767)
Proceeds from long-term debt............................. 158,164 20,000 --
Repayments on long-term debt............................. (27,235) (15,859) (59,596)
-------- -------- --------
Net cash provided by (used in) financing
activities.................................. 115,929 4,141 (87,363)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents....... (31,685) (15,941) 21,440
Cash and cash equivalents, beginning of period............. 31,685 31,685 --
-------- -------- --------
Cash and cash equivalents, end of period................... $ -- $ 15,744 $ 21,440
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-181
<PAGE>

NEIL CHESEN, M.D., PC

NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

1. ORGANIZATION AND BUSINESS:

Neil Chesen, M.D., PC (the "Company") is a physician owned medical practice
serving the Reading, Pennsylvania area. The Company was formed in 1994 for the
purpose of rendering professional medical ophthalomolic services and related
medical services to the general public.

On December 19, 1997, the Company entered into a Stock Acquisition
Agreement (the "Affiliation Agreement") with U.S. PHYSICIANS, Inc. ("USP").
Under the terms of the Affiliation Agreement, USP and its affiliated
professional corporation will acquire the stock of the Company in exchange for
cash, notes payable and USP Common Stock, subject to adjustment as defined. The
closing, as defined in the Affiliation Agreement, will occur upon completion of
an initial public offering by USP. If the closing has not occurred prior to
March 31, 1998, the Affiliation Agreement may be terminated by either the
Company or USP by written notice to the other party.

2. SIGNIFICANT ACCOUNTING POLICIES:

Interim Financial Statements

The financial statements for the nine months ended September 30, 1996, are
unaudited, and in the opinion of management, include all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of the
results of its operations for the nine months ended September 30, 1996. The
results of operations for the nine-month period are not necessarily indicative
of the results to be expected for the entire year.

Use of Estimates

Fair Value of Financial Instruments

Net Revenues

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.

F-182
<PAGE>

NEIL CHESEN, M.D., PC

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Accounts Receivable

Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.

Intangible Assets

Goodwill and covenants not to compete are amortized over three and seven
years respectively. Amortization of intangibles was $7,887 and $10,857 for the
year ended December 31, 1996 and the nine months ended September 30, 1997,
respectively. The Company reviews the recorded amounts of intangible assets for
impairments whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. If this review indicates
that the carrying amount of the asset may not be recoverable, as determined
based on the undiscounted cash flows of the operations acquired over the
remaining amortization periods, the carrying value of the asset is reduced to
fair value.

Concentration of Credit Risk

Property and Equipment

Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation is provided over the
estimated useful lives of the applicable assets ranging from five to seven years
and is computed using the straight-line method.

Income Taxes

The Company has elected treatment as an "S" Corporation for both federal
and state income tax purposes, and accordingly is not taxed as a separate
entity. The Company's taxable income or loss is allocated to each owner and
recognized on their individual tax return. Accordingly, no provision for income
taxes has been reflected in the accompanying financial statements.

The Company reports certain income and expense items for income tax
purposes on a different basis than that reflected in the accompanying financial
statements. The primary differences are due to the cash basis of accounting for
income tax purposes. The cumulative amount of these differences as of September
30, 1997 was approximately $128,000. If the S Corporation status is terminated,
then a deferred income tax liability of approximately $32,000 related to these
cumulative differences would need to be reflected in the accompanying financial
statements.

Statements of Cash Flows Information

Amounts paid for interest for the year ended December 31, 1996 and the nine
months ended September 30, 1997 were $11,113 and $11,838, respectively. Amounts
paid for taxes were not significant.

F-183
<PAGE>

NEIL CHESEN, M.D., PC

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

3. LINE OF CREDIT:

The Company has a line of credit for $125,000 with a local bank. Interest
is accrued on the outstanding balance at the bank's commercial rate (8.5% at
September 30, 1997). Outstanding borrowings under the line as of December 31,
1996 and September 30, 1997 were $50,000 and $22,233, respectively.

4. LONG-TERM DEBT:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Note payable to a bank, payable in monthly installments
of $1,488 including interest at 10%, final payment
due March 1998....................................... $ 19,587 $ 8,674
Note payable to a bank, payable in monthly installments
of $1,515 including interest at 7.7%, repaid in
1997................................................. 26,439 --
Note payable to a bank, payable in monthly installments
of $631 including interest at 8.5%, repaid in 1997... 14,986 --
Note payable to a bank, payable in monthly installments
of $1,250 including interest at 8.75%, final payment
due December 2001.................................... 124,661 121,953
Other debt............................................. 22,890 18,440
-------- --------
208,563 149,067
Less -- Current portion.............................. (66,061) (31,629)
-------- --------
$142,502 $117,438
======== ========
</TABLE>

Minimum principal repayments for long-term debt as of September 30, 1997,
are as follows:

Remaining 1997................................ $ 23,815
1998.......................................... 9,006
1999.......................................... 5,035
2000.......................................... 5,494
2001.......................................... 105,717
--------
$149,067
========

5. COMMITMENTS AND CONTINGENCIES:

Lease Obligations

The Company leases one of its office facilities from the shareholder of the
Company. This building was purchased by the shareholder in July 1997.
Additionally, the Company has another office location which is leased from a
non-related party. Future minimum lease payments for related-party and
nonrelated-party noncancellable operating leases primarily for office space are
as follows:

<TABLE>
<CAPTION>
RELATED-PARTY NONRELATED-PARTY
LEASES LEASES
------------- ----------------
<S> <C> <C>
Remaining 1997................................ 8,625 5,376
1998.......................................... 17,250 21,504
1999.......................................... -- 21,504
2000.......................................... -- 5,376
</TABLE>

F-184
<PAGE>

NEIL CHESEN, M.D., PC

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

5. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)

Rent expense on related-party operating leases was $8,625 for the nine
months ended September 30, 1997. Rent expense on nonrelated-party operating
leases was $24,638 for the year ended December 31, 1996 and $25,536 for the nine
months ended September 30, 1997.

Insurance Policies

The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.

Health Care Regulatory Environment and Reliance on Government Programs

F-185
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Northern Ophthalmic Associates, Inc.:

We have audited the accompanying balance sheets of Northern Ophthalmic
Associates, Inc. (a Pennsylvania corporation) as of November 30, 1995 and 1996,
and the related statements of operations and retained earnings and cash flows
for each of the three years ended November 30, 1996. 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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Northern Ophthalmic Associates,
Inc. as of November 30, 1995 and 1996, and the results of its operations and its
cash flows for each of the three years ended November 30, 1996, in conformity
with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Philadelphia, Pa.,
October 20, 1997

F-186
<PAGE>

NORTHERN OPHTHALMIC ASSOCIATES, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
NOVEMBER 30,
------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents................................ $ 50,005 $ 8,744 $ 8,061
Accounts receivable, net of allowance of $151,136,
$128,927 and $124,178................................. 141,722 157,511 159,861
Prepaid expenses and other............................... 8,479 -- 5,000
-------- -------- --------
Total current assets.................................. 200,206 166,255 172,922
-------- -------- --------
Property and equipment:
Equipment, furniture and fixtures........................ 919,571 986,914 986,914
Less -- Accumulated depreciation......................... (530,417) (588,980) (658,386)
-------- -------- --------
389,154 397,934 328,528
-------- -------- --------
Intangible assets.......................................... 42,667 39,333 39,333
-------- -------- --------
$632,027 $603,522 $540,783
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Line of credit........................................... $100,000 $ 66,640 $ 64,256
Current maturities of long-term debt..................... 80,881 107,634 44,535
Accounts payable......................................... 23,593 32,956 36,934
-------- -------- --------
Total current liabilities........................ 204,474 207,230 145,725
-------- -------- --------
Long-term debt............................................. 159,345 122,940 81,059
-------- -------- --------
Commitments and contingencies (Note 6)
Shareholders' equity:
Common Stock, $1 par value; 200 shares authorized, issued
and outstanding....................................... 200 200 200
Retained earnings........................................ 268,008 273,152 313,799
-------- -------- --------
Total shareholders' equity............................ 268,208 273,352 313,999
-------- -------- --------
$632,027 $603,522 $540,783
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-187
<PAGE>

NORTHERN OPHTHALMIC ASSOCIATES, INC.

STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEAR ENDED NOVEMBER 30, SEPTEMBER 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................... $1,717,728 $1,830,986 $1,639,488 $1,333,669 $1,377,918
---------- ---------- ---------- ---------- ----------

Operating expenses:

Salaries, wages and benefits............. 992,746 1,096,764 919,805 719,368 705,792

Pharmaceuticals and medical supplies..... 166,283 173,945 170,419 141,281 138,709

General and administrative............... 478,327 472,899 440,786 395,866 397,396

Depreciation and amortization............ 67,007 71,311 75,671 71,949 69,406
---------- ---------- ---------- ---------- ----------

Income from operations..................... 13,365 16,067 32,807 5,205 66,615

Interest expense, net...................... 14,958 28,977 27,663 23,052 25,968
---------- ---------- ---------- ---------- ----------

Net income (loss).......................... (1,593) (12,910) 5,144 (17,847) 40,647

Retained earnings, beginning of period..... 282,511 280,918 268,008 268,008 273,152
---------- ---------- ---------- ---------- ----------

Retained earnings, end of period........... $ 280,918 $ 268,008 $ 273,152 $ 250,161 $ 313,799
========== ========== ========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-188
<PAGE>

NORTHERN OPHTHALMIC ASSOCIATES, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEAR ENDED NOVEMBER 30, SEPTEMBER 30,
----------------------------- -------------------
1994 1995 1996 1996 1997
------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)................................. $(1,593) $(12,910) $ 5,144 $(17,847) $ 40,647
Adjustments to reconcile net income (loss) to net
cash provided by operating activities --
Depreciation and amortization................... 67,007 71,311 75,671 71,949 69,406
Changes in assets and liabilities --
Accounts receivable........................... 2,011 (3,733) (15,789) 11,227 (2,350)
Prepaid expenses and other.................... 5,521 1,000 8,479 (25,007) (5,000)
Accounts payable.............................. (32,690) 2,387 9,363 31,446 3,978
------- -------- -------- -------- --------
Net cash provided by operating
activities............................... 40,256 58,055 82,868 71,768 106,681
------- -------- -------- -------- --------
Investing activities:
Purchase of property and equipment................ (37,000) (24,206) -- (1,400) --
Sale of property and equipment.................... -- -- 9,706 9,105 --
------- -------- -------- -------- --------
Net cash (used in) provided by investing
activities............................... (37,000) (24,206) 9,706 7,705 --
------- -------- -------- -------- --------
Financing activities:
Net borrowings (repayments) on line of credit..... 75,000 25,000 (33,360) (30,474) (2,384)
Repayments on long-term debt...................... (19,202) (77,891) (100,475) (92,976) (104,980)
------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities............................... 55,798 (52,891) (133,835) (123,450) (107,364)
------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents....................................... 59,054 (19,042) (41,261) (43,977) (683)
Cash and cash equivalents, beginning of period...... 9,993 69,047 50,005 50,005 8,744
------- -------- -------- -------- --------
Cash and cash equivalents, end of period............ $69,047 $ 50,005 $ 8,744 $ 6,028 $ 8,061
======= ======== ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-189
<PAGE>

NORTHERN OPHTHALMIC ASSOCIATES, INC.

NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE TEN MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

1. ORGANIZATION AND BUSINESS:

Northern Ophthalmic Associates, Inc. (the "Company") is an ophthalmic
medical practice serving the Philadelphia, Pennsylvania area. The Company was
formed in December 1984.

On September 30, 1997, the Company entered into an Asset Acquisition
Agreement (the "Affiliation Agreement") with U.S. PHYSICIANS ("USP"). Under the
terms of the Affiliation Agreement, USP and its affiliated professional
corporation will acquire the majority of the assets and liabilities of the
Company in exchange for cash, notes payable and USP Common Stock, subject to
adjustment as defined. The closing, as defined in the Affiliation Agreement,
will occur upon the completion of an initial public offering by USP. If the
closing has not occurred prior to March 31, 1998, the Affiliation Agreement may
be terminated by either the Company or USP by written notice to the other party.

2. SIGNIFICANT ACCOUNTING POLICIES:

Interim Financial Statements

The financial statements for the ten months ended September 30, 1996 and
1997, are unaudited, and in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position as of September 30, 1997, and the results
of its operations for the ten months ended September 30, 1996 and 1997. The
results of operations for the ten-month period are not necessarily indicative of
the results to be expected for the entire year.

Use of Estimates

Fair Value of Financial Instruments

Net Revenues

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.

F-190
<PAGE>

NORTHERN OPHTHALMIC ASSOCIATES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE TEN MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Accounts Receivable

Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.

Concentration of Credit Risk

The Company extends credit to patients covered by programs such as Medicare
and Medicaid and private insurers. The Company manages credit risk with the
various public and private insurance providers, as appropriate. Allowances for
bad debts have been made for potential losses when appropriate.

Property and Equipment

Equipment, furniture and fixtures are stated at cost. Expenditures for
maintenance and repairs are charged to expense as incurred. Depreciation is
provided over the estimated useful life of each class of depreciable asset
ranging from five to seven years.

Intangible Assets

Intangible assets include the excess of cost over the net asset value of an
acquired physician practice and a covenant not to compete and are being
amortized over 15 years. The Company continually evaluates whether later events
and circumstances have occurred that indicate the remaining estimated useful
life of intangible assets may warrant revision or that the remaining balance may
not be recoverable. When factors indicate that intangible assets should be
evaluated for possible impairment, the Company uses an estimate of the related
undiscounted operating income over the remaining life of the intangible asset in
measuring whether the intangible asset is recoverable. As of November 30, 1996,
management believes that no revision to the remaining useful lives or write-down
of intangible assets is required.

Income Taxes

The Company has elected treatment as an "S" Corporation for both federal
and state income tax purposes and accordingly is not taxed as a separate entity.
The Company's taxable income or loss is allocated to each owner and recognized
on their individual tax return. Accordingly, no provision for income taxes has
been reflected in the accompanying financial statements.

The Company reports certain income and expense items for income tax
purposes on a different basis than that reflected in the accompanying financial
statements. The primary differences are due to the cash basis of accounting for
income tax purposes. The cumulative amount of these differences as of November
30, 1996 was approximately $150,000. If the S Corporation status is terminated,
then a deferred income tax liability of approximately $37,000 related to these
cumulative differences would need to be reflected in the accompanying financial
statements.

F-191
<PAGE>

NORTHERN OPHTHALMIC ASSOCIATES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE TEN MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Statements of Cash Flows Information

For the years ended November 30, 1994, 1995 and 1996, the Company paid
interest of $14,958, $28,977 and $27,663, respectively. Amounts paid for taxes
were not significant.

3. INTANGIBLE ASSETS:

<TABLE>
<CAPTION>
NOVEMBER 30,
----------------------
1995 1996
-------- --------
<S> <C> <C>
Excess of cost over net asset value of acquired
physician practice................................. $ 20,334 $ 20,334
Covenant not to compete.............................. 76,000 76,000
-------- --------
96,334 96,334
Less -- Accumulated amortization..................... (53,667) (57,001)
-------- --------
$ 42,667 $ 39,333
======== ========
</TABLE>

4. LONG-TERM DEBT:

<TABLE>
<CAPTION>
NOVEMBER 30,
-----------------------
1995 1996
-------- ---------
<S> <C> <C>
Note payable to a lending agent, interest at 22.40%, monthly
payments of $995 per month through May 2001............... $ -- $ 41,676
Note payable to a bank, interest at 9.75%, monthly payments
of $6,586 per month through September 1997................ 129,433 66,096
Note payable to an auto dealer, interest at 4.99%, monthly
payments of $1,237 through February 1999.................. -- 33,387
Note payable to a bank, interest at 6.75%, monthly payments
of $588 through February 1999............................. 19,413 13,440
Note payable to a bank, interest at 8.75%, monthly payments
of $1,185, due in full by April 2001...................... 91,380 75,975
-------- ---------
240,226 230,574
Less -- Current maturities.................................. (80,881) (107,634)
-------- ---------
$159,345 $ 122,940
======== =========
</TABLE>

5. EMPLOYEE BENEFIT PLAN:

The Company provides a 401(k) profit sharing plan that covers all qualified
employees, as defined by the plan agreement. Employees vest pro rata over five
years beginning after their first year as a participant. The Company matches
twenty-five cents for every dollar contributed by the employees. For the years
ended November 30, 1994, 1995 and 1996, contributions to the plan were $0, $0
and $2,465.

F-192
<PAGE>

NORTHERN OPHTHALMIC ASSOCIATES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE TEN MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

6. COMMITMENTS AND CONTINGENCIES:

Lease Obligations

Future minimum lease payments for noncancellable operating leases primarily
for office space as of November 30, 1996 are as follows:

<TABLE>
<CAPTION>
FISCAL YEAR
- -----------
<S> <C>
1997............................................. $153,681
1998............................................. 136,253
1999............................................. 136,253
2000............................................. 136,253
2001............................................. 142,445
2002 and thereafter.............................. 142,445
</TABLE>

Rent expense on operating leases was $114,620, $132,405 and $129,027 for
the years ended November 30, 1994, 1995 and 1996, respectively.

Insurance Policies

The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.

Health Care Regulatory Environment and Reliance on Government Programs

F-193
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Northwest Orthopedic Associates, PC:

We have audited the accompanying balance sheets of Northwest Orthopedic
Associates, PC (a Pennsylvania corporation) as of December 31, 1995 and 1996,
and the related statements of operations and retained earnings and cash flows
for each of the three years ended December 31, 1996. 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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Northwest Orthopedic
Associates, PC as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for each of the three years ended December 31,
1996, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Philadelphia, Pa.,
October 17, 1997

F-194
<PAGE>

NORTHWEST ORTHOPEDIC ASSOCIATES, PC

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1995 1996 1997
-------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents.............................. $ 6,735 $ 2,343 $ 12,445
Accounts receivable, net of allowance of
$164,543, $130,558 and $105,179..................... 183,309 153,956 114,838
Prepaid expenses and other............................. 5,000 5,000 5,000
-------- ---------- ----------
Total current assets.............................. 195,044 161,299 132,283
-------- ---------- ----------
Property and equipment:
Equipment, furniture and fixtures...................... 352,695 295,060 297,041
Less -- Accumulated depreciation....................... (264,407) (238,550) (257,456)
-------- ---------- ----------
88,288 56,510 39,585
-------- ---------- ----------
Deferred income taxes.................................... -- -- 6,159
-------- ---------- ----------
$283,332 $ 217,809 $ 178,027
======== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Current portion of long-term debt...................... $ 20,000 $ -- $ 18,000
Accounts payable....................................... 30,254 23,862 69,609
Accrued compensation................................... 14,318 12,860 7,655
Deferred income taxes.................................. 34,217 30,409 20,147
-------- ---------- ----------
Total current liabilities......................... 98,789 67,131 115,411
-------- ---------- ----------
Deferred income taxes.................................... 13,038 8,694 --
-------- ---------- ----------
Commitments and contingencies (Note 4)
Shareholders' equity:
Common Stock, $10 par value; 2,000 shares
authorized; 300 issued and 200 outstanding.......... 3,000 3,000 3,000
Additional paid in capital............................. 3,000 3,000 3,000
Retained earnings...................................... 170,447 140,926 61,558
Treasury stock, 100 shares at cost..................... (4,942) (4,942) (4,942)
-------- ---------- ----------
Total shareholders' equity........................ 171,505 141,984 62,616
-------- ---------- ----------
$283,332 $ 217,809 $ 178,027
======== ========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-195
<PAGE>

NORTHWEST ORTHOPEDIC ASSOCIATES, PC

STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................... $1,651,693 $1,415,223 $1,251,074 $ 973,358 $ 773,033
---------- ---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits............. 1,073,997 934,178 852,746 678,253 510,287
Pharmaceuticals and medical supplies..... 85,633 78,537 83,722 49,901 40,467
General and administrative............... 441,606 357,890 319,282 231,854 307,141
Depreciation............................. 29,121 32,137 33,865 25,481 18,906
---------- ---------- ---------- ---------- ----------
Income (loss) from operations.............. 21,336 12,481 (38,541) (12,131) (103,768)
Interest expense (income), net............. 2,643 1,592 (160) 462 1,407
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.......... 18,693 10,889 (38,381) (12,593) (105,175)
Income tax provision (benefit)............. 4,577 2,982 (8,860) (3,060) (25,807)
---------- ---------- ---------- ---------- ----------
Net income (loss).......................... 14,116 7,907 (29,521) (9,533) (79,368)
Retained earnings, beginning of period..... 148,424 162,540 170,447 170,447 140,926
---------- ---------- ---------- ---------- ----------
Retained earnings, end of period........... $ 162,540 $ 170,447 $ 140,926 $ 160,914 $ 61,558
========== ========== ========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-196
<PAGE>

NORTHWEST ORTHOPEDIC ASSOCIATES, PC

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)................................ $ 14,116 $ 7,907 $(29,521) $ (9,533) $(79,368)
Adjustments to reconcile net income (loss)
to net cash provided by (used
in) operating activities --
Depreciation................................. 29,121 32,137 33,865 25,481 18,906
Deferred income taxes........................ 3,255 2,560 (8,152) (3,060) (25,115)
Loss on disposal of asset.................... -- -- -- (901) --
Changes in assets and liabilities --
Accounts receivable....................... 20,213 (18,719) 29,353 74,320 39,118
Accounts payable.......................... (23,058) 3,347 (6,392) (13,596) 45,747
Accrued compensation...................... (5,171) (2,070) (1,458) (3,001) (5,205)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities............................ 38,476 25,162 17,695 69,710 (5,917)
-------- -------- -------- -------- --------
Investing activities:
Purchases of property and equipment.............. (39,342) (5,620) (2,087) -- (1,981)
-------- -------- -------- -------- --------
Financing activities:
Proceeds from long-term debt..................... 47,442 -- -- -- 49,000
Repayments on long-term debt..................... (47,556) (24,886) (20,000) (20,000) (31,000)
-------- -------- -------- -------- --------
Net cash (used in) provided by financing
activities............................ (114) (24,886) (20,000) (20,000) 18,000
-------- -------- -------- -------- --------
Net (decrease) increase in cash and cash
equivalents...................................... (980) (5,344) (4,392) 49,710 10,102
Cash and cash equivalents, beginning of period..... 13,059 12,079 6,735 6,735 2,343
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period........... $ 12,079 $ 6,735 $ 2,343 $ 56,445 $ 12,445
======== ======== ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-197
<PAGE>

NORTHWEST ORTHOPEDIC ASSOCIATES, PC

NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

1. ORGANIZATION AND BUSINESS:

Northwest Orthopedic Associates, PC (the "Company") is an orthopedic
medical practice serving the Western Pennsylvania area. The Company was formed
in February 1973.

On October 1, 1997, the Company entered into a Stock Acquisition Agreement
(the "Affiliation Agreement") with U.S. PHYSICIANS, Inc. ("USP"). Under the
terms of the Affiliation Agreement, USP and its affiliated professional
corporation will acquire the stock of the Company in exchange for cash, notes
payable and USP Common Stock, subject to adjustment as defined. The closing, as
defined in the Affiliation Agreement, will occur upon the completion of an
initial public offering by USP. If the closing has not occurred prior to March
31, 1998, the Affiliation Agreement may be terminated by either the Company or
USP by written notice to the other party.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Interim Financial Statements

Use of Estimates

Fair Value of Financial Instruments

Net Revenues

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.

Accounts Receivable

Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are contractual and estimated bad
debts.

Concentration of Credit Risk

F-198
<PAGE>

NORTHWEST ORTHOPEDIC ASSOCIATES, PC

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Property and Equipment

Equipment, furniture and fixtures are stated at cost. Expenditures for
maintenance and repairs are charged to expense as incurred. Depreciation is
provided over the estimated useful life of the applicable assets ranging from
five to seven years and is computed using the straight-line method.

Income Taxes

Statements of Cash Flows Information

For the years ended December 31, 1994, 1995 and 1996, the Company paid
interest of $3,573, $2,385 and $2,114, respectively. Amounts paid for taxes were
not significant.

3. INCOME TAXES:

The components of the income tax provision (benefit) are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
------ ------ -------
<S> <C> <C> <C>
Current:
Federal.............................................. $ 793 $ 253 $ (424)
State................................................ 529 169 (284)
------ ------ -------
1,322 422 (708)
------ ------ -------
Deferred:
Federal.............................................. 1,953 1,536 (4,891)
State................................................ 1,302 1,024 (3,261)
------ ------ -------
3,255 2,560 (8,152)
------ ------ -------
$4,577 $2,982 $(8,860)
====== ====== =======
</TABLE>

The provision (benefit) for income taxes differs from the amount computed
by applying the U.S. Federal income tax rate (34%) because of the effect of the
following items:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate................... $ 6,356 $ 3,702 $(13,050)
Tax impact of Federal rate differential for graduated
rates.............................................. (3,750) (2,132) 7,399
State income taxes, net of federal benefit........... 1,737 1,047 (3,767)
Non-deductible travel and entertainment.............. 234 365 558
------- ------- --------
$ 4,577 $ 2,982 $ (8,860)
======= ======= ========
</TABLE>

F-199
<PAGE>

NORTHWEST ORTHOPEDIC ASSOCIATES, PC

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

3. INCOME TAXES: -- (CONTINUED)

The components of the net deferred tax liability, measured under SFAS No.
109, are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
------- -------
<S> <C> <C>
Deferred tax liabilities --
Property and equipment............................... $13,038 $ 8,694
Cash to accrual adjustments.......................... 34,217 30,409
------- -------
Net deferred tax liability............................. $47,255 $39,103
======= =======
</TABLE>

4. COMMITMENTS AND CONTINGENCIES:

Lease Obligations

The Company leases some of its office space from shareholders of the
Company. Future minimum lease payments for related-party and nonrelated-party
noncancellable operating leases primarily for office space as of December 31,
1996, are as follows:

RELATED-PARTY NONRELATED-PARTY
LEASES LEASES
------------- ----------------

1997.................................. $50,400 $28,908

Rent expense on related-party operating leases was $50,400 for each of the
years ended December 31, 1994, 1995 and 1996. Rent expense on nonrelated-party
operating leases was $63,540, $64,325 and $66,105 for the years ended December
31, 1994, 1995 and 1996, respectively.

Insurance Policies

The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.

Health Care Regulatory Environment and Reliance on Government Programs

F-200

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Oncology and Hematology Associates, PA:

We have audited the accompanying balance sheets of Oncology and Hematology
Associates, PA (a New Jersey corporation) as of December 31, 1995 and 1996, and
the related statements of operations and retained earnings and cash flows for
each of the three years in the period ended December 31, 1996. 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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Oncology and Hematology
Associates, PA as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Philadelphia, Pa.,
October 10, 1997

F-201

<PAGE>

ONCOLOGY AND HEMATOLOGY ASSOCIATES, PA

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1995 1996 1997
-------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents.............................. $ 8,296 $ 1,728 $ 48,391
Accounts receivable, net of allowance of
$106,828, $114,246 and $174,350..................... 201,405 173,606 307,280
Prepaid expenses and other............................. 567 567 447
-------- ---------- ----------
Total current assets.............................. 210,268 175,901 356,118
-------- ---------- ----------
Property and equipment:
Equipment, furniture and fixtures...................... 170,812 170,812 171,873
Less -- Accumulated depreciation....................... (115,479) (127,800) (136,368)
-------- ---------- ----------
55,333 43,012 35,505
-------- ---------- ----------
Deferred income taxes.................................... 7,363 6,338 --
-------- ---------- ----------
Other assets............................................. 44,389 36,616 36,616
-------- ---------- ----------
$317,353 $ 261,867 $ 428,239
======== ========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY

Current liabilities:
Note payable to shareholder............................ $ 15,000 $ -- $ --
Accounts payable....................................... 73,065 128,889 105,501
Accrued compensation................................... 12,348 14,296 10,293
Deferred income taxes.................................. 28,235 7,405 47,204
-------- ---------- ----------
Total current liabilities......................... 128,648 150,590 162,998
-------- ---------- ----------
Deferred income taxes.................................... -- -- 3,034
-------- ---------- ----------
Commitments and contingencies (Note 5)
Shareholder's equity:
Common Stock, no par, 100 shares authorized and
issued, 50 shares outstanding....................... 3,766 3,766 3,766
Retained earnings...................................... 249,597 172,169 323,099
Treasury stock, 50 shares at cost...................... (64,658) (64,658) (64,658)
-------- ---------- ----------
Total shareholder's equity........................ 188,705 111,277 262,207
-------- ---------- ----------
$317,353 $ 261,867 $ 428,239
======== ========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-202

<PAGE>

ONCOLOGY AND HEMATOLOGY ASSOCIATES, PA

STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................... $1,958,218 $2,168,924 $2,000,191 $1,467,953 $1,819,293
---------- ---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits............. 1,517,723 1,677,382 1,351,788 843,816 914,512
Pharmaceuticals and medical
supplies............................... 191,563 285,615 368,819 273,298 497,119
General and administrative............... 258,008 257,406 370,095 272,579 196,359
Depreciation............................. 10,917 13,873 12,321 7,061 8,568
---------- ---------- ---------- ---------- ----------
Income (loss) from operations.............. (19,993) (65,352) (102,832) 71,199 202,735
Interest income (expense), net............. 1,559 1,837 2,313 962 (197)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.......... (18,434) (63,515) (100,519) 72,161 202,538
Income tax provision (benefit)............. (2,207) (16,393) (23,091) 17,535 51,608
---------- ---------- ---------- ---------- ----------
Net income (loss).......................... (16,227) (47,122) (77,428) 54,626 150,930
Retained earnings, beginning of period..... 312,946 296,719 249,597 249,597 172,169
---------- ---------- ---------- ---------- ----------
Retained earnings, end of period........... $ 296,719 $ 249,597 $ 172,169 $ 304,223 $ 323,099
========== ========== ========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-203

<PAGE>

ONCOLOGY AND HEMATOLOGY ASSOCIATES, PA

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)................................ $(16,227) $(47,122) $(77,428) $ 54,626 $150,930
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities --
Depreciation................................. 10,917 13,873 12,321 7,061 8,568
Deferred income taxes........................ 4,340 (23,318) (19,805) 17,535 49,171
Changes in assets and liabilities --
Accounts receivable....................... (7,147) 18,939 27,799 (99,864) (133,674)
Prepaid expenses and other................ -- 61 -- -- 120
Accounts payable.......................... 18,772 19,499 55,824 6,176 (23,388)
Accrued compensation...................... (10,035) 398 1,948 217,252 (4,003)
Other assets.............................. 7,183 15,058 7,773 -- --
-------- -------- -------- -------- --------
Net cash provided by (used
in) operating activities.............. 7,803 (2,612) 8,432 202,786 47,724
-------- -------- -------- -------- --------
Investing activities:
Purchases of property and equipment.............. (15,864) (9,099) -- -- (1,061)
-------- -------- -------- -------- --------
Financing activities:
Proceeds from note payable to
shareholder.................................... 30,000 -- -- -- --
Repayment on note payable to
shareholder.................................... -- (15,000) (15,000) (15,000) --
-------- -------- -------- -------- --------
Net cash provided by (used
in) financing activities.............. 30,000 (15,000) (15,000) (15,000) --
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents...................................... 21,939 (26,711) (6,568) 187,786 46,663
Cash and cash equivalents, beginning of period..... 13,068 35,007 8,296 8,296 1,728
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period........... $ 35,007 $ 8,296 $ 1,728 $196,082 $ 48,391
======== ======== ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-204

<PAGE>

ONCOLOGY AND HEMATOLOGY ASSOCIATES, PA

NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

1. ORGANIZATION AND BUSINESS:

Oncology and Hematology Associates, PA (the "Company") is a physician-owned
medical practice in Woodbury, New Jersey. The Company was formed in 1971 for the
purpose of both cancer evaluation and treatment and evaluation of patients with
hematologic disorders.

On April 18, 1997, the Company entered into a Stock Acquisition Agreement,
as amended on December 10, 1997, (the "Affiliation Agreement") with U.S.
PHYSICIANS, Inc. ("USP"). Under the terms of the Affiliation Agreement, USP and
its affiliated professional corporation will acquire the stock of the Company in
exchange for cash and USP Common Stock, subject to adjustment as defined. The
closing, as defined in the Affiliation Agreement, will occur upon the completion
of an initial public offering by USP. If the closing has not occurred prior to
May 14, 1998, the Affiliation Agreement may be terminated by either the Company
or USP by written notice to the other party.

2. SIGNIFICANT ACCOUNTING POLICIES:

Interim Financial Statements

Use of Estimates

Fair Value of Financial Instruments

Net Revenues

F-205

<PAGE>

ONCOLOGY AND HEMATOLOGY ASSOCIATES, PA

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Cash and Cash Equivalents

Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.

Accounts Receivable

Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.

Concentration of Credit Risk

Property and Equipment

Property and equipment are stated at cost. Expenditures for repairs and
maintenance are charged to expense as incurred. Depreciation is provided over
the estimated useful life of the applicable assets ranging from five to seven
years for equipment, furniture, and fixtures and is computed using the
straight-line method.

Income Taxes

Note Payable to Shareholder

In December 1994 and 1995, the Company signed a short-term interest-free
note payable to the shareholder. The notes were repaid in January 1995 and 1996,
respectively.

Statements of Cash Flows Information

Amounts paid for interest and taxes were not significant.

3. EMPLOYEE BENEFIT PLAN:

The Company provides a 401(k) profit sharing plan that covers all qualified
employees, as defined by the plan agreement. Employees vest pro rata over six
years beginning after their first year as a participant. Contributions to the
plan are discretionary and are determined by the Company on an annual basis. For
the years ended December 31, 1994, 1995 and 1996, contributions to the plan were
$48,063, $47,937 and $0, respectively.

F-206

<PAGE>

ONCOLOGY AND HEMATOLOGY ASSOCIATES, PA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

4. INCOME TAXES:

The components of the income tax benefit are as follows:

YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
------- -------- --------
Current:
Federal...................................... $(3,928) $ 4,455 $ (1,972)
State........................................ (2,619) 2,970 (1,314)
------- -------- --------
(6,547) 7,425 (3,286)
------- -------- --------
Deferred:
Federal...................................... 2,604 (14,291) (11,883)
State........................................ 1,736 (9,527) (7,922)
------- -------- --------
4,340 (23,818) (19,805)
------- -------- --------
$(2,207) $(16,393) $(23,091)
======= ======== ========

Income tax benefit differs from the amount currently payable or receivable
because certain expenses, primarily depreciation and accruals, are reported in
different periods for financial reporting and income tax purposes. The Company
is on a cash basis of accounting for income tax purposes.

The benefit for income taxes differs from the amount computed by applying
the U.S. Federal income tax rate (34%) because of the effect of the following
items:

YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
------- -------- --------
Tax at U.S. Federal statutory rate............. $(6,268) $(21,595) $(34,176)
Tax impact of Federal rate differential for
graduated rates.............................. 4,485 11,029 19,591
State income taxes, net of federal benefit..... (1,189) (7,044) (9,723)
Non-deductible travel and entertainment........ 765 1,217 1,217
------- -------- --------
$(2,207) $(16,393) $(23,091)
======= ======== ========

The components of the net deferred tax liability, measured under SFAS No.
109, are as follows:

YEAR ENDED
DECEMBER 31,
------------------
1995 1996
-------- -------
Deferred tax assets--
Net operating loss carryforward................ $ 18,996 $16,561
-------- -------
Deferred tax liabilities--
Property and equipment......................... (11,633) (10,223)
Cash to accrual adjustments.................... (28,235) (7,405)
-------- -------
(39,868) (17,628)
-------- -------
Net deferred tax liability....................... $(20,872) $(1,067)
======== =======

F-207

<PAGE>

ONCOLOGY AND HEMATOLOGY ASSOCIATES, PA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

5. COMMITMENTS AND CONTINGENCIES:

Lease Obligations

The company leases its administrative office space from the shareholder. In
addition, the medical office is leased from Woodbury Medical Center Associates
in which the Company has a 7% partnership interest. The net investment in the
partnership has been included in other assets. Management has compared the
investment in the partnership to the anticipated undiscounted operating income
of the partnership noting that no revision to the carrying value of the
investment is needed. Future minimum lease payments for noncancellable operating
leases for office space and medical equipment having terms in excess of one year
as of December 31, 1996, are as follows:

NON-RELATED RELATED PARTY
PARTY LEASE LEASE
----------- -------------
1997.............................................. $14,898 $59,333
1998.............................................. 13,812 59,333
1999.............................................. 13,812 50,783
2000.............................................. 13,812 52,290
2001.............................................. -- 52,290
Thereafter........................................ -- 78,435

Rent expense on related party operating leases for the years ended December
31, 1994, 1995 and 1996 was $55,928, $56,428 and $56,428, respectively. Rent
expense on nonrelated party operating leases for the years ended December 31,
1994, 1995 and 1996 was $8,100, $12,060 and $36,732, respectively.

Employment Agreement

On May 1, 1996, the Company entered into a seven-year employment agreement
with a physician which includes his gross annual salary of $236,000.

Insurance Policies

The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims, which would have a material impact on
the Company's financial position or results of operations.

Health Care Regulatory Environment and Reliance on Government Programs

F-208

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Orthopedic Associates of Pittsburgh, Inc.:

We have audited the accompanying balance sheets of Orthopedic Associates of
Pittsburgh, Inc. (a Pennsylvania corporation) as of September 30, 1996 and 1997,
and the related statements of operations, shareholders' equity and cash flows
for each of the three years in the period ended September 30, 1997. 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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Orthopedic Associates of
Pittsburgh, Inc. as of September 30, 1996 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1997, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Philadelphia, Pa.,
December 12, 1997

F-209

<PAGE>

ORTHOPEDIC ASSOCIATES OF PITTSBURGH, INC.
BALANCE SHEETS

<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1996 1997
-------- --------
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents................................. $ 89,357 $ 31,983
Accounts receivable, net of allowance of $388,973 and
$377,428............................................... 475,411 461,301
Prepaid expenses and other................................ 38,559 43,155
-------- --------
Total current assets................................. 603,327 536,439
-------- --------
Property and equipment:
Equipment, furniture and fixtures......................... 463,741 464,559
Leasehold improvements.................................... 51,842 59,410
-------- --------
515,583 523,969
Less -- Accumulated depreciation and amortization......... (423,514) (465,697)
-------- --------
92,069 58,272
Other assets................................................ 5,963 5,963
-------- --------
$701,359 $600,674
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Line of credit............................................ $ 85,000 $ 80,000
Current maturities of long-term debt...................... 34,858 --
Accounts payable.......................................... 33,427 35,905
Accrued compensation...................................... -- --
Deferred income taxes..................................... 117,034 115,490
-------- --------
Total current liabilities............................ 270,319 231,395
-------- --------
Long-term debt.............................................. 70,020 --
-------- --------
Deferred income taxes....................................... 36,968 24,216
-------- --------
Commitments and contingencies (Note 7)
Shareholders' equity:
Common Stock, $1 par value, 3,000 shares authorized, 2,063
shares issued and 1,407 and 1,125 shares outstanding... 2,063 2,063
Additional paid in capital................................ 123,168 339,169
Retained earnings......................................... 461,884 416,894
Treasury stock, 656 and 1,038 shares at cost.............. (263,063) (413,063)
-------- --------
Total shareholders' equity........................... 324,052 345,063
-------- --------
$701,359 $600,674
======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-210

<PAGE>

ORTHOPEDIC ASSOCIATES OF PITTSBURGH, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues................................................ $4,506,677 $3,888,067 $3,562,214
---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits.............................. 3,301,356 2,847,501 2,771,381
Pharmaceuticals and medical supplies...................... 125,970 97,790 81,897
General and administrative................................ 1,022,440 865,033 707,235
Depreciation and amortization............................. 58,427 51,567 42,183
---------- ---------- ----------
Income (loss) from operations............................... (1,516) 26,176 (40,482)
Interest expense............................................ 8,358 12,379 18,207
---------- ---------- ----------
Income (loss) before income taxes........................... (9,874) 13,797 (58,689)
Income tax provision (benefit).............................. (1,178) 4,822 (13,699)
---------- ---------- ----------
Net income (loss)........................................... $ (8,696) $ 8,975 $ (44,990)
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-211

<PAGE>

ORTHOPEDIC ASSOCIATES OF PITTSBURGH, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
------ ------ ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1994............... 2,063 $2,063 $123,168 $461,605 $(150,000) $436,836
Net loss................................ -- -- -- (8,696) -- (8,696)
----- ------ -------- -------- --------- --------
Balance, September 30, 1995............... 2,063 2,063 123,168 452,909 (150,000) 428,140
Purchase of treasury stock.............. -- -- -- -- (113,063) (113,063)
Net income.............................. -- -- -- 8,975 -- 8,975
----- ------ -------- -------- --------- --------
Balance, September 30, 1996............... 2,063 2,063 123,168 461,884 (263,063) 324,052
Capital contribution.................... -- -- 216,001 -- -- 216,001
Purchase of treasury stock.............. -- -- -- -- (150,000) (150,000)
Net loss................................ -- -- -- (44,990) -- (44,990)
----- ------ -------- -------- --------- --------
Balance, September 30, 1997............... 2,063 $2,063 $339,169 $416,894 $(413,063) $345,063
===== ====== ======== ======== ========= ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-212

<PAGE>

ORTHOPEDIC ASSOCIATES OF PITTSBURGH, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income (loss)......................................... $(8,696) $ 8,975 $(44,990)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities--
Depreciation and amortization......................... 58,427 51,567 42,183
Deferred income taxes................................. (1,313) 5,431 (14,296)
Changes in assets and liabilities--
Accounts receivable................................ (57,091) 102,391 14,110
Prepaid expenses and other......................... 422 8,382 (4,596)
Accounts payable................................... (4,523) (16,146) 2,478
Accrued compensation............................... 13,354 (54,481) --
------- -------- --------
Net cash provided by (used in) operating
activities..................................... 580 106,119 (5,111)
------- -------- --------
Investing activities:
Purchases of property and equipment....................... (23,034) (21,352) (8,386)
------- -------- --------
Financing activities:
Net borrowings (repayments) on line of credit............. 35,000 -- (5,000)
Proceeds from long-term debt.............................. 10,000 -- --
Repayments on long-term debt.............................. (60,000) (8,185) (104,878)
Purchase of treasury stock................................ -- -- (150,000)
Capital contributions..................................... -- -- 216,001
------- -------- --------
Net cash used in financing activities............ (15,000) (8,185) (43,877)
------- -------- --------
Net increase (decrease) in cash and cash equivalents........ (37,454) 76,582 (57,374)
Cash and cash equivalents, beginning of period.............. 50,229 12,775 89,357
------- -------- --------
Cash and cash equivalents, end of period.................... $12,775 $ 89,357 $ 31,983
======= ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-213

<PAGE>

ORTHOPEDIC ASSOCIATES OF PITTSBURGH, INC.

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND BUSINESS:

Orthopedic Associates of Pittsburgh, Inc. (the "Company") is a
physician-owned medical practice serving the Pittsburgh, Pennsylvania, area. The
Company was formed in September 1974 for the purpose of rendering professional
medical services.

On April 18, 1997, the Company entered into a Stock Acquisition Agreement,
as amended on December 8, 1997 (the "Affiliation Agreement"), with U.S.
PHYSICIANS, Inc. ("USP"). Under the terms of the Affiliation Agreement, USP and
its affiliated professional corporation will acquire stock of the Company in
exchange for cash, notes payable and USP Common Stock, subject to adjustment as
defined. The closing, as defined in the Affiliation Agreement, will occur upon
the completion of an initial public offering by USP. If the closing has not
occurred prior to February 15, 1998, the Affiliation Agreement may be terminated
by either the Company or USP by written notice to the other party.

2. SIGNIFICANT ACCOUNTING POLICIES:

Use of Estimates

Fair Value of Financial Instruments

Net Revenues

The Company has an agreement with a related party to provide medical
services to subscribing participants. Under this agreement the Company receives
monthly capitation payments based on the number of participants, regardless of
services actually provided by the Company. Total revenues received under this
agreement for the years ended September 30, 1995, 1996 and 1997 were $530,391,
$458,649 and $366,267, respectively.

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.

Accounts Receivable

Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.

F-214

<PAGE>

ORTHOPEDIC ASSOCIATES OF PITTSBURGH, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Concentration of Credit Risk

Property and Equipment

Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation and amortization are
provided over the estimated useful lives of the related assets ranging from five
to seven years for equipment, furniture and fixtures and the remaining lease
term for leasehold improvements and is computed using the straight-line method.

Income Taxes

Statements of Cash Flows Information

For the years ended September 30, 1995, 1996 and 1997, the Company paid
interest of $8,358, $12,379, and $18,207, respectively. Amounts paid for taxes
were not significant.

In 1996, the Company purchased treasury shares from a former shareholder
and issued a note payable in the amount of $113,063.

3. LINE OF CREDIT:

The Company has a line of credit for $150,000 with a local bank. Interest
is accrued on the outstanding balance at the bank's prime rate plus 1% (9.5% at
September 30, 1997). Outstanding borrowings under the line as of September 30,
1996 and 1997 were $85,000 and $80,000, respectively.

4. NOTE PAYABLE TO FORMER SHAREHOLDER:

In August 1996, the Company purchased a shareholder's interest for $113,063
and issued a note payable.

<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1996 1997
-------- --------
<S> <C> <C>
Note payable to shareholder, monthly payments of
$3,649 including interest of 10% through July 1999
(repaid in 1997)................................... $104,878 $ --
Less -- Current maturities........................... (34,858) --
-------- --------
$ 70,020 $ --
======== ========
</TABLE>

F-215

<PAGE>

ORTHOPEDIC ASSOCIATES OF PITTSBURGH, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

5. EMPLOYEE BENEFIT PLAN:

The Company maintains a profit sharing plan that covers all qualified
employees, as defined by the plan agreement. Contributions to the plan are
discretionary and are determined by the Company on an annual basis. Employees
vest in Company contributions, as defined. For the years ended September 30,
1995, 1996 and 1997, contributions to the plan were $236,481, $212,986 and
$177,000, respectively.

6. INCOME TAXES:

The components of the income tax (benefit) provision are as follows:

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------
1995 1996 1997
------- ------ --------
<S> <C> <C> <C>
Current:
Federal..................................... $ 81 $ (365) $ 358
State....................................... 54 (244) 239
------- ------ --------
135 (609) 597
------- ------ --------
Deferred:
Federal..................................... (788) 3,259 (8,578)
State....................................... (525) 2,172 (5,718)
------- ------ --------
(1,313) 5,431 (14,296)
------- ------ --------
$(1,178) $4,822 $(13,699)
======= ====== ========
</TABLE>

Income tax (benefit) expense differs from the amount currently payable or
receivable because certain expenses, primarily depreciation and accruals, are
reported in different periods for financial reporting and income tax purposes.
The Company is on a cash basis of accounting for income tax purposes.

The (benefit) provision for income taxes differs from the amount computed
by applying the U.S. Federal income tax rate (34%) because of the effect of the
following items:

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------
1995 1996 1997
------- ------ --------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate............ $(3,357) $4,691 $(19,954)
Tax impact of Federal rate differential for
graduated rates............................. 1,856 (2,530) 11,150
State income taxes, net of federal benefit.... (1,001) 1,441 (5,869)
Non-deductible travel and entertainment....... 1,324 1,220 974
------- ------ --------
$(1,178) $4,822 $(13,699)
======= ====== ========
</TABLE>

F-216

<PAGE>

ORTHOPEDIC ASSOCIATES OF PITTSBURGH, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

6. INCOME TAXES: -- (CONTINUED)
The components of the net deferred tax liability, measured under SFAS No.
109, are as follows:

SEPTEMBER 30,
------------------------
1996 1997
--------- ---------
Deferred tax assets --
Net operating loss carryforward................... $ -- $ 9,980
--------- ---------
Deferred tax liabilities --
Property and equipment............................ (36,968) (34,196)
Cash to accrual adjustments....................... (117,034) (115,490)
--------- ---------
(154,002) (149,686)
--------- ---------
Net deferred tax liability.......................... $(154,002) $(139,706)
========= =========

7. COMMITMENTS AND CONTINGENCIES:

Lease Obligations

The Company leases office space in two locations. Rent expense on operating
leases was $378,791, $278,185 and $193,105 for the years ended September 30,
1995, 1996 and 1997, respectively. Future minimum lease payments for
noncancellable operating leases as of September 30, 1997 are as follows:

FISCAL YEAR
- -----------
1998............................................. $120,649
1999............................................. 59,261

Insurance Policies

The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
practice and the other CAT Fund participants received a surcharge assessment
during fiscal 1996. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the practice's portion
of the CAT Fund unfunded liability could not be reasonably estimated.

Health Care Regulatory Environment and Reliance on Government Programs

F-217

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Philadelphia Uro-Gynecologic Associates, PC:

We have audited the accompanying balance sheet of Philadelphia Uro-Gynecologic
Associates, PC (a Pennsylvania corporation) as of December 31, 1996 and the
related statements of operations and accumulated deficit and cash flows for the
year ended December 31, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Philadelphia Uro-Gynecologic
Associates, PC as of December 31, 1996, and the results of its operations and
its cash flows for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Philadelphia, Pa.,
January 23, 1998

F-218

<PAGE>

PHILADELPHIA URO-GYNECOLOGIC ASSOCIATES, PC

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents................................. $ 1,026 $ --
Accounts receivable, net of allowance of $54,190 and
$67,366................................................ 54,141 44,175
Prepaid expenses and other................................ 13,500 20,250
-------- --------
Total current assets................................. 68,667 64,425
-------- --------
Property and equipment:
Equipment, furniture and fixtures......................... 97,482 97,482
Less -- Accumulated depreciation.......................... (41,868) (55,523)
-------- --------
55,614 41,959
-------- --------
Other assets................................................ 6,226 5,613
-------- --------
$130,507 $111,997
======== ========

LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)

Current liabilities:
Current maturities of long-term debt...................... $ 18,074 $ 24,329
Line of credit............................................ 94,000 150,000
Accounts payable.......................................... 33,546 63,512
Accrued compensation...................................... 5,784 17,729
-------- --------
Total current liabilities............................ 151,404 255,570
-------- --------
Long-term debt.............................................. 31,825 15,062
-------- --------
Commitments and contingencies (Note 6)
Shareholder's equity (deficit):
Common stock, $1.00 par value, 10,000 shares authorized,
100 shares issued and outstanding...................... 100 100
Accumulated deficit....................................... (52,822) (158,735)
-------- --------
Total shareholder's equity (deficit)................... (52,722) (158,635)
-------- --------
$130,507 $111,997
======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-219

<PAGE>

PHILADELPHIA URO-GYNECOLOGIC ASSOCIATES, PC

STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, --------------------
1996 1996 1997
------------ -------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Net revenues.............................................. $575,740 $416,534 $ 364,472
-------- -------- ---------
Operating expenses:
Salaries, wages and benefits............................ 380,036 279,498 291,377
Pharmaceuticals and medical supplies.................... 34,639 32,941 53,045
General and administrative.............................. 155,432 87,151 97,586
Depreciation and amortization........................... 18,572 13,909 14,268
-------- -------- ---------
Income (loss) from operations............................. (12,939) 3,035 (91,804)
Income expense (income), net.............................. 17,518 7,364 14,109
-------- -------- ---------
Net loss.................................................. (30,457) (4,329) (105,913)
Accumulated deficit, beginning of period.................. (22,365) (22,365) (52,822)
-------- -------- ---------
Accumulated deficit, end of period........................ $(52,822) $(26,694) $(158,735)
======== ======== =========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-220

<PAGE>

PHILADELPHIA URO-GYNECOLOGIC ASSOCIATES, PC

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, --------------------
1996 1996 1997
------------ -------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Operating activities:
Net loss................................................ $(30,457) $ (4,329) $(105,913)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization...................... 18,572 13,909 14,268
Changes in assets and liabilities --
Accounts receivable............................. (14,526) (1,752) 9,966
Prepaid expenses and other...................... 1,973 (10,402) (6,750)
Accounts payable................................ 11,711 4,642 29,966
Accrued compensation............................ (14,571) (17,027) 11,945
-------- -------- ---------
Net cash used in operating activities......... (27,298) (14,959) (46,518)
-------- -------- ---------
Investing activities:
Purchases of property and equipment..................... (2,793) (293) --
-------- -------- ---------
Financing activities:
Net proceeds on line of credit.......................... 27,305 7,305 56,000
Repayments on long-term debt............................ (10,464) (6,329) (10,508)
-------- -------- ---------
Net cash provided by financing activities............... 16,841 976 45,492
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents...... (13,250) (14,276) (1,026)
Cash and cash equivalents, beginning of period............ 14,276 14,276 1,026
-------- -------- ---------
Cash and cash equivalents, end of period.................. $ 1,026 $ -- $ --
======== ======== =========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-221

<PAGE>

PHILADELPHIA URO-GYNECOLOGIC ASSOCIATES, PC

NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

1. ORGANIZATION AND BUSINESS:

Philadelphia Uro-Gynecologic Associates, PC (the "Company") is a
professional corporation serving the Philadelphia, Pennsylvania area. The
Company was formed in 1993 for the purpose of rendering professional urological
and gynecological services and related medical services to the general public.

On January 21, 1998, the Company entered into an Asset Acquisition
Agreement (the "Affiliation Agreement") with U.S. PHYSICIANS ("USP"). Under the
terms of the Affiliation Agreement, USP and its affiliated professional
corporation will acquire the majority of the assets and liabilities of the
Company in exchange for cash, notes payable and USP Common Stock, subject to
adjustment as defined. The closing, as defined in the Affiliation Agreement,
will occur upon the completion of an initial public offering by USP. If the
closing has not occurred prior to May 15, 1998 the Affiliation Agreement may be
terminated by either the Company or USP by written notice to the other party.

2. SIGNIFICANT ACCOUNTING POLICIES:

Interim Financial Statements

Use of Estimates

Fair Value of Financial Instruments

Net Revenues

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.

Accounts Receivable

Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.

Concentration of Credit Risk

F-222

<PAGE>

PHILADELPHIA URO-GYNECOLOGIC ASSOCIATES, PC

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Property and Equipment

Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation is provided over the
estimated useful lives of the applicable assets ranging from five to seven years
and is computed using the straight-line method.

Income Taxes

The Company has elected treatment as an "S" Corporation for both federal
and state income tax purposes and accordingly is not taxed as a separate entity.
The Company's taxable income or loss is allocated to the owner and recognized on
his individual tax return. Accordingly, no provision for income taxes has been
reflected in the accompanying financial statements.

The Company reports certain income and expense items for income tax
purposes on a different basis than that reflected in the accompanying financial
statements. The primary differences are due to the cash basis of accounting for
income tax purposes. The cumulative amount of these differences as of December
31, 1996 was approximately $31,000. If the S Corporation status is terminated,
then a deferred income tax asset of approximately $18,000, subject to
utilization of net operating loss carryforwards, related to these cumulative
differences would need to be reflected in the accompanying financial statements.

Statements of Cash Flows Information

Amounts paid for interest for the year ended December 31, 1996 was $17,542.
Amounts paid for taxes were not significant.

3. LINE OF CREDIT:

The Company has a line of credit totaling $150,000 bearing interest at the
bank's prime rate plus 2% (10.5% at September 30, 1997). The line is due on May
1, 1998 and is collateralized by the accounts receivable and equipment of the
Company. At December 31, 1996, the balance outstanding on the line of credit was
$94,000.

4. LONG-TERM DEBT:

DECEMBER 31, 1996
-----------------
Note payable to a bank, bearing interest at 8.75%, principal
payments of $792 per month through March 1999............. $21,375
Capitalized lease obligations............................... 28,524
-------
49,899
Less -- Current maturities.................................. (18,074)
-------
$31,825
=======

Future maturities of long-term debt at December 31, 1996 are as follows:

1997............................................... $18,074
1998............................................... 16,241
1999............................................... 8,820
2000............................................... 6,564
-------
$49,899
=======

F-223

<PAGE>

PHILADELPHIA URO-GYNECOLOGIC ASSOCIATES, PC

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

5. EMPLOYEE BENEFIT PLAN:

The Company provides a 401(k) profit sharing plan that covers all qualified
employees, as defined by the plan agreement. Employees vest immediately.
Contributions to the plan are discretionary and are determined by the Company on
an annual basis. For the year ended December 31, 1996, contributions to the plan
were $4,000.

6. COMMITMENTS AND CONTINGENCIES:

Lease Obligations

Rent expense on operating leases was $40,587 for the year ended December 31,
1996.

Future minimum lease payments under the Company's leases as of December 31,
1996 are as follows:

1997....................................................... $39,345
1998....................................................... 39,345
1999....................................................... 39,345
2000....................................................... 14,279
2001....................................................... 12,000

Insurance Policies

The CAT Fund is significantly underfunded and the Commonwealth has
indicated that the unfunded liability will be funded exclusively through
surcharge assessments in future years as claims are settled and paid. The
Company and the other CAT Fund participants received a surcharge assessment
during fiscal 1996. No provision has been made for any future CAT Fund
assessments in the accompanying financial statements as the Company's portion of
the CAT Fund unfunded liability could not be reasonably estimated.

Health Care Regulatory Environment and Reliance on Government Programs

F-224

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Primary Care & Rehabilitation, PC and Medical Consultants, PC:

We have audited the accompanying combined balance sheets of Primary Care &
Rehabilitation, PC and Medical Consultants, PC as of December 31, 1995 and 1996
and September 30, 1997 and the related combined statements of operations and
owner's equity and cash flows for each of the two years in the period ended
December 31, 1996 and the nine month period ended September 30, 1997. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
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 combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Primary
Care & Rehabilitation, PC and Medical Consultants, PC as of December 31, 1995
and 1996 and September 30, 1997, and the combined results of their operations
and their cash flows for each of the two years in the period ended December 31,
1996 and the nine month period ended September 30, 1997, in conformity with
generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Philadelphia, Pa.,
December 31, 1997

F-225

<PAGE>

PRIMARY CARE & REHABILITATION, PC
AND MEDICAL CONSULTANTS, PC

COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
---------- ---------- -------------
<S> <C> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents............................. $ 29,358 $ 638 $ 154,918
Accounts receivable, net of allowance of $1,161,684,
$1,693,205 and $2,864,288.......................... 1,051,196 1,878,409 2,612,298
Prepaid expenses and other............................ 733 733 2,569
---------- ---------- ----------
Total current assets............................. $1,081,287 $1,879,780 $2,769,785
========== ========== ==========
LIABILITIES AND OWNER'S EQUITY

Current liabilities:
Accrued management fee................................ $ 634,104 $1,099,080 $1,497,775
Accounts payable...................................... 74,148 33,255 256,403
Accrued compensation.................................. 60,000 60,000 60,000
Deferred taxes........................................ 66,583 234,182 90,080
---------- ---------- ----------
Total current liabilities........................ 834,835 1,426,517 1,904,258
---------- ---------- ----------
Deferred compensation................................... 170,000 110,000 70,804
========== ========== ==========
Commitments and contingencies (Note 4)
Owner's equity.......................................... 76,452 343,263 794,723
---------- ---------- ----------
$1,081,287 $1,879,780 $2,769,785
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these combined financial
statements.

F-226

<PAGE>

PRIMARY CARE & REHABILITATION, PC
AND MEDICAL CONSULTANTS, PC

COMBINED STATEMENTS OF OPERATIONS AND OWNER'S EQUITY

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------- ------------------------
1995 1996 1996 1997
---------- ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues........................................... $2,348,786 $3,362,701 $2,577,423 $2,926,007
Operating expenses:
Salaries, wages and benefits......................... 567,595 1,228,110 917,627 915,076
Pharmaceuticals and medical supplies................. -- -- -- --
General and administrative........................... 578,507 114,878 83,260 178,427
Management fee....................................... 1,061,784 1,574,378 1,091,808 1,347,579
---------- ---------- ---------- ----------
Income from operations................................. 140,900 445,335 484,728 484,925
Interest income (expense).............................. -- (458) -- 3
---------- ---------- ---------- ----------
Income (loss) before income taxes...................... 140,900 444,877 484,728 484,928
Income tax provision................................... 60,949 178,066 193,891 33,468
---------- ---------- ---------- ----------
Net income............................................. 79,951 266,811 290,837 451,460
Owner's equity, beginning of period.................... (3,499) 76,452 76,452 343,263
---------- ---------- ---------- ----------
Owner's equity, end of period.......................... $ 76,452 $ 343,263 $ 367,289 $ 794,723
========== ========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these combined financial
statements.

F-227

<PAGE>

PRIMARY CARE & REHABILITATION, PC
AND MEDICAL CONSULTANTS, PC

COMBINED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- ----------------------
1995 1996 1996 1997
-------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating activities:
Net income................................................ $ 79,951 $266,811 $290,837 $451,460
Adjustments to reconcile net income to net cash provided
by (used in) operating activities --
Deferred taxes........................................ 64,812 167,599 130,405 (144,102)
Changes in assets and liabilities --
Accounts receivable................................ (770,161) (827,213) (613,184) (733,889)
Prepaid expenses and other......................... (708) -- -- (1,836)
Accounts payable................................... 7,906 (40,893) 43,603 223,148
Accrued management fee............................. 404,677 464,976 306,313 398,695
Deferred compensation.............................. 230,000 (60,000) (44,196) (39,196)
-------- -------- -------- --------
Net cash provided by (used in) operating
activities..................................... 16,477 (28,720) 113,778 154,280
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 16,477 (28,720) 113,778 154,280
Cash and cash equivalents, beginning of period.............. 12,881 29,358 29,358 638
-------- -------- -------- --------
Cash and cash equivalents, end of period.................... $ 29,358 $ 638 $143,136 $154,918
======== ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these combined financial
statements.

F-228

<PAGE>

PRIMARY CARE & REHABILITATION, PC
AND MEDICAL CONSULTANTS, PC

NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

1. ORGANIZATION AND BUSINESS:

Primary Care & Rehabilitation, PC ("PC&R") and Medical Consultants, PC
("Medical Consultants") (collectively, the "Company") provide pain management
and related medical services to the general public.

On December 10, 1997, the Company and the selling owner entered into an
Asset Acquisition Agreement (the "Affiliation Agreement") with U.S. PHYSICIANS,
Inc. ("USP"). Under the terms of the Affiliation Agreement, USP and its
affiliated professional corporation acquired the majority of the assets and
liabilities of the Company in exchange for cash, notes and shares of USP Common
Stock, subject to adjustment, as defined. The closing as defined in the
Affiliation Agreement will occur upon the completion of an initial public
offering by USP. If the closing has not occurred prior to May 14, 1998, the
Affiliation Agreement may be terminated by either the Company or USP by written
notice to the other party.

2. SIGNIFICANT ACCOUNTING POLICIES:

Principles of Combination

The combined financial statements include the accounts of PC&R and Medical
Consultants (see Note 1). The related companies are controlled by the sole
shareholder of the Company. All material intercompany accounts and transactions
have been eliminated in combination.

Interim Financial Statements

Use of Estimates

Fair Value of Financial Instruments

Net Revenues

F-229

<PAGE>

PRIMARY CARE & REHABILITATION, PC
AND MEDICAL CONSULTANTS, PC

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

2. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.

Accounts Receivable

Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.

Concentration of Credit Risk

The Company extends credit to patients covered by programs such as
Medicare, Medicaid and private insurers. The Company manages credit risk with
the various public and private insurance providers, as appropriate. Allowances
for bad debt have been made for potential losses when appropriate.

Accrued Management Fee

Accrued management fees consist of amounts due to a physician management
company for services rendered pursuant to management agreements.

Income Taxes

Medical Consultants accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
SFAS No. 109 requires the liability method of accounting for deferred income
taxes. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities. Deferred tax assets or liabilities at the end of each period are
determined using the tax rate expected to be in effect when taxes are actually
paid or recovered.

For 1995 and 1996, PC&R accounted for income taxes under SFAS No. 109.
Effective January 1, 1997, PC&R elected treatment as an "S" Corporation for both
federal and state income tax purposes and accordingly the taxable income or loss
effective as of that date with the exception of the book versus tax basis
differences will be allocated to the owners and recognized on their individual
tax returns. PC&R continues to provide a deferred tax liability to the extent
that it is subject to taxes on the net unrecognized book versus tax basis
differences.

Owner's Equity

Owner's equity includes the capital stock and retained earnings of the
Company.

Statements of Cash Flows Information

Amounts paid for interest and taxes were not significant.

F-230

<PAGE>

PRIMARY CARE & REHABILITATION, PC
AND MEDICAL CONSULTANTS, PC

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

3. INCOME TAXES:

The components of the income tax provision are as follows:

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
--------------------- SEPTEMBER 30,
1995 1996 1997
------- -------- -------------
<S> <C> <C> <C>
Current:
Federal............................... $ 3,284 $ 8,897 $ 150,935
State................................. 579 1,570 26,635
------- -------- ---------
3,863 10,467 177,570
------- -------- ---------
Deferred:
Federal............................... 55,090 142,459 (122,487)
State................................. 9,722 25,140 (21,615)
------- -------- ---------
64,812 167,599 (144,102)
------- -------- ---------
$60,949 $178,066 $ 33,468
======= ======== =========
</TABLE>

Income tax expense differs from the amount currently payable because
certain revenues and expenses are reported in different periods for financial
reporting and income tax purposes. The Company is on a cash basis of accounting
for income tax purposes.

The provision for income taxes differs from the amount computed by applying
the U.S. Federal income tax rate (34%) because of the effect of the following
items:

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
--------------------- SEPTEMBER 30,
1995 1996 1997
------- -------- -------------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate...... $49,185 $149,943 $28,072
State income taxes, net of federal
benefit............................... 8,680 26,460 4,955
Non-deductible travel and
entertainment......................... 3,084 1,663 441
------- -------- -------
$60,949 $178,066 $33,468
======= ======== =======
</TABLE>

The components of the net deferred tax liability measured under SFAS No.
109, are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1995 1996 1997
------- -------- -------------
<S> <C> <C> <C>
Deferred tax liability
Cash to accrual adjustments........... $66,583 $234,182 $90,080
------- -------- -------
Net deferred tax liability.............. $66,583 $234,182 $90,080
======= ======== =======
</TABLE>

4. COMMITMENTS AND CONTINGENCIES:

Management Agreements

The Company has entered into Management Agreements with Curamed, LLC, a
physician management company, and its related operating companies. PC&R's
agreement was effective on February 13, 1995 and provides for a management fee
of 50% of the gross collected revenues. The agreement has a five year term

F-231

<PAGE>

PRIMARY CARE & REHABILITATION, PC
AND MEDICAL CONSULTANTS, PC

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

4. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)

with automatic five year renewals unless either party provides six months
notice. Medical Consultants agreement provides for a management fee of 100% of
the gross collected revenues, less certain retained expenses, as defined.

Deferred Compensation:

In 1995, the Company entered into an agreement with a former physician to
pay $265,000 in 53 monthly installments of $5,000 for services already rendered.

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
--------- --------- -------------
<S> <C> <C> <C>
Agreed monthly payments of $5,000
through November 1999................. $ 230,000 $ 170,000 $ 130,804
Less: Current portion
(included in accrued
compensation)...................... (60,000) (60,000) (60,000)
--------- --------- ---------
$ 170,000 $ 110,000 $ 70,804
========= ========= =========
</TABLE>

Insurance Policies

Health Care Regulatory Environment and Reliance on Government Programs

F-232

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Vineland Obstetrical and Gynecological, PA:

We have audited the accompanying balance sheets of Vineland Obstetrical and
Gynecological, PA (a New Jersey corporation) as of December 31, 1995 and 1996
and the related statements of operations and retained earnings and cash flows
for each of the three years ended December 31, 1996. 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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Vineland Obstetrical and
Gynecological, PA as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for each of the three years ended December 31,
1996, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Philadelphia, Pa.,
October 14, 1997

F-233

<PAGE>

VINELAND OBSTETRICAL AND GYNECOLOGICAL, PA

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
-------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents................................ $ 48,907 $ 78,264 $111,080
Accounts receivable, net of allowance of $360,963,
$378,431 and $261,119................................. 431,049 412,754 298,890
Due from related parties................................. 16,666 -- --
Prepaid expenses and other............................... 7,420 7,270 163,531
-------- --------- --------
Total current assets................................ 504,042 498,288 573,501
-------- --------- --------
Property and equipment:
Equipment, furniture and fixtures........................ 402,271 278,247 278,247
Less -- Accumulated depreciation......................... (261,513) (166,182) (188,528)
-------- --------- --------
140,758 112,065 89,719
-------- --------- --------
Other assets............................................... 4,300 4,300 4,300
-------- --------- --------
$649,100 $ 614,653 $667,520
======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current maturities of long-term debt..................... $ 41,825 $ 55,422 $234,459
Accounts payable......................................... 72,611 109,129 83,560
Accrued compensation..................................... 214,426 173,677 126,403
Deferred income taxes.................................... 9,187 20,355 23,554
-------- --------- --------
Total current liabilities........................... 338,049 358,583 467,976
-------- --------- --------
Long-term debt............................................. 29,918 4,494 --
-------- --------- --------
Deferred income taxes...................................... 13,630 12,567 10,248
-------- --------- --------
Deferred compensation...................................... 52,630 19,390 --
-------- --------- --------
Commitments and contingencies (Note 6)
Shareholders' equity:
Common Stock, no par value; 1,000 shares authorized, 500
issued and 300 outstanding............................ 59,151 59,151 59,151
Additional paid-in capital............................... 3,832 3,832 3,832
Retained earnings........................................ 186,890 191,636 161,313
Treasury stock at cost, 200 shares....................... (35,000) (35,000) (35,000)
-------- --------- --------
Total shareholders' equity.......................... 214,873 219,619 189,296
-------- --------- --------
$649,100 $ 614,653 $667,520
======== ========= ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-234

<PAGE>

VINELAND OBSTETRICAL AND GYNECOLOGICAL, PA

STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................... $2,928,635 $3,350,136 $3,437,967 $2,536,962 $2,215,465
---------- ---------- ---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits............. 1,926,768 2,208,700 2,252,914 1,556,030 1,495,242
Pharmaceuticals and medical supplies..... 69,225 92,026 106,596 83,793 76,322
General and administrative............... 810,568 953,584 1,025,599 695,500 653,875
Depreciation and amortization............ 27,756 29,179 32,893 25,966 22,346
---------- ---------- ---------- ---------- ----------
Income (loss) from operations.............. 94,318 66,647 19,965 175,673 (32,320)
Interest expense, net...................... 3,983 9,763 6,655 5,622 3,567
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.......... 90,335 56,884 13,310 170,051 (35,887)
Income tax provision (benefit)............. 27,706 18,257 8,564 41,322 (5,564)
---------- ---------- ---------- ---------- ----------
Net income (loss).......................... 62,629 38,627 4,746 128,729 (30,323)
Retained earnings, beginning of period..... 85,634 148,263 186,890 186,890 191,636
---------- ---------- ---------- ---------- ----------
Retained earnings, end of period........... $ 148,263 $ 186,890 $ 191,636 $ 315,619 $ 161,313
========== ========== ========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-235

<PAGE>

VINELAND OBSTETRICAL AND GYNECOLOGICAL, PA

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------------- -------------------
1994 1995 1996 1996 1997
-------- -------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)................................. $ 62,629 $ 38,627 $ 4,746 $128,729 $(30,323)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating
activities--
Depreciation and amortization................. 27,756 29,179 32,893 25,966 22,346
Deferred income taxes......................... 25,351 17,854 10,105 41,322 880
Changes in assets and liabilities--
Accounts receivable...................... (143,575) (84,935) 18,295 101,762 113,864
Due from related parties................. 1,497 (14,105) 16,666 16,666 --
Prepaid expenses and other............... 2,697 (7,420) 150 (54,488) (156,261)
Accounts payable......................... 20,743 (2,099) 36,518 (31,107) (25,569)
Accrued compensation..................... (27,105) 78,167 (40,749) (82,950) (47,274)
Deferred compensation.................... (36,565) (33,240) (33,240) (24,930) (19,390)
-------- -------- ------- -------- --------
Net cash (used in) provided by
operating activities................. (66,572) 22,028 45,384 120,970 (141,727)
-------- -------- ------- -------- --------
Investing activities:
Purchases of property and equipment............... (15,230) (85,873) (4,200) (14,199) --
-------- -------- ------- -------- --------
Financing activities:
Proceeds from long-term debt...................... 60,000 25,000 40,000 40,000 253,349
Repayments on long-term debt...................... (9,163) (35,124) (51,827) (35,342) (78,806)
-------- -------- ------- -------- --------
Net cash provided by (used in)
financing activities................. 50,837 (10,124) (11,827) 4,658 174,543
-------- -------- ------- -------- --------
Net (decrease) increase in cash and cash
equivalents....................................... (30,965) (73,969) 29,357 111,429 32,816
Cash and cash equivalents, beginning of period...... 153,841 122,876 48,907 48,907 78,264
-------- -------- ------- -------- --------
Cash and cash equivalents, end of period............ $122,876 $ 48,907 $78,264 $160,336 $111,080
======== ======== ======= ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-236

<PAGE>

VINELAND OBSTETRICAL AND GYNECOLOGICAL, PA

NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTHS ENDEDSEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

Vineland Obstetrical and Gynecological, PA (the "Company") is an obstetrics
and a gynecology medical practice serving the Southern New Jersey area. The
Company was formed in June 1969.

On August 29, 1997, the Company entered into a Stock Acquisition Agreement
(the "Affiliation Agreement") with U.S. PHYSICIANS, Inc. ("USP"). Under the
terms of the Affiliation Agreement, USP and its affiliated professional
corporation will acquire the stock of the Company in exchange for cash, notes
payable and USP Common Stock, subject to adjustment as defined. The closing, as
defined in the Affiliation Agreement, will occur upon completion of an initial
public offering by USP. If the closing has not occurred prior to March 31, 1998,
the Affiliation Agreement may be terminated by either the Company or USP by
written notice to the other party.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Interim Financial Statements

Use of Estimates

Fair Value of Financial Instruments

Net Revenues

The Company also receives fees from a local hospital for providing clinic
services. Clinic fees included in net revenues for the years ended December 31,
1994, 1995 and 1996, were $805,186, $857,663 and $849,086, respectively.

F-237

<PAGE>

VINELAND OBSTETRICAL AND GYNECOLOGICAL, PA

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly liquid investments
purchased with an original maturity of three months or less.

Accounts Receivable

Accounts receivable primarily consist of receivables from patients,
third-party payors and others. Such amounts are recorded net of contractual
allowances and estimated bad debts.

Concentration of Credit Risk

Property and Equipment

Income Taxes

Statements of Cash Flows Information

For the years ended December 31, 1994, 1995 and 1996, the Company paid
interest of $7,563, $10,139 and $7,989, respectively. Amounts paid for taxes
were not significant.

Reclassifications

Certain reclassifications have been made to prior year financial statements
to conform with the current year presentation.

F-238

<PAGE>

VINELAND OBSTETRICAL AND GYNECOLOGICAL, PA

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

3. LONG-TERM DEBT:

DECEMBER 31,
----------------------
1995 1996
-------- --------
<S> <C> <C>
Note payable to a bank, interest at 9.25%, payable on
demand and due in full on August 15, 1997............... $ -- $ 30,000
Note payable to a bank, interest at 9.0%, principal
payments of $2,083 per month through August 28, 1996.... 16,667 --
Note payable to a bank, interest at 9.0%, monthly payments
of $1,880 through November 10, 1997..................... 39,965 19,878
Installment note to an employee, interest at 9.0%,
quarterly payments of $1,566, due in full on September
30, 1997................................................ 15,111 10,038
-------- --------
71,743 59,916
Less-- Current maturities................................. (41,825) (55,422)
-------- --------
$ 29,918 $ 4,494
======== ========
</TABLE>

4. EMPLOYEE BENEFIT PLAN:

The Company provides a pension and a profit sharing plan covering all
full-time employees subject to minimum age and length of service requirements.
Pension plan expense is determined based on the salaries of the covered
employees, and is integrated with social security. Profit sharing plan expense
is determined annually by decision of the Board of Directors. Effective January
1, 1996, the corporation has frozen the pension plan. The corporation has
adopted a 401(k) profit sharing plan with a 10% matching contribution by the
employer. For the years ended December 31, 1994, 1995 and 1996, contributions to
the plans were $172,777, $184,695 and $60,572, respectively.

5. INCOME TAXES:

The components of the income tax provision (benefit) are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Current:
Federal.................................... $ 1,413 $ 242 $ (925)
State...................................... 942 161 (616)
------- ------- -------
2,355 403 (1,541)
------- ------- -------
Deferred:
Federal.................................... 15,211 10,712 6,063
State...................................... 10,140 7,142 4,042
------- ------- -------
25,351 17,854 10,105
------- ------- -------
$27,706 $18,257 $ 8,564
======= ======= =======
</TABLE>

F-239

<PAGE>

VINELAND OBSTETRICAL AND GYNECOLOGICAL, PA

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

5. INCOME TAXES: -- (CONTINUED)

The provision for income taxes differs from the amount computed by applying
the U.S. Federal income tax rate (34%) because of the effect of the following
items:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
-------- -------- -------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate......... $ 30,714 $ 19,341 $ 4,525
Tax impact of Federal rate differential for
graduated rates.......................... (17,517) (10,869) (2,298)
State income taxes, net of federal
benefit.................................. 8,798 5,648 1,485
Non-deductible travel and entertainment.... 5,711 4,137 4,852
-------- -------- -------
$ 27,706 $ 18,257 $ 8,564
======== ======== =======
</TABLE>

The components of the net deferred tax liability, measured under SFAS No.
109, are as follows:

DECEMBER 31,
--------------------
1995 1996
------- -------

Deferred liabilities:
Property and equipment............................ $13,630 $12,567
Cash to accrual adjustments....................... 9,187 20,355
------- -------
Net deferred tax liability.......................... $22,817 $32,922
======= =======

6. COMMITMENTS AND CONTINGENCIES:

Lease Obligations

The corporation has entered into an informal lease agreement with APGO
Associates. The partners of APGO Associates are also shareholders of the
corporation. As the lease with APGO Associates is informal, there are no future
minimum lease payments included in the table below. Future minimum lease
payments for noncancellable operating leases, excluding related party leases,
primarily for office space as of December 31, 1996, are as follows:

NONRELATED-PARTY
LEASES
----------------

1997....................................... $46,584
1998....................................... 45,574
1999....................................... 21,540

Rent expense on related-party operating leases was $82,800, $82,800 and
$85,800 for the years ended December 31, 1994, 1995 and 1996, respectively. Rent
expense on nonrelated-party operating leases was $14,400, $28,800 and $29,400
for the years ended December 31, 1994, 1995 and 1996, respectively.

F-240

<PAGE>

VINELAND OBSTETRICAL AND GYNECOLOGICAL, PA

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)

6. COMMITMENTS AND CONTINGENCIES: -- (CONTINUED)

Deferred Compensation

Pursuant to a deferred compensation agreement, the Company must pay a
former physician for services already rendered.

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
-------- --------
<S> <C> <C>

Deferred compensation agreement, monthly payments of
$2,770 through July 1, 1998........................ $ 85,870 $ 52,630
Less -- Current portion (included in accrued
compensation)...................................... (33,240) (33,240)
-------- --------
$ 52,630 $ 19,390
======== ========
</TABLE>

Insurance Policies

The Company maintains insurance with respect to medical malpractice risks
on an occurrence basis in amounts management believes to be adequate. Management
is not aware of any outstanding claims, which would have a material impact on
the Company's financial position or results of operations.

Health Care Regulatory Environment and Reliance on Government Programs

F-241

<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. Other Expenses of Issuance and Distribution.

The following table sets forth expenses in connection with the issuance and
distribution of the securities being registered, all of which are being borne by
the Registrant.

Securities and Exchange Commission registration fee......... $ 15,152
National Association of Securities Dealers, Inc. fee........ 5,500
Nasdaq Stock Market Inc./National Market listing fee........
Printing and engraving expenses.............................
Accountants' fees and expenses..............................
Legal fees and expenses.....................................
Blue Sky qualification fees and expenses....................
Transfer agent's fees and expenses..........................
Directors' and officers' insurance..........................
Miscellaneous...............................................
--------
TOTAL..................................................
========

The foregoing, except for the Securities and Exchange Commission
registration fee, the National Association of Securities Dealers, Inc. fee and
the Nasdaq Stock Market Inc. fee, are estimates.

ITEM 14. Indemnification of Directors and Officers.

Subchapter D (Sections 1741 through 1750) of Chapter 17 of the Pennsylvania
Business Corporation Law of 1988, as amended (the "BCL"), contains provisions
for mandatory and discretionary indemnification of a corporation's directors,
officers, employees and agents (collectively, "Representatives"), and related
matters.

Under Section 1741, subject to certain limitations, a corporation has the
power to indemnify directors, officers and other Representatives under certain
prescribed circumstances against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with a threatened, pending or completed action or proceeding,
whether civil, criminal, administrative or investigative, to which any of them
is a party or threatened to be made a party by reason of his being a
Representative of the corporation or serving at the request of the corporation
as a Representative of another corporation, partnership, joint venture, trust or
other enterprise, if he acted in good faith and in a manner he reasonably
believed to be in, or not opposed to, the best interests of the corporation and,
with respect to any criminal proceeding, had no reasonable cause to believe his
conduct was unlawful.

Section 1742 provides for indemnification with respect to derivative
actions similar to that provided by Section 1741. However, indemnification is
not provided under Section 1742 in respect of any claim, issue or matter as to
which a Representative has been adjudged to be liable to the corporation unless
and only to the extent that the proper court determines upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, a Representative is fairly and reasonably entitled to indemnity for
the expenses that the court deems proper.

Section 1743 provides that indemnification against expenses is mandatory to
the extent that a Representative has been successful on the merits or otherwise
in defense of any such action or proceeding referred to in Section 1741 or 1742.

Section 1744 provides that unless ordered by a court, any indemnification
under Section 1741 or 1742 shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of a
Representative is proper because the Representative met the applicable standard
of conduct, and such determination will be made by the board of directors by a
majority vote of a quorum of

II-1

<PAGE>

directors not parties to the action or proceeding; if a quorum is not obtainable
or if obtainable and a majority of disinterested directors so directs, by
independent legal counsel; or by the shareholders.

Section 1745 provides that expenses incurred by a Representative in
defending any action or proceeding referred to in Subchapter D of Chapter 17 of
the BCL may be paid by the corporation in advance of the final disposition of
such action or proceeding upon receipt of an undertaking by or on behalf of the
Representative to repay such amount if it shall ultimately be determined that he
is not entitled to be indemnified by the corporation.

Section 1746 provides generally that except in any case where the act or
failure to act giving rise to the claim for indemnification is determined by a
court to have constituted willful misconduct or recklessness, the
indemnification and advancement of expenses provided by Subchapter D of Chapter
17 of the BCL shall not be deemed exclusive of any other rights to which a
Representative seeking indemnification or advancement of expenses may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding that office.

Section 1747 grants a corporation the power to purchase and maintain
insurance on behalf of any Representative against any liability incurred by him
in his capacity as a Representative, whether or not the corporation would have
the power to indemnify him against that liability under Subchapter D of Chapter
17 of the BCL.

Sections 1748 and 1749 apply the indemnification and advancement of
expenses provisions contained in Subchapter D of Chapter 17 of the BCL to
successor corporations resulting from consolidation, merger or division and to
service as a representative of a corporation or an employee benefit plan.

Section 1750 provides that the indemnification and advancement of expenses
provided by, or granted pursuant to, Subchapter D of Chapter 17 of the BCL
shall, unless otherwise provided when authorized or ratified, continue as to a
person who has ceased to be a Representative and shall inure to the benefit of
the heirs and personal representatives of such Representative.

Article Ninth of the Registrant's Second Amended and Restated Articles of
Incorporation, filed as Exhibit 3.1 hereto, provides indemnification to
directors and officers of the Registrant against all expenses, liability and
loss incurred as a result of such person's being a party to, or threatened to be
made a party to, any action, suit or proceeding by reason of the fact that he or
she is or was a director or officer of the Registrant or is or was serving at
the request of the Registrant as a director, officer, employee or agent of
another enterprise, to the fullest extent authorized by the BCL.

Article VII of the Registrant's By-laws, filed as Exhibit 3.2 hereto,
generally permits indemnification of directors and officers to the fullest
extent authorized by the BCL. Article VII further permits the Registrant to
maintain insurance, at its expense, to protect itself and any such director or
officer of the Registrant or another enterprise against any such expenses,
liability or loss.

The Registrant intends to purchase directors' and officers' liability
insurance.

See Section 8 of the Underwriting Agreement, filed as Exhibit 1 hereto,
pursuant to which the Underwriters agree to indemnify the Registrant, its
directors, officers and controlling persons against certain liabilities,
including liabilities under the Securities Act of 1933.

ITEM 15. Recent Sales of Unregistered Securities.

On July 14, 1994, in connection with the Registrant's incorporation, the
Registrant issued 1,020,000 shares of Common Stock to Thomas J. Keane, Chief
Executive Officer and President of the Registrant, for services rendered.

On September 30, 1994, for services rendered, the Registrant issued 45,000
shares of Common Stock to Noreen E. Burke, an employee of the Registrant, 30,000
shares of Common Stock to Daniel Promislo, a consultant to the Registrant, and
45,000 shares of Common Stock to James L. Weese, a consultant to the Registrant.

II-2

<PAGE>

On February 1, 1995, in connection with the Registrant's initial
capitalization, the Registrant sold 2,568,492 shares of Series A Preferred Stock
to Edison Venture Fund III, L.P. ("Edison"), 1,541,097 shares of Series A
Preferred Stock to NEPA Venture Fund II, L.P. ("NEPA") and 410,958 shares of
Series A Preferred Stock to Major Oil, Inc. (which shares were subsequently
transferred to Killion Liquidating Trust) for an aggregate purchase price of
$2,200,000. On February 1, 1995, the Registrant also issued 1,774,518 shares of
Common Stock to Thomas J. Keane, 52,194 shares of Common Stock to Daniel
Promislo and 78,288 shares of Common Stock to Noreen E. Burke valued at a price
of $0.01 per share. Also on February 1, 1995, the Registrant issued 78,288
shares of Common Stock to James L. Weese valued at a price of $0.01 per share
and entered into a Subscription Agreement with Mr. Weese, whereby the Registrant
sold 30,000 shares of Common Stock to Mr. Weese for an aggregate price of
$10,000.

On November 21, 1995, the Registrant issued 205,479 shares of Common Stock
to Daniel Promislo in consideration of services rendered to the Registrant.

On February 23, 1996, the Registrant sold 205,479 shares of Common Stock to
William P. Ferretti, a director of the Registrant, for an aggregate price of
$100,000.

On July 30, 1996, the Registrant sold 408,163 shares of Common Stock to
Edward R. Miersch, an officer of the Registrant, for an aggregate price of
$200,000.

On July 30, 1996, the Registrant issued 25,000 shares of Common Stock to
Daniel Promislo in consideration of services rendered to the Company.

On September 13, 1997, the Registrant sold 75,000 shares of Common Stock to
James M. McCrossin, an employee of the Registrant, for an aggregate price of
$75,000.

On December 31, 1996, the Registrant sold 396,825 shares of Series B
Preferred Stock and issued a Warrant to purchase 79,365 shares of Common Stock
to Keystone Venture IV, L.P. ("Keystone") for an aggregate price of $1,250,000;
128,968 shares of Series B Preferred Stock and issued a Warrant to purchase
25,794 shares of Common Stock to Edison for an aggregate price of $406,250; and
109,127 shares of Series B Preferred Stock and issued a Warrant to purchase
21,825 shares of Common Stock to NEPA for an aggregate price of $343,750.

On February 20, 1997, the Registrant sold 317,460 shares of Series B
Preferred Stock and issued a Warrant to purchase 63,492 shares of Common Stock
to Dominion Fund IV ("Dominion") for an aggregate price of $1,000,000; sold
71,429 shares of Series B Preferred Stock and issued a Warrant to purchase
14,286 shares of Common Stock to E.J.K. Real Estate Services Limited for an
aggregate price of $225,000; sold 63,492 shares of Series B Preferred Stock and
issued a Warrant to purchase 12,698 shares of Common Stock to Glenville Capital
Partners, L.P. for an aggregate price of $200,000; sold 31,746 shares of Series
B Preferred Stock and issued a Warrant to purchase 6,349 shares of Common Stock
to each of Thomas J. Keane, Douglas P. Heller, Charles Schwab & Co., Inc. FBO
William J. Barry IRA and Pasquale W. Croce, Jr. for an aggregate price of
$100,000, respectively; and sold 15,873 shares of Series B Preferred Stock and
issued a Warrant to purchase 3,175 shares of Common Stock to each of Robert W.
Muir, Jr. and Joseph J. Croce for an aggregate price of $50,000, respectively.

On April 7, 1997, the Registrant issued a Senior Subordinated Note in the
principal amount of $2,000,000 and issued a Warrant to purchase 266,667 shares
of Series B Preferred Stock to Dominion.

On June 13, 1997, the Registrant sold 7,937 shares of Common Stock to Lewis
S. Sharps, M.D. and 9,523 shares of Common Stock to an entity of which Dr.
Sharps is a beneficial owner for an aggregate purchase price of $55,000.

On September 8, 1997, the Registrant issued a Subordinated Note in the
principal amount of $1,500,000 and a Warrant to purchase 166,667 shares of
Series B Preferred Stock to Dominion, issued a Subordinated Note in the
principal amount of $150,000 and Warrants to purchase 16,667 shares of Series B
Preferred Stock to Keystone; issued a Subordinated Note in the principal amount
of $125,000 and Warrants to purchase 13,889 shares of Series B Preferred Stock
to each of Edison and NEPA; and issued a Subordinated Note in the principal
amount of $100,000 and Warrants to purchase 11,111 shares of Series B Preferred
Stock to Thomas J. Keane.

II-3

<PAGE>

On October 29, 1997, the Registrant issued 15,000 shares of Common Stock to
Donaldson, Lufkin and Jenrette Securities Corporation FBO Lucia S. Rosenberg IRA
for a purchase price of $7,350 pursuant to the exercise of a stock option.

On November 25, 1997, the Registrant issued to Canpartners Investments IV,
LLC a note in the principal amount of $850,000 and Warrants to purchase 43,573
shares of Common Stock.

On January 8, 1998, the Registrant issued to Dominion a note in the
principal amount of $800,000, and on January 20, 1997, the Registrant issued to
Dominion Warrants to purchase 38,555 shares of Common Stock in connection with
the repayment of such note.

On January 16, 1998, the Registrant sold shares of Series C Preferred Stock
and Common Stock Warrants to Capital Ventures International ("CVI"), Lancaster
Investment Partners, L.P. ("Lancaster"), Dominion, Keystone, Edison, NEPA and
Mr. Keane, as follows: to CVI, 722,892 shares of Series C Preferred Stock and
Warrants to purchase 200,000 shares of Common Stock for an aggregate purchase
price of $3,000,000; to Lancaster, 361,446 shares of Series C Preferred Stock
and Warrants to purchase 100,000 shares of Common Stock for an aggregate
purchase price of $1,500,000; to Dominion, 72,289 shares of Series C Preferred
Stock and Warrants to purchase 20,000 shares of Common Stock for an aggregate
purchase price of $300,000; to Keystone, 60,241 shares of Series C Preferred
Stock and Warrants to purchase 16,667 shares of Common Stock for an aggregate
purchase price of $250,000; to Edison, 54,217 shares of Series C Preferred Stock
and Warrants to purchase 15,000 shares of Common Stock for an aggregate purchase
price of $225,000; to NEPA, 48,193 shares of Series C Preferred Stock and
Warrants to purchase 13,333 shares of Common Stock for an aggregate purchase
price of $200,000; and to Mr. Keane, 24,096 shares of Series C Preferred Stock
and Warrants to purchase 6,667 shares of Common Stock for an aggregate purchase
price of $100,000.

In connection with the Conditional Affiliation Transactions, the Company
has issued $11.1 million of notes, $20.0 million of Convertible Notes and a
number of shares of Common Stock to be determined at the time of the Offering,
and, in connection with the IPO Affiliation Transactions, the Company has agreed
to issue an aggregate of approximately $8.9 million of notes and a number of
shares of Common Stock to be determined at the time of the Offering. See
"Prospectus Summary," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Business -- Affiliation Transactions."

Registration under the Securities Act of the securities issued in the
transactions described in this Item was not required because such securities
were issued in transactions not involving any "public offering" within the
meaning of Section 4(2) of said Act, in reliance in part on Rule 506 under said
Act.

II-4

<PAGE>

ITEM 16. Exhibits and Financial Statement Schedules.

(a) Exhibits

EXHIBIT
NO.
- -------
1 -- Form of Underwriting Agreement.
3.1.1 -- Second Amended and Restated Articles of Incorporation of the
Company.
3.1.2 -- Amendment to Second Amended and Restated Articles of
Incorporation of the Company.
*3.1.3 -- Third Amended and Restated Articles of Incorporation of the
Company.
3.2.1 -- Amended and Restated By-laws of the Company.
**3.2.2 -- Form of Second Amended and Restated By-laws of the Company.
**5 -- Opinion of Wolf, Block, Schorr and Solis-Cohen LLP with
respect to the legality of the securities being offered.
10.1 -- 1995 Company Stock Option Plan.
10.2 -- 1995 Affiliate Stock Option Plan.
**10.3 -- Stock Incentive Plan.
10.4.1 -- Amended and Restated Registration Rights Agreement by and
among the Company, Thomas J. Keane, Keystone Venture IV,
L.P., Edison Venture Fund III, L.P., NEPA Venture Fund II,
L.P., Dominion Fund IV, Joseph J. Croce, Douglas P. Heller,
E.J.K. Real Estate Services Limited, Glenville Capital
Partners, L.P., Robert W. Muir, Jr., Pasquale W. Croce, Jr.
and Charles Schwab & Co., Inc, f/b/o William J. Barry IRA,
dated as of December 31, 1996.
10.4.2 -- Amendment to Amended and Restated Registration Rights
Agreement dated as of February 6, 1997.
*10.4.3 -- Amendment to Amended and Restated Registration Rights
Agreement dated as of January 16, 1998.
10.5 -- Amended and Restated Management and Services Agreement
between the Company and U.S. Medical Services of
Pennsylvania, P.C. dated as of January 6, 1997.
10.6 -- Management and Services Agreement between the Company and
U.S. Medical Services of New Jersey, P.C. dated as of
February 13, 1997.
10.7 -- Management and Services Agreement between the Company and
U.S. Medical Services of Delaware, P.C. dated as of November
1, 1997.
10.8 -- Employment Agreement between the Company and Thomas J. Keane
dated as of October 9, 1997.
10.9 -- Amended and Restated Employment Agreement between the
Company and Martin G. Chilek dated as of October 9, 1997.
10.10 -- Amended and Restated Employment Agreement between the
Company and Edward R. Miersch dated as of October 9, 1997.
10.11 -- Amended and Restated Employment Agreement between the
Company and Warren D. Barratt dated as of October 9, 1997.
10.12 -- Amended and Restated Employment Agreement between the
Company and John M. Hogan dated as of October 9, 1997.
10.13 -- Amended and Restated Employment Agreement between the
Company and Linda F. Larson dated as of October 9, 1997.
10.14 -- Amended and Restated Shareholders' Agreement between U.S.
Medical Services of Pennsylvania, P.C. and James F. Bonner,
M.D. dated September 10, 1997.

II-5

<PAGE>

EXHIBIT
NO.
- -------
10.15 -- Amended and Restated Shareholders' Agreement between U.S.
Medical Services of New Jersey, P.C. and James F. Bonner,
M.D. dated September 10, 1997.
10.16 -- Shareholders Agreement between U.S. Medical Services of
Delaware, P.A. and John E. Hocutt, Jr., M.D. dated November
3, 1997.
10.17 -- Form of Common Stock Purchase Warrant.
10.18 -- Asset Purchase Agreement between the Company and Wende W.
Young, M.D. [Portions have been redacted pursuant to request
for confidential treatment.]
10.19 -- Employment Agreement between U.S. Medical Services of New
York, P.C. and Wende W. Young, M.D. [Portions have been
redacted pursuant to request for confidential treatment.]
*10.20 -- Stock Repurchase Agreement between the Company and Thomas J.
Keane dated as of February 1, 1995.
*10.21 -- Registration Rights Agreement among the Company, Capital
Ventures International, Lancaster Investment Partners, L.P.,
Keystone Venture IV, L.P., Edison Venture Fund III, L.P.,
NEPA Venture Fund II, L.P., Dominion Fund IV and Thomas J.
Keane dated as of January 16, 1998.
*10.22 -- Form of Common Stock Warrant.
*10.23 -- Amended and Restated Employment Agreement between the
Company and Lewis S. Sharps, M.D., F.A.C.S. dated as of
April 10, 1997.
*10.24 -- Management and Services Agreement between the Company and
U.S. Medical Services of New York, P.C. dated as of December
8, 1997. [Portions have been redacted pursuant to request
for confidential treatment.]
*11 -- Statement regarding Computation of Per Share Earnings.
*21 -- Subsidiaries of the Company.
*23.1 -- Consent of Arthur Andersen LLP.
**23.2 -- Consent of Wolf, Block, Schorr and Solis-Cohen LLP (included
as part of Exhibit 5).
*23.3 -- Consent of Cozen and O'Connor P.C.
24 -- Power of Attorney (included on signature page of this
Registration Statement).
*27 -- Financial Data Schedule.

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

* Filed with this Amendment to the Registration Statement.

** To be filed by amendment.

II-6

<PAGE>

(b) Financial Statement Schedules

Financial Statement Schedules have been omitted because they are
inapplicable or the information is provided in the Financial Statements,
including the Notes thereto, included in the Prospectus.

ITEM 17. Undertakings.

The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to Item 14 above, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.

(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.

II-7

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Philadelphia,
Pennsylvania on the 30th day of January, 1998.

U.S. PHYSICIANS, INC.

By: /s/ WARREN D. BARRATT
-------------------------------------

Warren D. Barratt
Senior Vice President, Treasurer and
Chief Financial Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ THOMAS J. KEANE* Chairman, President and Chief January 30, 1998
- ------------------------------- Executive Officer (principal
Thomas J. Keane executive officer)

/s/ WARREN D. BARRATT Senior Vice President, Treasurer January 30, 1998
- ------------------------------- and Chief Financial Officer
Warren D. Barratt (principal financial and accounting
officer)

/s/ KERRY J. DALE* Director January 30, 1998
- -------------------------------
Kerry J. Dale

/s/ WILLIAM P. FERRETTI* Director January 30, 1998
- -------------------------------
William P. Ferretti

/s/ GUSTAV H. KOVEN, III* Director January 30, 1998
- -------------------------------
Gustav H. Koven, III

/s/ DANIEL PROMISLO* Director January 30, 1998
- -------------------------------
Daniel Promislo

- ---------

*By /s/ WARREN D. BARRATT
-----------------------------------------------------
Attorney-in-fact
</TABLE>

II-8

THIRD AMENDED AND RESTATED ARTICLES OF INCORPORATION

U.S. PHYSICIANS, INC.

- --------------------------------------------------------------------------------
Pursuant to Sections 1914 and 1915 of
the Pennsylvania Business Corporation Law
- --------------------------------------------------------------------------------

U.S. PHYSICIANS, Inc., a Pennsylvania corporation (the "Corporation"),
incorporated on July 14, 1994, does hereby amend and restate its Articles of
Incorporation to read in its entirety as set forth in Schedule I attached
hereto.

IN WITNESS WHEREOF, the Corporation has caused this Third Amended and
Restated Articles of Incorporation to be duly adopted in accordance with the
provisions of Sections 1914 and 1915 of the Business Corporation Law of the
Commonwealth of Pennsylvania ("Pennsylvania BCL") and to be executed in its
corporate name on January 16, 1998.

U.S. PHYSICIANS, Inc.

By: /s/ Martin G. Chilek
------------------------------

-1-

<PAGE>

Schedule I

THIRD AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
U.S. PHYSICIANS, INC.

(A Pennsylvania Corporation)

FIRST. Corporate Name. The name of the corporation is U.S. PHYSICIANS, Inc.
(hereinafter referred to as the "Corporation").

SECOND. Registered Office. The locations and post office address of the
registered office of the Corporation in the Commonwealth of Pennsylvania is 220
Commerce Drive, Suite 400, Fort Washington, PA 19034 in the County of
Montgomery.

THIRD. Governing Law. The Corporation is incorporated under the provisions
of the Pennsylvania BCL.

FOURTH. Corporate Purposes. The purposes for which the Corporation is
incorporated under the Pennsylvania BCL are to engage in, and to do any lawful
act concerning, any or all lawful business for which corporations may be
incorporated under said Pennsylvania BCL, including, but not limited to,
acquisition and management of physician practices.

FIFTH. Corporate Existence. The term of existence of the Corporation is
perpetual.

SIXTH. Capital Stock. The aggregate number of shares which the corporation
shall have authority to issue is Twenty-Nine Million Seven Hundred Eighty-Two
Thousand Seven Hundred Ninety-One (29,782,791) shares consisting of:

(a) Twenty Five Million (25,000,000) shares of Common Stock, par value
$.01; and

(b) Four Million Seven Hundred Eighty-Two Thousand Seven Hundred Ninety-One
(4,782,791) shares of Preferred Stock, par value $.01.

SEVENTH. Preferred Stock.

(a) The Board of Directors of the Corporation (the "Board of Directors")
shall have the full authority permitted by law to fix by resolution full,
limited, multiple or fractional or no voting rights, and such designations,
preferences, qualifications, privileges, limitations, restrictions, options,
conversion rights, and other special or relative rights of the Preferred Stock
or any series of the Preferred Stock that may be desired and which have not been
fixed in these Articles.

-2-

<PAGE>

(b) Unless otherwise provided in any resolution hereafter adopted by the
Board of Directors pursuant to this Article Seventh and filed in the manner
provided by law, the terms of the Preferred Stock to be issued by the Company
shall be as set forth in Exhibit A hereto.

EIGHTH. Shareholders.

(a) Shareholders of the Corporation shall not have the right to cumulate
their votes for the election of directors of the Corporation.

(b) Any action required or permitted to be taken at a meeting of the
shareholders may be taken without a meeting upon the written consent of the
shareholders who would have been entitled to cast the minimum number of votes
that would be necessary to authorize the action at a meeting at which all
shareholders entitled to vote thereon were present and voting.

NINTH. Board of Directors.

(a) The Board of Directors shall consist of such number of directors as
shall be fixed from time to time by resolutions adopted by a majority of all the
directors then in office.

(b) The directors of the Corporation shall not be personally liable, as
such, for monetary damages for any action taken, or any failure to take any
action, except as specifically provided in the Pennsylvania BCL, as the same may
be amended from time to time. In addition, the Corporation shall, to the fullest
extent permitted by the provisions of the Pennsylvania BCL relating to the
indemnification and advancement of expenses, as the same may be amended from
time to time, indemnity and advance expenses for the benefit of any and all
directors and representatives of the Corporation and any and all other persons
whom the Corporation shall have the power to indemnify under said provisions
from and against any and all of the expenses, liabilities, or other matters
referred to in or covered by said provisions, and the indemnification provided
for herein shall not be deemed exclusive of any other rights to which those
indemnified may be entitled to under any Bylaw, vote of shareholders or
disinterested directors, or otherwise, both as to action in official capacity
and as to action in another capacity while holding such office, and shall
continue as to any person who has ceased to be a director, officer, employee, or
agent and shall insure to the benefit of heirs, executors and administrators of
such person.

TENTH. Proposal of Amendments. Notwithstanding the provisions of Section
1912(a)(2) of the Pennsylvania BCL, every amendment of these Third Amended and
Restated Articles of Incorporation of the Corporation shall be proposed by the
adoption by the Board of Directors of a resolution setting forth the proposed
amendment.

ELEVENTH. Headings. Any headings preceding the text of the several
Articles, parts and paragraphs hereof are solely for the convenience of
reference and shall not constitute a part of these Articles or affect their
meaning, construction or effect.

-3-

<PAGE>

EXHIBIT A

to Third Amended and Restated Articles of Incorporation of U.S. PHYSICIANS, Inc.

SERIES A CONVERTIBLE PREFERRED STOCK,

SERIES B CONVERTIBLE PREFERRED STOCK AND

SERIES C CONVERTIBLE PREFERRED STOCK

1. Number of shares. The series of Preferred Stock designated and known as
"Series A Convertible Preferred Stock" shall consist of 1,506,849 shares. The
series of Preferred Stock designated and known as "Series B Convertible
Preferred Stock" shall consist of 1,830,158 shares. The series of Preferred
Stock designated and known as "Series C Preferred Stock" shall consist of
1,445,784 shares. The Series A Convertible Preferred Stock, Series B Convertible
Preferred Stock and the Series C Convertible Preferred Stock are sometimes
collectively referred to herein as the "Convertible Preferred Stock."

2. Voting.

2A. General. Except as may be otherwise provided in these terms of the
Series A Convertible Preferred Stock, the Series B Convertible Preferred Stock
and the Series C Convertible Preferred Stock or by law, the Series A Convertible
Preferred Stock, the Series B Convertible Preferred Stock and the Series C
Convertible Preferred Stock shall vote together with all other classes and
series of stock of the Corporation as a single class on all actions to be taken
by the stockholders of the Corporation. Each share of Series A Convertible
Preferred Stock, Series B Convertible Preferred Stock and the Series C
Convertible Preferred Stock shall entitle the holder thereof to such number of
votes per share on each such action as shall equal the number of shares of
Common Stock (including fractions of a share) into which each share of Series A
Convertible Preferred Stock, Series B Convertible Preferred Stock or Series C
Convertible Preferred Stock, as applicable, is then convertible.

2B. Board Size. The Corporation shall not, without the written consent
or affirmative vote of the holders of at least two-thirds of each of the then
outstanding shares of Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock, given in writing or by vote at a meeting,
consenting or voting (as the case may be) separately as two separate series,
increase the maximum number of directors constituting the Board of Directors to
a number in excess of seven (7), except that: (i) the number of directors shall
increase to eight in the event that the holders of Series C Convertible
Preferred Stock are entitled to elect a director as provided in subparagraph 2C;
or (ii) the size of the Board of Directors is increased upon a Redemption
Default as provided in subparagraph 2C.

2C. Board Seats. The holders of the Series A Convertible Preferred
Stock, voting as a separate series, shall be entitled to elect two (2) directors
of the Corporation

-4-

<PAGE>

(the "Series A Directors"). The holders of the Series B Convertible Preferred
Stock, voting as a separate series, shall be entitled to elect one (1) director
of the Corporation (the "Series B Director"). The holders of the Common Stock,
voting together with the holders of the Series C Convertible Preferred Stock as
a single class, shall be entitled to elect three (3) directors of the
Corporation. A seventh director (the "Seventh Director") of the Corporation
shall be such person, if any, who has received a plurality vote of the holders
of the Common Stock, voting as a separate class, and a plurality vote of the
holders of the Series A Convertible Preferred Stock and Series B Convertible
Preferred Stock, voting together as a single class. If a Qualifying IPO (as
defined in subparagraph 6P below) has not been closed by May 29, 1998, the
holders of Series C Convertible Preferred Stock, voting as a separate series,
shall thereafter be entitled to elect one (1) director of the Corporation (the
"Series C Director"). Notwithstanding the foregoing or anything else to the
contrary provided in the Articles of Incorporation of the Corporation, if the
Corporation fails or refuses, for any reason or for no reason, to redeem on any
Redemption Date (as defined in Paragraph 7) all of the shares of any series of
Convertible Preferred Stock required to be redeemed on such Redemption Date in
accordance with the terms and provisions of Paragraph 7 (a "Redemption
Default"), the holders of the Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock and Series C Convertible Preferred Stock, shall be
entitled to elect a majority of the directors of the Corporation (which shall
include the Series A Directors, the Series B Director and the Series C Director,
if any) which shall be accomplished first by the removal of the Seventh Director
as provided below and then, if and to the extent necessary, by the election of
additional directors who shall be elected by the holders of the Series A
Convertible Preferred Stock, the Series B Convertible Preferred Stock and the
Series C Convertible Preferred Stock, voting together as a single class. At any
meeting (or in a written consent in lieu thereof) held for the purpose of
electing directors, the presence in person or by proxy (or the written consent)
of (i) the holders of a majority of the shares of Series A Convertible Preferred
Stock, Series B Convertible Preferred Stock or Series C Convertible Preferred
Stock, as applicable, then outstanding shall constitute a quorum of the Series A
Convertible Preferred Stock, Series B Convertible Preferred Stock or Series C
Convertible Preferred Stock, as applicable, for the election of directors to be
elected solely by the holders of the Series A Convertible Preferred Stock, the
Series B Convertible Preferred Stock or Series C Convertible Preferred Stock;
(ii) the holders of a majority of the aggregate shares of Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock then outstanding
(calculated in accordance with Paragraph 2A above) shall constitute a quorum of
such shares for the election of the Seventh Director; (iii) the holders of a
majority of the aggregate shares of Common Stock and Series C Convertible
Preferred Stock (calculated in accordance with Paragraph 2A above) then
outstanding shall constitute a quorum of such shares for the election of
directors to be elected jointly by such holders; or (iv) the holders of a
majority of the aggregate number of shares of Series A Convertible Preferred
Stock, Series B Convertible Preferred Stock and Series C Convertible Preferred
Stock (calculated in accordance with Paragraph 2A above) shall constitute a
quorum for the election of directors upon the exercise of the rights of the
holders of Convertible Preferred Stock to elect a majority of the directors of
the Corporation upon a Redemption Default. A vacancy in any directorship elected
by the holders of the Series A Convertible Preferred Stock, the Series B
Convertible Preferred Stock or Series C Convertible Preferred Stock shall be
filled only by vote or written consent of the holders of the

-5-

<PAGE>

Series A Convertible Preferred Stock, the Series B Convertible Preferred Stock
or Series C Convertible Preferred Stock, as applicable. A vacancy in any
directorship elected jointly by the holders of the Common Stock and the holders
of the Series C Convertible Preferred Stock shall be filled only by vote or
written consent of the holders of the Common Stock and the holders of the Series
C Convertible Preferred Stock and a vacancy in the directorship elected jointly
by the holders of the Series A Convertible Preferred Stock, the Series B
Convertible Preferred Stock and the Common Stock shall be filled only by vote or
written consent of the Series A Convertible Preferred Stock, the Series B
Convertible Preferred Stock and the Common Stock as provided above; provided,
however, that in the event of a Redemption Default the holders of the Series A
Convertible Preferred Stock, the Series B Convertible Preferred Stock and the
Series C Convertible Preferred Stock, voting together as a single class, shall
be entitled to remove the Seventh Director. With respect to any other action by
shareholders, the presence in person or by proxy (or by written consent) of the
holders of a majority of the shares of Series A Convertible Preferred Stock,
Series B Convertible Preferred Stock, Series C Convertible Preferred Stock and
Common Stock (calculated in accordance with Paragraph 2A above), voting as a
single class, shall constitute a quorum for the consideration of any business.

3. Dividends. The holders of the Convertible Preferred Stock shall be
entitled to receive, out of funds legally available therefor, when and if
declared by the Board of Directors, quarterly dividends at the rate per annum of
$.073 per share of Series A Convertible Preferred Stock, $.1575 per share of
Series B Convertible Preferred Stock and $.20 per share of Series C Convertible
Preferred Stock (the "Accruing Dividends"). Accruing Dividends shall accrue from
day to day whether or not earned or declared, and shall be cumulative.

4. Liquidation. Upon any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of the shares of
Convertible Preferred Stock shall be entitled, before any distribution or
payment is made upon any stock ranking on liquidation junior to the Convertible
Preferred Stock, to be paid an amount equal to $1.46 per share of Series A
Convertible Preferred Stock, $3.15 per share of Series B Convertible Preferred
Stock and $4.15 per share of Series C Convertible Preferred Stock plus, in the
case of each share, an amount equal to all Accruing Dividends unpaid thereon
(whether or not declared), computed to the date payment thereof is made
available (such amount being referred to as the "Base Liquidation Amount"),
provided that, as to any Convertible Preferred Stock, holders shall receive, in
lieu of the Base Liquidation Amount, the amount per share, if greater than the
Base Liquidation Amount, that would be payable to each holder of one share of
Convertible Preferred Stock in connection with such liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, had all of the
holders of Convertible Preferred Stock converted into shares of Common Stock
(including for purposes of this Paragraph 4, any fractional shares of Common
Stock issuable upon the conversion of one share of Convertible Preferred Stock)
immediately prior to such liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary. The amount payable with respect
to one share of Convertible Preferred Stock pursuant to this Paragraph 4 is
hereinafter referred to as the "Liquidation Preference Payment" and with respect
to all shares of Convertible Preferred Stock being sometimes referred to as the
"Liquidation Preference Payments." If upon such liquidation, dissolution or
winding up

-6-

<PAGE>

of the Corporation, whether voluntary or involuntary, the assets to be
distributed among the holders of Convertible Preferred Stock shall be
insufficient to permit payment in full to the holders of Convertible Preferred
Stock of the Liquidation Preference Payments, then the entire assets of the
Corporation to be so distributed shall be distributed ratably among the holders
of Convertible Preferred Stock based upon the percentage of total Liquidation
Preference Payments to which each such holder is entitled. Upon any such
liquidation, dissolution or winding up of the Corporation, immediately after the
holders of Convertible Preferred Stock shall have been paid in full the
Liquidation Preference Payments, the remaining net assets of the Corporation
available for distribution shall be distributed ratably among the holders of
Common Stock and all other classes or series of stock ranking on liquidation
junior to the Convertible Preferred Stock. Written notice of such liquidation,
dissolution or winding up, stating a payment date, the amount of the Liquidation
Preference Payments, and the place where said payments shall be made, shall be
delivered in person, mailed by certified or registered mail, return receipt
requested or sent by telecopier or telex, not less than 20 days prior to the
payment date stated therein, to the holders of record of Convertible Preferred
Stock, such notice to be addressed to each such holder at its address as shown
by the records of the Corporation. Unless otherwise agreed to by the holders of
at least 66-2/3% of the then outstanding shares of each series of Convertible
Preferred Stock, consenting in writing or voting separately as three separate
series, any consolidation or merger involving the Corporation and any other
entity or entities (other than a merger to reincorporate the Corporation in a
different jurisdiction), and the sale, lease, abandonment, transfer or other
disposition by the Corporation of all or substantially all its assets, shall
be-deemed to be a liquidation, dissolution or winding up of the Corporation
within the meaning of the provisions of this Paragraph 4. For purposes hereof,
the Common Stock shall rank on liquidation junior to the Convertible Preferred
Stock.

5. Restrictions. At any time when shares of Convertible Preferred Stock are
outstanding, except where the vote or written consent of the holders of a
greater number of shares of the Corporation is required by law or by the
Articles of Incorporation and in addition to any other vote required by law or
the Articles of Incorporation, without the approval of the holders of at least
66-2/3% of the then outstanding shares of Convertible Preferred Stock, given in
writing or by vote at a meeting, consenting or voting (as the case may be)
separately as three separate series, (provided that, if no shares of a series of
Convertible Preferred Stock are outstanding, no approval of that series shall be
required hereunder), the Corporation will not:

5A. Create or authorize the creation of any additional class or series
of shares of stock unless the same ranks junior to the Series A Convertible
Preferred Stock, the Series B Convertible Preferred Stock and the Series C
Convertible Preferred Stock as to the distribution of assets on the liquidation,
dissolution or winding up of the Corporation, or increase the authorized amount
of the Convertible Preferred Stock or increase the authorized amount of any
additional class or series of shares of stock unless the same ranks junior to
the Convertible Preferred Stock as to the distribution of assets on the
liquidation, dissolution or winding up of the Corporation, or create or
authorize any obligation or security convertible into shares of Series A
Convertible Preferred Stock, Series B Convertible Preferred Stock or Series C
Convertible Preferred Stock or into shares of any other class or series of stock
unless the same ranks junior to

-7-

<PAGE>

the Convertible Preferred Stock as to the distribution of assets on the
liquidation, dissolution or winding up of the Corporation, whether any such
creation, authorization or increase shall be by means of amendment to the
Articles of Incorporation or by merger, consolidation or otherwise;

5B. Consent to any liquidation, dissolution or winding up of the
Corporation or consolidate or merge into or with any other entity or entities or
sell, lease, abandon, transfer or otherwise dispose of all or substantially all
its assets;

5C. Amend, alter or repeal its Articles of Incorporation or amend or
alter its By-laws, unless, in the case of an amendment or alteration of its
By-laws, such amendment or alteration, is approved by a majority of the
directors, which majority must include both of the Series A Directors and the
Series B Director.

5D. Purchase or set aside any sums for the purchase of, or pay any
dividend or make any distribution on, any shares of stock other than on each
series of Convertible Preferred Stock, except for dividends or other
distributions payable on the Common Stock solely in the form of additional
shares of Common Stock and except for the purchase of shares of Common Stock
from former employees of the Corporation who acquired such shares directly from
the Corporation, if each such purchase is made pursuant to contractual rights
held by the Corporation relating to the termination of employment of such former
employee and the purchase price does not exceed the original issue price paid by
such former employee to the Corporation for such shares; or

5E. Redeem or otherwise acquire any shares of Convertible Preferred
Stock except as expressly authorized in Paragraph 7 hereof or pursuant to a
purchase offer made pro rata to all holders of the shares of Convertible
Preferred Stock on the basis of the aggregate number of outstanding shares of
Convertible Preferred Stock then held by each such holder.

5F. Increase the authorized amount of any series of the Convertible
Preferred Stock or create or authorize any obligation or security convertible
into shares of any series of the Convertible Preferred Stock.

6. Conversions. The holders of shares of Convertible Preferred Stock shall
have the following conversion rights:

6A. Right to Convert. Subject to the terms and conditions of this
Paragraph 6, the holder of any share or shares of Convertible Preferred Stock
shall have the right, at its option at any time, to convert any such shares of
Convertible Preferred Stock (except that upon any liquidation of the Corporation
the right of conversion shall terminate at the close of business on the business
day fixed for payment of the amount distributable on the Convertible Preferred
Stock) into such number of fully paid and nonassessable shares of Common Stock
as is obtained by (i) multiplying the number of shares of Convertible Preferred
Stock so to be converted by $1.46 (with respect to shares of Series A
Convertible Preferred Stock), $3.15 (with respect to shares of Series B
Convertible Preferred Stock) or $4.15 (with respect to shares of

-8-

<PAGE>

Series C Convertible Preferred Stock ) (the "Initial Conversion Price") and (ii)
dividing the result by the applicable Initial Conversion Price with respect to
the Series A Convertible Preferred Stock, the Series B Convertible Preferred
Stock and/or the Series C Convertible Preferred Stock, as applicable, or, in
case an adjustment of such price has taken place pursuant to the further
provisions of this Paragraph 6 then by the conversion price as last adjusted and
in effect at the date any share or shares of Convertible Preferred Stock are
surrendered for conversion (such price, or such price as last adjusted, being
referred to as the "Conversion Price"). Upon the consummation of a Liquidity
Event (as defined below) on or prior to December 31, 1999 at a Transaction Price
(as defined below) of less than $9.45 (appropriately adjusted to reflect the
occurrence of any event described in subparagraph 6F subsequent to December 25,
1996), the Conversion Price of the Series B Convertible Preferred Stock shall
automatically become, effective immediately prior to such consummation,
one-third of such Transaction Price; provided, however, that if the Transaction
Price is $3.60 or less (appropriately adjusted as described above), such
Conversion Price shall automatically become $1.20 (appropriately adjusted to
reflect the occurrence of any event described in subparagraph 6F subsequent to
December 25, 1996). Upon the consummation of a Liquidity Event on or subsequent
to January 1, 2000 at a Transaction Price less than $12.60 (appropriately
adjusted to reflect the occurrence of any event described in subparagraph 6F
subsequent to December 25, 1996), the Conversion Price of the Series B
Convertible Preferred Stock shall automatically become, effective immediately
prior to such consummation, one-quarter of such Transaction Price, provided,
however, that if the Transaction Price is $4.80 or less (appropriately adjusted
as described above), such Conversion Price shall automatically become $1.20
(appropriately adjusted to reflect the occurrence of any event described in
subparagraph 6F subsequent to December 25, 1996). As used herein, "Liquidity
Event" shall mean: (i) an initial public offering of Common Stock (an "IPO");
(ii) a sale of all or substantially all of the assets of the Corporation (a
"Sale"); or (iii) a capital reorganization or reclassification effected as
contemplated by subparagraph 6G (a "Reorganization"). As used herein,
"Transaction Price" shall mean: (i) as to an IPO, the price to public per share
of Common Stock without reduction for underwriting discounts or commissions;
(ii) as to a Sale, the fair value of the consideration received by the
Corporation in such Sale (plus (A) the fair value of the remaining assets of the
Corporation and (B) the consideration that the Corporation would receive upon
exercise of any outstanding options, warrants or similar rights, minus (C) the
Corporation's remaining liabilities), all as determined in good faith by the
Board of Directors of the Corporation, divided by the total number of shares of
Common Stock outstanding or issuable upon the exercise of any outstanding
options, warrants or similar rights or the conversion of outstanding convertible
securities (including without limitation the conversion of the Convertible
Preferred Stock at the Conversion Price in effect immediately prior to the
consummation of the Sale); or (iii) as to a Reorganization, the fair value of
the consideration per share of Common Stock to be received by the holders of
Common Stock as determined in good faith by the Board of Directors of the
Corporation. Notwithstanding anything else herein, the Conversion Price of the
Series C Convertible Preferred Stock shall be adjusted as follows: if (A) a
Qualifying IPO has not been closed by February 27, 1998 and (B) subsequent to
the initial sale of the Series C Convertible Preferred Stock and prior to
February 27, 1998, the Corporation has not sold securities for gross cash
proceeds of at least $7,000,000 which sale is based on a valuation of $5.92 per
common

-9-

<PAGE>

share equivalent, then the Conversion Price of the Series C Convertible
Preferred Stock shall become the Revised Conversion Price at such time as the
Next Financing is closed; and (y) if a Qualifying IPO has not been closed by May
29, 1998, the Conversion Price shall become the lower of the Revised Conversion
Price or $3.15. As used herein, "Revised Conversion Price" means the price per
share of Class C Convertible Preferred Stock as would reflect a valuation of the
Corporation at 70% of the valuation on which equity securities are sold by the
Corporation in the next financing by the Corporation in which the gross cash
proceeds are at least $5,000,000 subsequent to the initial sale of the Series C
Convertible Preferred Stock (or, if there is no single such financing in such
amount that is completed by February 27, 1998, the weighted average valuation on
which the first $5,000,000 of equity securities are sold subsequent to the
initial sale of the Series C Convertible Preferred Stock) (the "Next
Financing"); provided that, in no event shall the Revised Conversion Price be
less than $2.90 if the Next Financing is closed by March 15, 1998. The foregoing
adjustments are subject to additional adjustments as provided elsewhere in this
Paragraph 6. Such rights of conversion shall be exercised by the holder thereof
by giving written notice that the holder elects to convert a stated number and
series of shares of Convertible Preferred Stock into Common Stock and by
surrender of a certificate or certificates for the shares so to be converted to
the Corporation at its principal office (or such other office or agency of the
Corporation as the Corporation may designate by notice in writing to the holders
of the Convertible Preferred Stock) at any time during its usual business hours
on the date set forth in such notice, together with a statement of the name or
names (with address) in which the certificate or certificates for shares of
Common Stock shall be issued.

6B. Issuance of Certificates; Time Conversion Effected. Promptly after
the receipt of the written notice referred to in subparagraph 6A and surrender
of the certificate or certificates for the share or shares of Convertible
Preferred Stock to be converted, the Corporation shall issue and deliver, or
cause to be issued and delivered, to the holder, registered in such name or
names as such holder may direct, a certificate or certificates for the number of
whole shares of Common Stock issuable upon the conversion of such share or
shares of Convertible Preferred Stock. To the extent permitted by law, such
conversion shall be deemed to have been effected and the Conversion Price shall
be determined as of the close of business on the date on which such written
notice shall have been received by the Corporation and the certificate or
certificates for such share or shares shall have been surrendered as aforesaid,
and at such time the rights of the holder of such share or shares of Convertible
Preferred Stock shall cease, and the person or persons in whose name or names
any certificate or certificates for shares of Common Stock shall be issuable
upon such conversion shall be deemed to have become the holder or holders of
record of the shares represented thereby;

6C. Fractional Shares; Dividends; Partial Conversion. No fractional
shares shall be issued upon conversion of Convertible Preferred Stock into
Common Stock and no payment or adjustment shall be made upon any conversion on
account of any cash dividends on the Common Stock issued upon such conversion.
At the time of each conversion, including without limitation, a mandatory
conversion pursuant to subparagraph 6P, to the maximum extent permitted by law,
the Corporation shall pay in cash an amount equal to all unpaid Accruing
Dividends, whether or not declared, on the shares of Convertible Preferred Stock
surrendered for

-10-

<PAGE>

conversion to the date upon which such conversion is deemed to take place as
provided in subparagraph 6B. If the funds of the Corporation legally available
for payment of such dividends are insufficient to pay the full amount of such
dividends, the holders of such shares shall share ratably in any funds legally
available for payment of such dividends according to the respective amounts
which would be payable to them if the full amount of such dividends were
actually paid. At any time thereafter when additional funds of the Corporation
are legally available for the payment of such dividends, such funds shall be
used, at the end of the next succeeding fiscal quarter, to pay the balance of
such dividends, or such portion thereof for which funds are then legally
available, on the basis set forth above. In case the number of shares of
Convertible Preferred Stock represented by the certificate or certificates
surrendered pursuant to subparagraph 6A exceeds the number of shares converted,
the Corporation shall, upon such conversion, execute and deliver to the holder,
at the expense of the Corporation a new certificate or certificates for the
number and series of shares of Convertible Preferred Stock represented by the
certificate or certificates surrendered which are not to be converted. If any
fractional share of Common Stock would, except for the provisions of the first
sentence of this subparagraph 6C, be delivered upon such conversion, the
Corporation, in lieu of delivering such fractional share, shall pay to the
holder surrendering the Convertible Preferred Stock for conversion an amount in
cash equal to the current market price of such fractional share as determined in
good faith by the Board of Directors of the Corporation.

6D. Adjustment of Price Upon Issuance of Common Stock. Except as
provided in subparagraph 6E, if and whenever the Corporation shall issue or
sell, or is, in accordance with subparagraphs 6D(1) through 6D(7), deemed to
have issued or sold, any shares of Common Stock for a consideration per share
less than the Conversion Price for a series then outstanding of Convertible
Preferred Stock in effect immediately prior to the time of such issue or sale,
then, forthwith upon such issue or sale, the Conversion Price for such series
shall be reduced to the price determined by dividing (i) an amount equal to the
sum of (a) the number of shares of Common Stock outstanding immediately prior to
such issue or sale multiplied by the then existing Conversion Price applicable
to such series and (b) the consideration, if any, received by the Corporation
upon such issue or sale, by (ii) the total number of shares of Common Stock
outstanding immediately after such issue or sale.

For purposes of this subparagraph 6D, the following subparagraphs 6D(1) to
6D(7) shall also be applicable:

6D(1) Issuance of Rights or Options. In case at any time the
Corporation shall in any manner grant (whether directly or by assumption in a
merger or otherwise) any warrants or other rights to subscribe for or to
purchase, or any options for the purchase of, Common Stock or any stock or
security convertible into or exchangeable for Common Stock (such warrants,
rights or options being called "Options" and such convertible or exchangeable
stock or securities being called "Convertible Securities") whether or not such
Options or the right to convert or exchange any such Convertible Securities are
immediately exercisable, and the price per share for which Common Stock is
issuable upon the exercise of such Options or upon the conversion or exchange of
such Convertible Securities (determined by

-11-

<PAGE>

dividing (i) the total amount, if any, received or receivable by the Corporation
as consideration for the granting of such Options, plus the minimum aggregate
amount of additional consideration payable to the Corporation upon the exercise
of all such Options, plus, in the case of such Options which relate to
Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable upon the issue or sale of such Convertible
Securities and upon the conversion or exchange thereof, by (ii) the total
maximum number of shares of Common Stock issuable upon the exercise of such
Options or upon the conversion or exchange of all such Convertible Securities
issuable upon the exercise of such Options) shall be less than the Conversion
Price for the applicable series of Convertible Preferred Stock in effect
immediately prior to the time of the granting of such Options, then the total
maximum number of shares of Common Stock issuable upon the exercise of such
Options or upon conversion or exchange of the total maximum amount of such
Convertible Securities issuable upon the exercise of such Options shall be
deemed to have been issued for such price per share as of the date of granting
of such Options or the issuance of such Convertible Securities and thereafter
shall be deemed to be outstanding. Except as otherwise provided in subparagraph
6D(3), no adjustment of the Conversion Price for the applicable series of
Convertible Preferred Stock shall be made upon the actual issue of such Common
Stock or of such Convertible Securities upon exercise of such Options or upon
the actual issue of such Common Stock upon conversion or exchange of such
Convertible Securities.

6D(2) Issuance of Convertible Securities. In case the Corporation
shall in any manner issue (whether directly or by assumption in a merger or
otherwise) or sell any Convertible Securities, whether or not the rights to
exchange or convert any such Convertible Securities are immediately exercisable,
and the price per share for which Common Stock is issuable upon such conversion
or exchange (determined by dividing (i) the total amount received or receivable
by the Corporation as consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Corporation upon the conversion or exchange thereof, by (ii)
the total maximum number of shares of Common Stock issuable upon the conversion
or exchange of all such Convertible Securities) shall be less than the
Conversion Price for the applicable series of Convertible Preferred Stock in
effect immediately prior to the time of such issue or sale, then the total
maximum number of shares of Common Stock issuable upon conversion or exchange of
all such Convertible Securities shall be deemed to have been issued for such
price per share as of the date of the issue or sale of such Convertible
Securities and thereafter shall be deemed to be outstanding, provided that (a)
except as otherwise provided in subparagraph 6D(3), no adjustment of the
applicable Conversion Price shall be made upon the actual issue of such Common
Stock upon conversion or exchange of such Convertible Securities and (b) if any
such issue or sale of such Convertible Securities is made upon exercise of any
Options to purchase any such Convertible Securities for which adjustments of the
applicable Conversion Price have been or are to be made pursuant to other
provisions of this subparagraph 6D, no further adjustment of the applicable
Conversion Price shall be made by reason of such issue or sale.

6D(3) Change in Option Price or Conversion Rate. Upon the happening
of any of the following events, namely, if the purchase price provided for in
any

-12-

<PAGE>

Option referred to in subparagraph 6D(1), the additional consideration, if any,
payable upon the conversion or exchange of any Convertible Securities referred
to in subparagraph 6D(1) or 6D(2), or the rate at which Convertible Securities
referred to in subparagraph 6D(1) or 6D(2) are convertible into or exchangeable
for Common Stock shall change at any time (including, but not limited to,
changes under or by reason of provisions designed to protect against dilution),
the Conversion Price for the applicable series of Convertible Preferred Stock in
effect at the time of such event shall forthwith be readjusted to the Conversion
Price for the applicable series of Convertible Preferred Stock which would have
been in effect at such time had such Options or Convertible Securities still
outstanding provided for such changed purchase price, additional consideration
or conversion rate, as the case may be, at the time initially granted, issued or
sold, but only if as a result of such adjustment the applicable Conversion Price
then in effect hereunder is thereby reduced; and on the termination of any such
Option or any such right to convert or exchange such Convertible Securities, the
applicable Conversion Price then in effect hereunder shall forthwith be
increased to the applicable Conversion Price which would have been in effect at
the time of such termination had such Options or Convertible Securities, to the
extent outstanding immediately prior to such termination, never been issued.

6D(4) Stock Dividends. In case the Corporation shall declare a
dividend or make any other distribution upon any stock of the Corporation
payable in Common Stock (except for dividends or distributions upon the Common
Stock), Options or Convertible Securities, any Common Stock, Options or
Convertible Securities, as the case may be, issuable in payment of such dividend
or distribution shall be deemed to have been issued or sold without
consideration.

6D(5) Consideration for Stock. In case any shares of Common Stock,
Options or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received by the
Corporation therefor, without deduction therefrom of any expenses incurred or
any underwriting commissions or concessions paid or allowed by the Corporation
in connection therewith. In case any shares of Common Stock, Options or
Convertible Securities shall be issued or sold for a consideration other than
cash, the amount of the consideration other than cash received by the
Corporation shall be deemed to be the fair value of such consideration as
determined in good faith by the Board of Directors of the Corporation, without
deduction of any expenses incurred or any underwriting commissions or
concessions paid or allowed by the Corporation in connection therewith. In case
any Options shall be issued in connection with the issue and sale of other
securities of the Corporation, together comprising one integral transaction in
which no specific consideration is allocated to such Options by the parties
thereto, such Options shall be deemed to have been issued for such consideration
as determined in good faith by the Board of Directors of the Corporation.

6D(6) Record Date. In case the Corporation shall determine a record
date to make a record of the holders of its Common Stock for the purpose of
entitling them (i) to receive a dividend or other distribution payable in Common
Stock, Options or Convertible Securities or (ii) to subscribe for or purchase
Common Stock, Options or

-13-

<PAGE>

Convertible Securities, then such record date shall be deemed to be the date of
the issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.

6D(7) Treasury Shares. The number of shares of Common Stock
outstanding
at any given time shall not include shares owned or held by or for the account
of the Corporation, and the disposition of any such shares shall be considered
an issue or sale of Common Stock for the purpose of this subparagraph 6D.

6E. Certain Issues of Common Stock Excepted. Anything herein to the
contrary notwithstanding, the Corporation shall not be required to make any
adjustment of the Conversion Price for any series of Convertible Preferred Stock
in the case of the issuance from and after December 25, 1996: (i) of up to an
aggregate of 3,282,577 shares (appropriately adjusted to reflect the occurrence
of any event described in subparagraph 6F) of Common Stock (directly or through
the grant of Options or other Convertible Securities) to directors, officers,
employees, consultants or affiliated physicians of the Corporation in connection
with their service to the Corporation; (ii) of Common Stock made solely in
consideration for the acquisition of (whether by merger or otherwise) by the
Corporation or by an affiliate of the Corporation of all or substantially all of
the stock or assets of any other entity engaged primarily in the practice of
medicine or other operating business; or (iii) in connection with the employment
by the Corporation or an affiliate of the Corporation of a physician, provided
that the issuances contemplated by this clause (iii) shall be limited to 600,000
shares of Common Stock in the aggregate; (iv) of warrants on or prior to January
15, 1997 (or Common Stock issued upon the exercise of such warrants) to
purchasers of Series B Convertible Preferred Stock; (v) the issuance of warrants
to purchase 43,573 shares of Common Stock in December 1997 and warrants to
purchase 77,110 shares of Common Stock, both in connection with obtaining debt
financing or (vi) the issuance of warrants to the purchasers of Series C
Convertible Preferred Stock pursuant to the terms of the stock purchase
agreement relating thereto.

6F. Subdivision or Combination of Common Stock. In case the Corporation
shall, as to Series A Convertible Preferred Stock, at any time after February 1,
1995 and, as to Series B Convertible Preferred Stock and Series C Convertible
Preferred Stock at any time after December 25, 1996, subdivide (by any stock
split, stock dividend or otherwise) its outstanding shares of Common Stock into
a greater number of shares, the Conversion Price for each series of Convertible
Preferred Stock in effect immediately prior to such subdivision shall be
proportionately reduced, and, conversely, in case the outstanding shares of
Common Stock shall be combined into a smaller number of shares, the Conversion
Price in effect immediately prior to such combination shall be proportionately
increased. In the case of any such subdivision, no further adjustment shall be
made pursuant to subparagraph 6D(4) by reason thereof.

6G. Reorganization or Reclassification. If any capital reorganization or
reclassification of the capital stock of the Corporation shall be effected in
such a way that

-14-

<PAGE>

holders of Common Stock shall be entitled to receive stock, securities or assets
with respect to or in exchange for Common Stock, then, as a condition of such
reorganization or reclassification, lawful and adequate provisions shall be made
whereby each holder of a share or shares of Convertible Preferred Stock shall
thereupon have the right to receive, upon the basis and upon the terms and
conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore receivable upon the conversion of such share or shares
of Convertible Preferred Stock, such shares of stock, securities or assets as
may be issued or payable with respect to or in exchange for a number of
outstanding shares of such Common Stock equal to the number of shares of such
Common Stock immediately theretofore receivable upon such conversion had such
reorganization or reclassification not taken place, and in any such case
appropriate provisions shall be made with respect to the rights and interests of
such holder to the end that the provisions hereof (including without limitation
provisions for adjustments of the applicable Conversion Price) shall thereafter
be applicable, as nearly as may be, in relation to any shares of stock,
securities or assets thereafter deliverable upon the exercise of such conversion
rights.

6H. Failure to Redeem. If the Corporation fails, for any reason or for
no reason, to redeem on any Redemption Date (as defined in Paragraph 7) all of
the shares of Convertible Preferred Stock required to be redeemed on such
Redemption Date in accordance with the terms and conditions of Paragraph 7, the
Conversion Price for each series of Convertible Preferred Stock then in effect
shall be immediately reduced to an amount equal to 90% of such Conversion Price.
Thereafter, until such redemption has been made in full in accordance with such
terms and conditions, each such applicable Conversion Price shall be further
reduced on the 90th day following such Redemption Date and at the end of each
90-day period thereafter to an amount equal to 90% of such applicable Conversion
Price in effect immediately prior to each such reduction. Nothing set forth in
this subparagraph 6H shall limit the remedies otherwise available to any holder
of Convertible Preferred Stock in the event of a failure by the Corporation to
make a redemption in accordance with the terms and conditions of Paragraph 7.

6I. Notice of Adjustment. Upon any adjustment of a Conversion Price,
then and in each such case the Corporation shall give written notice thereof, by
delivery in person, certified or registered mail, return receipt requested,
telecopier or telex, addressed to each holder of shares of Convertible Preferred
Stock affected by an adjustment to such Conversion Price at the address of such
holder as shown on the books of the Corporation, which notice shall state such
the Conversion Price for the applicable series of Convertible Preferred Stock
resulting from such adjustment, setting forth in reasonable detail the method
upon which such calculation is based.

6J. Other Notices. In case at any time:

(1) the Corporation shall declare any dividend upon its Common Stock
payable in cash or stock or make any other distribution to the holders of its
Common Stock;

-15-

<PAGE>

(2) the Corporation shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class or other
rights;

(3) there shall be any capital reorganization or reclassification of
the capital stock of the Corporation, or a consolidation or merger of the
Corporation with or into another entity or entities, or a sale, lease,
abandonment, transfer or other disposition of all or substantially all of the
assets of the Corporation; or

(4) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;

then, in any one or more of said cases, the Corporation shall give, by delivery
in person, certified or registered mail, return receipt requested, telecopier or
telex, addressed to each holder of any shares of Convertible Preferred Stock at
the address of such holder as shown on the books of the Corporations (a) at
least 20 days' prior written notice of the date on which the books of the
Corporation shall close or a record shall be taken for such dividend,
distribution or subscription rights or for determining rights to vote in respect
of any such reorganization, reclassification, consolidation, merger,
disposition, dissolution, liquidation or winding up, at least 20 days' prior
written notice of the date when the same shall take place. Such notice in
accordance with the foregoing clause (a) shall also specify, in the case of any
such dividend, distribution or subscription rights, the date on which the
holders of Common Stock shall be entitled thereto and such notice in accordance
with the foregoing clause (b) shall also specify the date on which the holders
of Common Stock shall be entitled to exchange their Common Stock for securities
or other property deliverable upon such reorganization, reclassification,
consolidation, merger, disposition, dissolution, liquidation or winding up, as
the case may be.

6K. Stock to be Reserved. The Corporation will at all times reserve and
keep available out of its authorized Common Stock solely for the purpose of
issuance upon the conversion of Convertible Preferred Stock as herein provided,
such number of shares of Common Stock as shall then be issuable upon the
conversion of all outstanding shares of Convertible Preferred stock. The
Corporation covenants that shares of Common Stock which shall be so issued shall
be duly and validly issued and fully paid and nonassessable and free from all
taxes, liens and charges with respect to the issue thereof, and, without
limiting the generality of the foregoing, the Corporation covenants that it will
from time to time take all such action as may be requisite to assure that the
par value per share of the Common Stock is at all times equal to or less than
the lower of the Conversion Price for the Series A Convertible Preferred Stock,
the Conversion Price for the Series B Convertible Preferred Stock or the
Conversion Price for the Series C Convertible Preferred Stock in effect at the
time. The Corporation will take all such action as may be necessary to assure
that all such shares of Common Stock may be so issued without violation of any
applicable law or regulation, or of any requirement of any national securities
exchange upon which the Common Stock may be listed. The Corporation will not
take any action which results in any adjustment of the Conversion Price for the
Series A Convertible Preferred Stock, the Conversion Price for the Series B
Convertible Preferred Stock or the Conversion Price for the Series C Convertible
Preferred Stock if the total number of shares of

-16-

<PAGE>

Common Stock issued and issuable after such action upon conversion of the
Convertible Preferred Stock would exceed the total number of shares of Common
Stock then authorized by the Articles of Incorporation.

6L. No Reissuance of Convertible Preferred Stock. Shares of
Convertible Preferred Stock which are converted into shares of Common Stock as
provided herein shall not be reissued.

6M. Issue Tax. The issuance of certificates for shares of Common
Stock upon conversion of Convertible Preferred Stock shall be made without
charge to the holders thereof for any issuance tax in respect thereof, provided
that the Corporation shall not be required to pay any tax which may be payable
in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the holder of the Convertible Preferred
Stock which is being converted.

6N. Closing of Books. The Corporation will at no time close its transfer
books against the transfer of any Convertible Preferred Stock or of any shares
of Common Stock issued or issuable upon the conversion of any shares of
Convertible Preferred Stock in any manner which interferes with the timely
conversion of such Convertible Preferred Stock, except as may otherwise be
required to comply with applicable securities laws.

6O. Definition of Common Stock. As used in this Paragraph 6, the term
"Common Stock" shall mean and include the Corporation's authorized Common Stock,
par value $.01 per share, and shall also include any capital stock of any class
of the Corporation thereafter authorized which shall neither be limited to a
fixed sum or percentage in respect of the rights of the holders thereof to
participate in dividends nor entitled to a preference in the distribution of
assets upon the voluntary or involuntary liquidation, dissolution or winding up
of the Corporation; provided that the shares of Common Stock receivable upon
conversion of shares of Convertible Preferred Stock shall include only shares
designated as Common Stock of the Corporation on the date of filing of this
instrument, or in case of any reorganization or reclassification of the
outstanding shares thereof, the stock, securities or assets provided for in
subparagraph 6G.

6P. Mandatory Conversion. If at any time the Corporation shall effect a
firm commitment underwritten public offering of shares of Common Stock in which
(i) the aggregate price paid for such shares by the public shall be at least
$15,000,000 and (ii) the price paid by the public for such shares shall be at
least $4.50 per share (appropriately adjusted to reflect the occurrence of any
event described in subparagraph 6F occurring after December 25, 1996), then
effective upon the closing of the sale of such shares by the Corporation
pursuant to such public offering (a "Qualifying IPO"), all outstanding shares of
Convertible Preferred Stock shall automatically convert to shares of Common
Stock on the basis set forth in this Paragraph 6. Holders of shares of
Convertible Preferred Stock so converted may deliver to the Corporation at its
principal office (or such other office or agency of the Corporation as the
Corporation may designate by notice in writing to such holders) during its usual
business hours, the certificate or

-17-

<PAGE>

certificates for the shares so converted. As promptly as practicable thereafter,
the Corporation shall issue and deliver to such holder a certificate or
certificates for the number of whole shares of Common Stock to which such holder
is entitled, together with any cash dividends and payment in lieu of fractional
shares to which such holder may be entitled pursuant to subparagraph 6C. Until
such time as a holder of shares of Convertible Preferred Stock shall surrender
his or its certificates therefor as provided above, such certificates shall be
deemed to represent the shares of Common Stock to which such holder shall be
entitled upon the surrender thereof.

7. Redemption. The shares of Convertible Preferred Stock shall be redeemed
as follows:

7A. Mandatory Redemption. At any time and from time to time on or after
February 1, 2000, upon the written request of the holders of at least 66-2/3% of
the then outstanding shares of Series A Convertible Preferred Stock, or upon the
written request of holders of at least 66-2/3% of the outstanding shares of
Series B Convertible Preferred Stock, or at any time and from time to time on or
after February 1, 1999 (the "Series C Redemption Date"), upon the written
request of holders of at least 66-2/3% of the outstanding shares of Series C
Convertible Preferred Stock, the Corporation shall redeem any outstanding shares
of the series of Convertible Preferred Stock making such request on the terms
set forth in this Paragraph 7; provided that, if a Qualifying IPO has not been
closed by February 27, 1998, the Series C Redemption Date shall become December
1, 1998 and, if a Qualifying IPO has not been closed by May 29, 1998, the Series
C Redemption Date shall become September 1, 1998. Such written request (the
"Redemption Request") shall be made at least 90 days prior to the date of
redemption (the "Redemption Date"), shall specify the number and type of shares
of Convertible Preferred Stock to be redeemed on the Redemption Date and shall
be sent to the Corporation.

7B. Redemption Price and Payment. The shares of Series A Convertible
Preferred Stock to be redeemed on any Redemption Date shall be redeemed by
paying for each share in cash an amount equal to $1.46 per share plus, in the
case of each share, an amount equal to all unpaid Accruing Dividends, whether or
not declared, computed to such Redemption Date, such amount being referred to as
the "Series A Redemption Price." The shares of Series B Convertible Preferred
Stock to be redeemed on any Redemption Date shall be redeemed by paying for each
share in cash an amount equal to $3.15 per share plus, in the case of each
share, an amount equal to all unpaid Accruing Dividends, whether or not
declared, computed to such Redemption Date, such amount being referred to as the
"Series B Redemption Price." The shares of Series C Convertible Preferred Stock
to be redeemed on any Redemption Date shall be redeemed by paying for each share
in cash an amount equal to $4.15 per share plus, in the case of each share, an
amount equal to all unpaid Accruing Dividends, whether or not declared, computed
to such Redemption Date, such amount being referred to as the "Series C
Redemption Price." References to "Redemption Price" shall be to the Series A
Redemption Price, the Series B Redemption Price or the Series C Redemption
Price, as applicable. Any such payment shall be made in full on the applicable
Redemption Date to the holders entitled thereto.

-18-

<PAGE>

7C. Redemption Mechanics. At least 20 but not more than 30 days prior to
each Redemption Date, written notice (the "Redemption Notice") shall be given by
the Corporation by delivery in person, certified or registered mail, return
receipt requested, telecopier or telex, to each holder of record (at the close
of business on the business day next preceding the day on which the Redemption
Notice is given) of shares of Convertible Preferred Stock entitled to be
redeemed notifying such holder of the redemption and specifying the Redemption
Price, such Redemption Date, the number and series of Convertible Preferred
Stock to be redeemed from such holder (computed on a pro rata basis in
accordance with the number of such shares entitled to be redeemed held by all
holders thereof) and the place where said Redemption Price shall be payable. The
Redemption Notice shall be addressed to each holder at his address as shown by
the records of the Corporation. From and after the close of business on a
Redemption Date, unless there shall have been a default in the payment of the
Redemption Price, all rights of holders of shares of Convertible Preferred Stock
(except the right to receive the Redemption Price) shall cease with respect to
the shares to be redeemed on such Redemption Date, and such shares shall not
thereafter be transferred on the books of the Corporation or be deemed to be
outstanding for any purpose whatsoever. If the funds of the Corporation legally
available for redemption of shares of Convertible Preferred Stock on a
Redemption Date are insufficient to redeem the total number of shares of
Convertible Preferred Stock to be redeemed on such Redemption Date, the holders
of such shares shall share ratably in any funds legally available for redemption
of such shares according to the respective amounts which would be payable to
them if the full number of shares to be redeemed on such Redemption Date were
actually redeemed. The shares of Convertible Preferred Stock required to be
redeemed but not so redeemed shall remain outstanding and entitled to all rights
and preferences provided herein. At any time thereafter when additional funds of
the Corporation are legally available for the redemption of such shares of
Convertible Preferred Stock, such funds will be used, at the end of the next
succeeding fiscal quarter, to redeem the balance of such shares, or such portion
thereof for which funds are then legally available, on the basis set forth
above.

7D. Redeemed or Otherwise Acquired Shares to be Retired. Any shares of
Convertible Preferred Stock redeemed pursuant to this Paragraph 7 or otherwise
acquired by the Corporation in any manner whatsoever shall be canceled and shall
not under any circumstances be reissued; and the Corporation may from time to
time take such appropriate corporate action as may be necessary to reduce
accordingly the number of authorized shares of Convertible Preferred Stock.

8. Amendments. In addition to, and not in limitation of, any other
requirements set forth herein relating to the amendment, modification or waiver
of the terms hereof, no provision of these terms of the Series A Convertible
Preferred Stock, Series B Convertible Preferred Stock and Series C Convertible
Preferred Stock may be amended, modified or waived without the written consent
or affirmative vote of the holders of at least two-thirds of each series of the
then outstanding shares of Convertible Preferred Stock, each such series voting
as a separate series.

-19-

<PAGE>

9. Documents Available at Corporation's Principal Place of Business. The
full text of any document referred to herein is on file at the principal place
of business of the Corporation which is located at 220 Commerce Drive, Suite
300, Fort Washington, PA 19034.

-20-

<PAGE>

AGREEMENT AND AMENDMENT RELATING TO:

(a) Amended and Restated Registration Rights Agreement dated December
31, 1996, as amended as of February 6, 1997 and as of August 25,
1997, among U.S. PHYSICIANS, Inc. (the "Company") and certain of
its shareholders (the "Series A and B Registration Rights
Agreement"); and

(b) Amended and Restated Shareholders Agreement dated as of December
31, 1996, as amended as of February 6, 1997 and as of August 25,
1997, among the Company and its shareholders (the "Shareholders
Agreement").

THIS AGREEMENT AND AMENDMENT is made as of January 16, 1998 by and among
the Company and the signatories hereto.

WHEREAS, the Company and the other signatories hereto, other than the
Series C Purchasers (as defined below), have previously executed and delivered
one or both of the Series A and B Registration Rights Agreement and the
Shareholders Agreement (collectively, the "Operative Agreements");

WHEREAS, the Company wishes to enter into (i) a Series C Convertible
Preferred Stock Purchase Agreement (the "Purchase Agreement") with certain
purchasers (the "Series C Purchasers") pursuant to which the Company will issue
to the Series C Purchasers up to (a) 1,445,784 shares (the "Series C Shares") of
the Company's Series C Convertible Preferred Stock, $.01 par value (the "Series
C Preferred Stock"), (b) warrants (the "Series C Initial Warrants") to purchase
400,000 shares (the "Series C Initial Warrant Shares") of the Company's Common
Stock, $.01 par value ("Common Stock"), at an exercise price of $4.15 per share
(subject to anti-dilution and other adjustments), and (c) in the event that the
Company does not close the initial public offering of its Common Stock by
specified dates, warrants (the "Series C Contingent Warrants") to purchase up to
450,000 shares of Common Stock (the "Series C Contingent Warrants Shares"), and
(ii) a Registration Rights Agreement with the Series C Purchasers (the "Series C
Registration Rights Agreement") pursuant to which the Company will provide
demand and piggyback registration rights for the shares of Common Stock issuable
upon conversion of the Series C Shares (the "Series C Conversion Shares"), the
Series C Initial Warrant Shares and the Series C Contingent Warrant Shares;

WHEREAS, the Company wishes to issue to Dominion Fund IV ("Dominion")
warrants (the "Dominion Warrants") to purchase either: up to 38,555 shares of
Common Stock at an exercise price of $4.15 per share or, if the Company does not
pay on or prior to January 19, 1998 principal and interest due and owing on a
loan in the principal amount of $800,000 from Dominion (or if such prinicipal
amount is converted into Series C Shares), up to 77,110 shares at an exercise
price of $.01 per share (the "Dominion Warrant Shares"), and to grant to
Dominion registration rights with respect to the Dominion Warrant Shares
substantially comparable to those granted to the Series C Purchasers under the
Series C Registration Rights Agreement;

<PAGE>

WHEREAS, the parties hereto wish to waive certain rights under the
Operative Agreements and to reflect the other matters provided for herein.

NOW, THEREFORE, in consideration of the agreements set forth below and the
parties' desires to further the interests of the Company and its present and
future shareholders, and intending to be legally bound, the parties agree as
follows:

1. The parties hereto confirm that none of the following transactions
shall result in any adjustment to (a) the Conversion Price (as defined in
Exhibit A to the Company's Second Amended and Restated Articles of
Incorporation, as amended through the date hereof (the "Articles")) of the
Series A Preferred Stock (as defined in the Series A and B Registration Rights
Agreement) or the Series B Preferred Stock (as defined in the Series A and B
Registration Rights Agreement), or (b) (i) the number of shares of Common Stock
issuable pursuant to the Warrants (as defined in the Registration Rights
Agreement) or (ii) the exercise price of such Warrants. The undersigned consent
for all purposes to, and waive any rights (including, without limitation, rights
of first refusal under Section 4 of the Shareholders Agreement and rights
arising under subparagraph 6D of the Articles) arising out of, the following
transactions:

(I) the issuance of the Series C Shares, the issuance of the Series
C Conversion Shares, the issuance of the Series C Initial Warrants, the issuance
of the Series C Contingent Warrants and the issuance of the Series C Initial
Warrant Shares and the Series C Contingent Warrant Shares upon the exercise of
the Series C Initial Warrants and the Series C Contingent Warrants,
respectively; and

(II) the issuance of the Dominion Warrants and the issuance of the
Dominion Warrant Shares upon the exercise of the Dominion Warrants.

2. The parties hereto consent for all purposes to, and waive any rights
(including, without limitation, any rights arising under Section 5 or Section
13(i) of the Registration Rights Agreement or any other provision of the
Operative Agreements) arising out of, (i) the grant by the Company of
registration rights to the Series C Purchasers under the Series C Registration
Rights Agreement or any grant of substantially comparable registration rights to
Dominion with respect to the Dominion Warrant Shares or (ii) the exercise of any
such registration rights by the Series C Purchasers under the Series C
Registration Rights Agreement or by Dominion of such substantially comparable
rights with respect to the Dominion Warrant Shares.

3. By executing this Agreement and Amendment, the Series C Purchasers
shall become a party to the Shareholders Agreement. The address of the Series C
Purchasers for notice purposes shall be as specified in the Purchase Agreement.

4. Paragraph 12 of the Shareholders Agreement is hereby amended by
adding the following phrase at the end of the first sentence thereof: "and
provided, further, that the holders of Series C Preferred Stock owning at least
two-thirds of the Shares owned by all holders of Series C Preferred Stock may
effect any such waiver, modification, amendment or termination on behalf of all
the holders of Series C Preferred Stock."

-2-

<PAGE>

5. The Series A and B Registration Rights Agreement and the
Shareholders Agreement shall remain in full force and effect, except as set
forth herein.

6. This Agreement and Amendment may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument. In accordance with Section 12 of the
Shareholders Agreement and Section 13d of the Series A and B Registration Rights
Agreement, this Amendment and Agreement shall become effective when the Company,
the Series C Purchasers and Series A Purchasers owning at least two-thirds of
the Shares owned by all Series A Purchasers, Series B Purchasers owned at least
two-thirds of the Shares owned by all Series B Purchasers and Stockholders
owning at least two-thirds of the Shares owned by all Stockholders (as such
terms are defined in the Shareholders Agreement) have executed and delivered to
the Company counterparts or originals of this Amendment and Agreement.

-3-

<PAGE>

IN WITNESS WHEREOF, the Company and the undersigned have executed this
Agreement and Amendment as of the day and year first above written.

U.S. PHYSICIANS, Inc.

By: /s/ Martin G. Chilek
----------------------------------------------
Title: Sr. Vice President
-------------------------------------------

SHAREHOLDERS:

/s/ Thomas J. Keane
--------------------------------------------------
Thomas J. Keane

/s/ Daniel Promislo
--------------------------------------------------
Daniel Promislo

/s/ Daniel Promislo, attorney in fact
--------------------------------------------------
Mark Promislo

/s/ Daniel Promislo, attorney in fact
--------------------------------------------------
Jacueline Promislo

/s/ Daniel Promislo, attorney in fact
--------------------------------------------------
Steven Promislo

/s/ William P. Ferretti
--------------------------------------------------
William P. Ferretti

/s/ Edward R. Miersch
--------------------------------------------------
Edward R. Miersch

/s/ James M. McCrossin
--------------------------------------------------
James M. McCrossin

/s/ Noreen E. Burke
--------------------------------------------------
Noreen E. Burke

--------------------------------------------------
Lucia Rosenberg, with respect to all shares
beneficially owned by her

/s/ Brenda M. McCrossin
--------------------------------------------------
Brenda M. McCrossin

-4-

<PAGE>

/s/ Lewis S. Sharps, M.D.
--------------------------------------------------
Lewis S. Sharps, M.D., with respect to all shares
beneficially owned by him

SERIES A PURCHASERS:

EDISON VENTURE FUND III, L.P.
By: Edison Partners III, L.P., its general partner

By: /s/ Gustav H. Koven, III
----------------------------------------------
Title: General Partner

NEPA VENTURE FUND II, L.P.

By: NEPA II Management Partners, L.P.,
its general partner

By: NEPA II Management Corporation,
its general partner

By: /s/ Glen R. Bressner
----------------------------------------------
Title: Secretary and Treasurer
-------------------------------------------

KILLION LIQUIDATING TRUST

By: /s/ John C. Killion, Sr.
----------------------------------------------
John C. Killion, Sr.
Title: Trustee

SERIES B PURCHASERS:

KEYSTONE VENTURE IV, L.P.

By: Keystone Venture IV Management Co., L.P.,
the general partner of
Keystone Venture IV, L.P.

By: Keystone Venture IV Management Co., Group
the general partner of
Keystone Venture IV Management Co., L.P.

By: /s/ Kerry J. Dale
----------------------------------------------
Kerry J. Dale
Title: Vice President

-5-

<PAGE>

EDISON VENTURE FUND III, L.P.

By: Edison Partners, III, L.P.,
its general partner

By: /s/ Gustav H. Koven, III
----------------------------------------------
Title: General Partner

NEPA VENTURE FUND II, L.P.

By: NEPA II Management Partners, L.P.,
its general partner

By: NEPA II Management Corporation,
its general partner

By: /s/ Glen R. Bressner
----------------------------------------------
Title: Secretary and Treasurer
-------------------------------------------

SUBSEQUENT PURCHASERS:

/s/ Joseph J. Croce
--------------------------------------------------
Joseph J. Croce

/s/ Douglas P. Heller
--------------------------------------------------
Douglas P. Heller

/s/ Thomas J. Keane
--------------------------------------------------
Thomas J. Keane

E.J.K. Real Estate Services Limited

By: /s/ Terence M. Kavanagh
----------------------------------------------
Terence M. Kavanagh
Title: President

Glenville Capital Partners, L.P.
By: Glenville Capital Corporation,
its general partner

By: /s/ Milton S. Schneider
----------------------------------------------
Title: President
-------------------------------------------

-6-

<PAGE>

DOMINION FUND IV, A DELAWARE
LIMITED PARTNERSHIP
By: Dominion Management IV,
its general partner

By: /s/ Randolph D. Werner
----------------------------------------------
Randolph D. Werner,
Title: Member

/s/ Robert W. Muir, Jr.
--------------------------------------------------
Robert W. Muir, Jr.

/s/ Pasquale W. Croce, Jr.
--------------------------------------------------
Pasquale W. Croce, Jr.

/s/ William J. Barry, M.D.
--------------------------------------------------
William J. Barry, M.D., with respect to all shares
beneficially owned by him

-7-

<PAGE>

SERIES C PURCHASERS:

CAPITAL VENTURES INTERNATIONAL
By: Heights Capital Management, Inc.,
Authorized Agent

By: /s/ Michael Spolan
----------------------------------------------
Title: Secretary and General Counsel
-------------------------------------------

LANCASTER INVESTMENT PARTNERS, L.P.

By: /s/ Robert A. Berlacher
----------------------------------------------
Title: Managing General Partner
-------------------------------------------

KEYSTONE VENTURE IV, L.P.

By: Keystone Venture IV Management Co., L.P.,
the general partner of
Keystone Venture IV, L.P.

By: Keystone Venture IV Management Co., Group
the general partner of
Keystone Venture IV Management Co., L.P.

By: /s/ Kerry J. Dale
----------------------------------------------
Kerry J. Dale
Title: Vice President

EDISON VENTURE FUND III, L.P.

By: Edison Partners, III, L.P.,
its general partner

By: /s/ Gustav H. Koven, III
----------------------------------------------
Title: General Partner

NEPA VENTURE FUND II, L.P.

By: NEPA II Management Partners, L.P.,
its general partner

By: NEPA II Management Corporation,
its general partner

By: /s/ Glen R. Bressner
----------------------------------------------
Title: Secretary and Treasurer
-------------------------------------------

-8-

<PAGE>

DOMINION FUND IV, A DELAWARE
LIMITED PARTNERSHIP

By: Dominion Management IV,
its general partner

By: /s/ Randolph D. Werner
----------------------------------------------
Randolph D. Werner,
Title: Member

/s/ Thomas J. Keane
--------------------------------------------------
Thomas J. Keane

-9-

STOCK REPURCHASE AGREEMENT

AGREEMENT made as of the 1st day of February, 1995, by and
between Cancer Recovery, Inc., a Pennsylvania corporation (the "Company") and
Thomas J. Keane (the "Stockholder").

WHEREAS, the Stockholder is the holder of an aggregate of 931,306 shares of
common stock, $.01 par value, of the Company (the "Common Stock");

WHEREAS, certain investors (the "Purchasers") are acquiring an aggregate of
approximately $2,200,000 worth of shares of Series A Convertible Preferred Stock
of the Company pursuant to the terms of a Series A Convertible Preferred Stock
Purchase Agreement dated the date hereof between the Company and the Purchasers
(the "Purchase Agreement"); and

WHEREAS, it is a condition to the obligations of the Purchasers under the
Purchase Agreement that this Agreement be executed by the parties hereto, and
the parties are willing to execute this Agreement and to be bound by the
provisions hereof;

NOW, THEREFORE, in consideration of the foregoing, the agreements set forth
below, and the parties' desire to further the interests of the Company and its
present and future stockholders, the parties hereby agree with each other as
follows:

1. Certain Defined Terms. As used in this Agreement, the following
terms shall have the following respective meanings:

(a) "Stock" shall mean and include all shares of Common Stock, and
all other securities of the Company which may be issued in exchange for or in
respect of shares of Common Stock (whether by way of stock split, stock
dividend, combination, reclassification, reorganization, or any other means).

(b) "Shares" shall mean and include all shares of Stock now owned or
hereafter acquired by the Stockholder.

2. Prohibited Transfers. The Stockholder shall not sell, assign,
transfer, pledge, hypothecate, mortgage, encumber or otherwise dispose of all or
any of his Shares unless such shares are not Contingent Shares (as defined
below). Any transfer by the Stockholder of Shares that are not Contingent Shares
shall be made subject to and in accordance with the provisions of a certain
Shareholders Agreement of even date herewith among the Company, the Purchasers,
the Stockholder and the other parties thereto (the "Shareholders Agreement").

<PAGE>

3. Option of Company Upon Termination of Employment.

(a) If the Stockholder ceases to be a full-time employee of the
Company or any of its subsidiaries by reason of (x) the voluntary termination of
such employment by the Stockholder, (y) the death or Permanent Disability (as
defined below) of the Stockholder or (z) the termination of such employment by
the Company for Cause (as defined below), the Company may within 120 days from
the date upon which the Stockholder shall so cease to be employed, exercise its
option under this Section 3 to purchase from the Stockholder all of his Shares
that are Contingent Shares (as defined below) as of the date upon which the
Stockholder shall so cease to be employed (the "Termination Date") in the event
of a termination pursuant to clause (x) or (z) of this sentence or as of the
date that is one year after the Termination Date in the event of a termination
pursuant to clause (y) of this sentence.

(b) "Contingent Shares" as of any date shall mean 745,204 Shares as
of the date of this Agreement, which number of Shares will be reduced by 186,301
Shares as of each anniversary of the date of this Agreement, provided that no
additional Shares shall become Vested Shares after the date upon which the
Stockholder shall cease to be employed in any capacity by the Company or any of
its subsidiaries. The numbers of Shares referred to in the preceding sentence
shall be appropriately adjusted in the event of any stock split, stock dividend
or the like affecting the number of issued and outstanding shares of Common
Stock.

(c) The purchase price of any Shares for which the Company exercises
its option under this Section 3 (the "Option Price") shall be $.01 per Share
(such price being subject to equitable adjustment for any stock split, stock
dividend, combination of shares or the like and based upon Common Stock or
Common Stock equivalents).

(d) If the Company desires to exercise its option to purchase, it
shall do so by communicating in writing its election to purchase to the
Stockholder, which communication shall state the number of Shares the Company is
electing to purchase and the Option Price and shall be given to the Stockholder
in accordance with Section 8 below within the 120-day period provided for in
Section 3(a). The sale of the Shares to be sold to the Company pursuant to this
Section 3 shall be made at the offices of the Company on the 20th day following
the date of the Company's written election to purchase (or if such 20th day is
not a business day, then on the next succeeding business day). Such sale shall
be effected by the Stockholder's delivery to the Company of a certificate or
certificates evidencing the Shares to be purchased by it, duly endorsed for
transfer to the Company, against payment to the Stockholder by the Company of
the Option Price for each Share to be purchased by the Company.

(e) In addition to the other restrictions provided in this
Agreement, in no event shall the Stockholder transfer any Shares pursuant to any
other Section of this Agreement if, upon completing such transfer, the
Stockholder would be unable to meet his obligations (whether accrued or
contingent) under this Section 3.

-2-

<PAGE>

(f) "Permanent Disability" shall mean the inability of the
Stockholder to substantially perform his tasks as an employee for 90 days or
more out of any 365-day period due to illness, physical incapacity or mental
incompetence. "Cause" shall mean the determination by the Company's Board of
Directors that the Stockholder has engaged in criminal misconduct in the course
of his duties as an employee or that the Stockholder has materially breached his
fiduciary duties or care or loyalty to the Company.

4. Term. This Agreement shall terminate (a) immediately prior to the
consummation of the first firm commitment underwritten public offering pursuant
to an effective registration statement on Form S-1 (or its then equivalent)
under the Securities Act of 1933, as amended, pursuant to which the aggregate
price paid by the public for the purchase of Stock is at least $15,000,000 that
either (i) results in the automatic conversion of the Company's Series A
Convertible Preferred Stock into shares of Common Stock or (ii) if consummated
prior to February 1, 1997, involves the sale of shares of Common Stock at a
price per share of at least $3.00; or (b) upon the closing of a sale of all of
the Company's outstanding capital stock, or a sale of all or substantially all
of the Company's assets, or a merger or consolidation involving the Company as a
result of which the shares of the Company's outstanding capital stock
immediately prior to the merger or consolidation represent or are exchanged for
or converted into shares representing less than a majority of the outstanding
shares of capital stock of the entity surviving or resulting from such merger or
consolidation, in any case resulting in a payment to the holders of the Common
Stock of at least $4.50 per share, after giving effect to all stock splits,
stock dividends or the like affecting the number of issued and outstanding
shares of Common Stock.

5. Failure to Deliver Shares. If the Stockholder becomes obligated to
sell any Shares to the Company under this Agreement and fails to deliver such
Shares in accordance with the terms of this Agreement, the Company may, at its
option, in addition to all other remedies it may have, send to the Stockholder
the purchase price for such Shares as is herein specified. Thereupon, the
Company upon written notice to the Stockholder, (a) shall cancel on its books
the certificate or certificates representing the Shares to be sold and (b) shall
issue, in lieu thereof, in the name of the Company a new certificate or
certificates representing such Shares, and thereupon all of the Stockholder's
rights in and to such Shares shall terminate.

6. Specific Enforcement. The Stockholder expressly agrees that the
Purchasers and the Company will be irreparably damaged if this Agreement is not
specifically enforced. Upon a breach or threatened breach of the terms,
covenants and/or conditions of this Agreement by the Stockholder, the Purchasers
and the Company shall, in addition to all other remedies, each be entitled to a
temporary or permanent injunction, without showing any actual damage, and/or a
decree for specific performance, in accordance with the provisions hereof.

-3-

<PAGE>

7. Legend. Each certificate evidencing any of the Shares shall bear a
legend substantially as follows:

"The shares represented by this certificate are subject to
restrictions on transfer and may not be sold, exchanged,
transferred, pledged, hypothecated or otherwise disposed of except
in accordance with and subject to all the terms and conditions of a
certain Stock Repurchase Agreement dated as of February 1, 1995, a
copy of which the Company will furnish to the holder of this
certificate upon request and without charge."

8. Notices. Notices given hereunder shall be deemed to have been
duly given on the date of personal delivery, on the date of postmark if mailed
by certified or registered mail, return receipt requested, or on the date sent
by telecopier or telex to the party being notified at his or its address
specified on the applicable signature page hereto or such other address as the
addressee may subsequently notify the other parties of in writing.

9. Entire Agreement and Amendments. This Agreement, together with
the Purchase Agreement, the Shareholders Agreement and the other agreements
attached as exhibits to the Purchase Agreement, constitutes the entire agreement
of the parties with respect to the subject matter hereof and neither this
Agreement nor any provision hereof may be waived, modified, amended or
terminated except by a written agreement signed by the parties hereto. To the
extent any term or other provision of any other indenture, agreement or
instrument by which any party hereto is bound conflicts with this Agreement,
this Agreement shall have precedence over such conflicting term or provision.

10. Governing Law: Successors and Assign. This Agreement shall be
governed by the laws of the Commonwealth of Pennsylvania and shall be binding
upon the heirs, personal representatives, executors, administrators, successors
and assigns of the parties.

11. Waivers. No waiver of any breach or default hereunder shall. be
considered valid unless in writing, and no such waiver shall be deemed a waiver
of any subsequent breach or default of the same or similar nature.

12. Severability. If any provision of this Agreement shall. be held
to be illegal, invalid or unenforceable, such illegality, invalidity or
unenforceability shall attach only to such provision and shall not in any manner
affect or render illegal, invalid or unenforceable any other provision of this
Agreement, and this Agreement shall be carried out as if any such illegal,
invalid or unenforceable provision were not contained herein.

13. Captions. Captions are for convenience only and are not deemed
to be part of this Agreement.

-4-

<PAGE>

14. Continuation of Employment. Nothing in this Agreement shall
create an obligation on the Company or the Purchasers to continue the
Stockholder's employment with the Company.

15. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

IN WITNESS WHEREOF, this Agreement has been executed as of the date and
year first above written.

COMPANY:

CANCER RECOVERY, INC.

By: /s/ Thomas J. Keane
-------------------------------

Title: President
----------------------------

Address:

Suite 240
220 Commerce Drive
Fort Washington, PA 19034

STOCKHOLDER:

/s/ Thomas J. Keane
-----------------------------------

Thomas J. Keane

Address:

Suite 240
220 Commerce Drive
Fort Washington, PA 19034

-5-

<PAGE>

REGISTRATION RIGHTS AGREEMENT

REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of January 16,
1998 by and among U.S. PHYSICIANS, INC., a corporation organized under the laws
of the Pennsylvania, with headquarters located at 220 Commerce Drive, Fort
Washington, Pennsylvania 19034 (the "Company"), and the undersigned investors
(together with their respective affiliates, the "Initial Investors").

WHEREAS:

A. In connection with the Series C Convertible Preferred Stock Purchase
Agreement of even date herewith by and between the Company and the Initial
Investors (the "Securities Purchase Agreement"), the Company has agreed, upon
the terms and subject to the conditions contained therein, to issue and sell to
the Initial Investors (i) shares of the Company's Series C Preferred Stock (the
"Preferred Shares"), which are convertible into shares (the "Conversion Shares")
the Company's Common Stock, par value $.01 per share (the "Common Shares") and
(ii) Warrants, including the Contingent Warrants (as defined in the Securities
Purchase Agreement) issued by the Company (collectively, the "Warrants") to
purchase Common Shares (the "Warrant Shares"); and

B. To induce the Initial Investors to execute and deliver the Securities
Purchase Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, or any similar successor statute (collectively, the
"Securities Act"), and any other applicable federal and state securities laws;

NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Initial
Investors hereby agree as follows:

1. DEFINITIONS.

a. As used in this Agreement, the following terms shall have the
following meanings:

(i) "Investors" means the Initial Investors and any transferees or
assignees who agree to become bound by the provisions of this Agreement in
accordance with Section 9 hereof.

(ii) "register," "registered," and "registration" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act and pursuant to Rule 415 under
the Securities Act or any successor rule providing for offering securities on a
continuous basis ("Rule 415"), and the declaration or ordering of

<PAGE>

effectiveness of such Registration Statement by the United States Securities and
Exchange Commission (the "SEC").

(iii) "Registrable Securities" means (i) the Conversion Shares, (ii)
the Warrants Shares issued or issuable with respect to the Warrants, and (iii)
any shares of capital stock issued or issuable, from time to time (with any
adjustments), as a distribution on or in exchange for or otherwise with respect
to any of the foregoing.

(iv) "Registration Statement" means a registration statement of the
Company under the Securities Act.

b. Capitalized terms used herein and not otherwise defined herein shall
have the respective meanings set forth in the Securities Purchase Agreement.

2. REGISTRATION.

a. Mandatory Registration. If at any time on or after the ninetieth
(90th) day following the effective date of a Registration Statement (the "IPO
Registration Statement") filed with the SEC in connection with the Company's
first underwritten public offering (the "IPO Date"), the Company shall receive a
written request (such date of the Company's receipt, the "Request Date") from
the Investors holding at least forty percent (40%) of the Registrable Securities
that the Company effect a registration of with respect to the Registrable
Securities, the Company shall file promptly after the Request Date a
Registration Statement on Form S-1 (or on such form of Registration Statement as
is then available to effect a registration of all of the Registrable Securities)
covering the resale of the Registrable Securities, which Registration Statement,
to the extent allowable under the Securities Act and the Rules promulgated
thereunder (including Rule 416), shall state that such Registration Statement
also covers such indeterminate number of additional Common Shares as may become
issuable upon conversion of the Preferred Shares or exercise of the Warrants (i)
to prevent dilution resulting from stock splits, stock dividends or similar
transactions or (ii) by reason of changes in the Conversion Price of the
Preferred Shares or Exercise Price of the Warrants in accordance with the terms
thereof. The Registration Statement (and each amendment or supplement thereto,
and each request for acceleration of effectiveness thereof) shall be provided to
the Initial Investors and their respective counsel for review and comment prior
to its filing or other submission. The Registration Statement covering the
Registrable Securities shall contain appropriate plans of distribution
reasonably satisfactory to the Investors.

b. Underwritten Offering. If any offering pursuant to a Registration
Statement pursuant to Section 2(a) hereof involves an underwritten offering, the
Investors who hold a majority in interest of the Registrable Securities subject
to such underwritten offering, with the consent of the Investor who holds the
greatest percentage of Registrable Securities subject to such underwritten
offering, shall have the right to select one legal counsel to represent the
Investors and the Company shall have the right to select an investment banker or
bankers and

-2-

<PAGE>

manager or managers to administer the offering, which investment banker or
bankers or manager or managers shall be reasonably satisfactory to the
Investors.

c. Payments by the Company. The Company shall use its best efforts to
cause the Registration Statement required to be filed pursuant to Section 2(a)
hereof to become effective as soon as practicable, but in no event later than
the ninetieth (90th) day after the Request Date (the "Registration Deadline")
and to keep such Registration Statement current and effective until the earlier
of (i) the date upon which all Registrable Securities (in the reasonable opinion
of counsel to the Initial Investors) may be sold to the public without
registration or restriction pursuant to Rule 144(k) under the Securities Act or
(ii) the date upon which the aggregate amount of Common Shares constituting the
Registrable Securities, and issuable upon exercise or conversion of the
Preferred Shares and Warrants becomes less than one percent (1%) of the
outstanding Common Shares of the Company (the "Registration Period"). If the
Registration Statement(s) covering the Registrable Securities required to be
filed by the Company pursuant to Section 2(a) hereof is not declared effective
by the SEC on or before the Registration Deadline or if, after the Registration
Statement has been declared effective by the SEC, sales of all the Registrable
Securities (including any Registrable Securities required to be registered
pursuant to Section 2(b) hereof) cannot be made pursuant to the Registration
Statement during the Registration Period (by reason of a stop order or the
Company's failure to update the Registration Statement or any other reason),
then the Company will make payments to the Investors in such amounts and at such
times as shall be determined pursuant to this Section 2(c) as partial relief for
the damages to the Investors by reason of any such delay in or reduction of
their ability to sell the Registrable Securities (which remedy shall not be
exclusive of any other remedies available at law or in equity). The Company
shall pay to each Investor an amount equal to the product of (i) the aggregate
purchase price of the Preferred Shares held by such Investor (including, without
limitation, Preferred Shares that have been converted into Conversion Shares
then held by such Investor) at the Registration Deadline (for purposes of the
filing of the Registration Statement pursuant to Section 2(a)) or if the
Registration Statement has been declared effective, the date upon which such
sales of Registrable Securities cannot be made during the Registration Period
(the "Aggregate Principal Amount"), multiplied by (ii) one and one-half percent
(1.5%), multiplied by (iii) the sum of (x) the number of months (prorated for
partial months) after the Registration Deadline and prior to the date the
Registration Statement filed pursuant to Section 2(a) is declared effective by
the SEC, plus (y) the number of additional months (prorated for partial months)
that sales of any Registrable Securities cannot be made pursuant to the
Registration Statement after the Registration Statement has been declared
effective during the Registration Period, provided, however, that there shall be
excluded from each such period (A) any delays which are solely attributable to
changes (other than corrections of Company mistakes with respect to information
previously provided by the Investors) required by the Investors in the
Registration Statement with respect to information relating to the Investors,
including, without limitation, changes to the plan of distribution or to the
failure of the Investors to comply with their obligations under this Agreement;
and (B) any Permitted Delay Period pursuant to Section 2(e); and provided,
further, however, that there shall be excluded from each such period any delays,
up to an aggregate of thirty (30) days, which are solely attributable to the
time period between the Company's filing of a post-effective amendment,

-3-

<PAGE>

supplement or similar materials with the SEC to enable the resumption the sales
of Registrable Securities and its receipt of a response from the SEC declaring
such amendment effective or with comments regarding such filing or notice that
no comments will be made. Such amounts shall be paid in cash. Payments of cash
pursuant hereto shall be made within five (5) days after the end of each period
that gives rise to such obligation, provided that, if any such period extends
for more than thirty (30) days, interim payments shall be made for each such
thirty (30) day period.

d. Piggy-Back Registrations. If at any time prior to the expiration of
the Registration Period the Company shall file with the SEC a Registration
Statement relating to an offering for its own account or the account of others
under the Securities Act of any of its equity securities (other than on Form S-4
or Form S-8 or their then equivalents relating to equity securities to be issued
solely in connection with any acquisition of any entity or business or equity
securities issuable in connection with stock option or other employee benefit
plans) and the Company shall have determined that it is not prohibited from
including such Registrable Securities on such Registration Statement and that
the Registrable Securities are not covered by an effective Registration
Statement, the Company shall send to each Investor who is entitled to
registration rights under this Section 2(d) written notice of such determination
and, if within fifteen (15) days after the date of such notice, such Investor
shall so request in writing, the Company shall include in such Registration
Statement all or any part of the Registrable Securities such Investor requests
to be registered, except that if, in connection with any underwritten public
offering the managing underwriter(s) thereof shall impose a limitation on the
number of Common Shares which may be included in the Registration Statement
because, in such underwriter(s)' judgment, marketing or other factors dictate
such limitation is necessary to facilitate public distribution, then the Company
shall be obligated to include in such Registration Statement only such limited
portion of the Registrable Securities with respect to which such Investor has
requested inclusion hereunder as the underwriter shall permit. Any exclusion of
Registrable Securities shall be made pro rata among the Investors seeking to
include Registrable Securities, in proportion to the number of Registrable
Securities sought to be included by such Investors; provided, however, that the
Company shall not exclude any Registrable Securities unless the Company has
first excluded all outstanding securities (other than those offered for sale by
the Company), the holders of which are not entitled to inclusion of such
securities in such Registration Statement or are not entitled to pro rata
inclusion with the Registrable Securities; and provided, further, however, that,
after giving effect to the immediately preceding proviso, any exclusion of
Registrable Securities shall be made pro rata with holders of other securities
having the right to include such securities in the Registration Statement other
than holders of securities entitled to inclusion of their securities in such
Registration Statement by reason of demand registration rights (except to the
extent any existing agreements otherwise provide). No right to registration of
Registrable Securities under this Section 2(d) shall be construed to limit any
registration required under Section 2(a) hereof. If an offering in connection
with which an Investor is entitled to registration under this Section 2(d) is an
underwritten offering, then each Investor whose Registrable Securities are
included in such Registration Statement shall, unless otherwise agreed by the
Company, offer and sell such Registrable Securities in an underwritten

-4-

<PAGE>

offering using the same underwriter or underwriters and, subject to the
provisions of this Agreement, on the same terms and conditions as other Common
Shares included in such underwritten offering. Without limiting the generality
of the foregoing, this Section 2(d) shall not apply to the IPO Registration
Statement.

e. Permitted Delay Periods; Suspension of Sales. If at any time prior to
the expiration of the Registration Period, counsel to the Company has determined
in good faith that compliance by the Company with its disclosure obligations in
connection with the Registration Statement would require the disclosure of
material information which the Company has a bona fide business purpose for
preserving as confidential or which requires disclosure of financial information
which is not reasonably available to the Company, the Company shall not be
required to maintain the effectiveness thereof or amend or supplement the
Registration Statement for a period (a "Permitted Delay Period") expiring upon
the earlier to occur of (A) the date on which such material information is
disclosed to the public or ceases to be material or (B) thirty (30) days after
the date upon which the Permitted Delay commences. The Company will give prompt
written notice, in the manner prescribed by Section 11 hereof, to the Initial
Investors of each Permitted Delay Period. Such notice shall state to the extent,
if any, as is practicable, an estimate of the duration of such Permitted Delay
Period. Each Investor, by its acceptance of any Common Shares, agrees that, upon
receipt of such notice it will forthwith discontinue disposition of the Common
Shares pursuant to the Registration Statement, and will not deliver any
prospectus forming a part thereof in connection with any sale of Common Shares,
until the expiration of such Permitted Delay Period. There shall not be more
than one (1) Permitted Delay Period in any ninety (90) day period nor shall the
aggregate period during which there are Permitted Delays exceed sixty (60) days
in any three hundred sixty-five (365) day period.

3. OBLIGATIONS OF THE COMPANY.

In connection with the registration of the Registrable Securities, the
Company shall have the following obligations:

a. The Company shall prepare promptly and use its best efforts to file
with the SEC the Registration Statement required by Section 2(a) as soon as
practicable after the Request Date and cause such Registration Statement
relating to Registrable Securities to become effective by, but in no event later
than, the Registration Deadline, and keep the Registration Statement effective
pursuant to Rule 415 at all times (subject to Section 2(e)) until the
termination of the Registration Period, which Registration Statement (including
any amendments or supplements thereto and prospectuses contained therein and all
documents incorporated by reference therein) may be amended on, or replaced
with, any such form of Registration Statement as is then available to the
Company to effect or maintain effective registration of the Registrable
Securities (including Form S-3) and shall not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein, or
necessary to make the statements therein not misleading.

-5-

<PAGE>

b. The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to the Registration
Statement and the prospectus used in connection with the Registration Statement
as may be necessary to keep the Registration Statement effective at all times
during the Registration Period (subject to Section 2(e)), and, during such
period, comply with the provisions of the Securities Act with respect to the
disposition of all Registrable Securities of the Company covered by the
Registration Statement.

c. The Company shall furnish to each Investor whose Registrable
Securities are included in the Registration Statement and its legal counsel (i)
promptly after the same is prepared and publicly distributed, filed with the
SEC, or received by the Company, one copy of the Registration Statement and any
amendment thereto, each preliminary prospectus and prospectus and each amendment
or supplement thereto, and, in the case of the Registration Statement referred
to in Section 2(a), each letter written by or on behalf of the Company to the
SEC or the staff of the SEC (including, without limitation, any request to
accelerate the effectiveness of any Registration Statement or amendment
thereto), and each item of correspondence from the SEC or the staff of the SEC,
in each case relating to such Registration Statement (other than any portion, if
any, thereof which contains information for which the Company has sought
confidential treatment), (ii) on the date of effectiveness of the Registration
Statement or any amendment thereto, a notice stating that the Registration
Statement or amendment has been declared effective, and (iii) such number of
copies of a prospectus, including a preliminary prospectus, and all amendments
and supplements thereto and such other documents as such Investor may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such Investor.

d. The Company shall use its best efforts to (i) register and qualify
the Registrable Securities covered by the Registration Statement under such
other securities or "blue sky" laws of such other jurisdictions as each Investor
who holds Registrable Securities being offered reasonably requests, (ii) prepare
and file in those jurisdictions such amendments (including post-effective
amendments) and supplements to such registrations and qualifications as may be
necessary to maintain the effectiveness thereof during the Registration Period,
(iii) take such other actions as may be necessary to maintain such registrations
and qualifications in effect at all times during the Registration Period, and
(iv) take all other actions reasonably necessary or advisable to qualify the
Registrable Securities for sale in such jurisdictions; provided, however, that
the Company shall not be required in connection therewith or as a condition
thereto to (a) qualify to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 3(d), (b) subject itself
to general taxation in any such jurisdiction, (c) file a general consent to
service of process in any such jurisdiction, (d) provide any undertakings that
cause the Company undue expense or burden, or (e) make any change in its charter
or by-laws, which in each case the Board of Directors of the Company determines
to be contrary to the best interests of the Company and its stockholders.

-6-

<PAGE>

e. In the event the Investors who hold a majority in interest of the
Registrable Securities make an underwritten offering pursuant to Section 2(b),
the Company shall enter into and perform its obligations under an underwriting
agreement, in usual and customary form, including, without limitation, customary
indemnification and contribution obligations, with the underwriters of such
offering.

f. As promptly as practicable after becoming aware of such event, the
Company shall notify each Investor of the happening of any event, of which the
Company has knowledge, as a result of which the prospectus included in the
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omission to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, and, subject to
Section 2(e), use its best efforts promptly to prepare a supplement or amendment
to the Registration Statement to correct such untrue statement or omission, and
deliver such number of copies of such supplement or amendment to each Investor
as such Investor may reasonably request.

g. The Company shall use its best efforts to prevent the issuance of any
stop order or other suspension of effectiveness of a Registration Statement,
and, if such an order is issued, to obtain the withdrawal of such order at the
earliest practicable moment (including in each case by amending or supplementing
such Registration Statement) and to notify each Investor who holds Registrable
Securities being sold (or, in the event of an underwritten offering, the
managing underwriters) of the issuance of such order and the resolution thereof
(and if such Registration Statement is supplemented or amended, deliver such
number of copies of such supplement or amendment to each Investor as such
Investor may reasonably request).

h. The Company shall permit a single firm of counsel designated by the
Investors who hold a majority in interest of the Registrable Securities covered
by such Registration Statement, with the consent of the Investor who holds the
greatest percentage of Registrable Securities covered by such Registration
Statement, to review the Registration Statement and all amendments and
supplements thereto a reasonable period of time prior to their filing with the
SEC, and not file any document in a form to which such counsel reasonably
objects.

i. The Company shall make generally available to its security holders as
soon as practical, but not later than ninety (90) days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 under the Securities Act) covering a twelve-month period
beginning not later than the first day of the Company's fiscal quarter next
following the effective date of the Registration Statement.

j. At the request of any Investor, the Company shall furnish, on the
date of effectiveness of the Registration Statement (i) an opinion, dated as of
such date, from counsel representing the Company addressed to the Investors and
in form, scope and substance as is customarily given in an underwritten public
offering and (ii) in the case of an underwriting, a letter, dated such date,
from the Company's independent certified public accountants in form and

-7-

<PAGE>

substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and the Investors.

k. The Company shall make available for inspection by (i) any Investor,
(ii) any underwriter participating in any disposition pursuant to the
Registration Statement, (iii) one firm of attorneys and one firm of accountants
or other agents retained by the Investors, and (iv) one firm of attorneys
retained by all such underwriters (collectively, the "Inspectors") all pertinent
financial and other records, and pertinent corporate documents and properties of
the Company (collectively, the "Records"), as shall be reasonably deemed
necessary by each Inspector to enable each Inspector to exercise its due
diligence responsibility, and cause the Company's officers, directors and
employees to supply all information which any Inspector may reasonably request
for purposes of such due diligence; provided, however, that each Inspector shall
hold in confidence and shall not make any disclosure (except to an Investor) of
any Record or other information which the Company determines in good faith to be
confidential, and of which determination the Inspectors are so notified, unless
(a) the disclosure of such Records is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (b) the release of such
Records is ordered pursuant to a subpoena or other order from a court or
government body of competent jurisdiction, or (c) the information in such
Records has been made generally available to the public other than by disclosure
in violation of this or any other agreement. The Company shall not be required
to disclose any confidential information in such Records to any Inspector until
and unless such Inspector shall have entered into confidentiality agreements (in
form and substance satisfactory to the Company) with the Company with respect
thereto, substantially in the form of this Section 3(k). Each Investor agrees
that it shall, upon learning that disclosure of such Records is sought in or by
a court or governmental body of competent jurisdiction or through other means,
give prompt notice to the Company and allow the Company, at its expense, to
undertake appropriate action to prevent disclosure of, or to obtain a protective
order for, the Records deemed confidential. Nothing herein shall be deemed to
limit the Investors' ability to sell Registrable Securities in a manner which is
otherwise consistent with applicable laws and regulations.

l. The Company shall hold in confidence and not make any disclosure of
information concerning an Investor provided to the Company unless (i) disclosure
of such information is necessary to comply with federal or state securities
laws, (ii) the disclosure of such information is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (iii) the release of
such information is ordered pursuant to a subpoena or other order from a court
or governmental body of competent jurisdiction, (iv) such information has been
made generally available to the public other than by disclosure in violation of
this or any other agreement, or (v) such Investor consents to the form and
content of any such disclosure. The Company agrees that it shall, upon learning
that disclosure of such information concerning an Investor is sought in or by a
court or governmental body of competent jurisdiction or through other means,
give prompt notice to such Investor prior to making such disclosure, and allow
the Investor, at its expense, to undertake appropriate action to prevent
disclosure of, or to obtain a protective order for, such information.

-8-

<PAGE>

m. The Company shall use its best efforts to promptly either (i) cause
all the Registrable Securities covered by the Registration Statement to be
listed on the NYSE or another national securities exchange and on each
additional national securities exchange market on which securities of the same
class or series issued by the Company are then listed, if any, if the listing of
such Registrable Securities is then permitted under the rules of such exchange,
or (ii) secure the designation and quotation, of all the Registrable Securities
covered by the Registration Statement on the Nasdaq National Market and, without
limiting the generality of the foregoing, to arrange for or maintain at least
two market makers to register with the National Association of Securities
Dealers ("NASD") as such with respect to such Registrable Securities.

n. The Company shall provide a transfer agent and registrar, which may
be a single entity, for the Registrable Securities not later than the effective
date of the Registration Statement.

o. The Company shall cooperate with the Investors who hold Registrable
Securities being offered and the managing underwriter or underwriters, if any,
to facilitate the timely preparation and delivery of certificates (not bearing
any restrictive legends) representing Registrable Securities to be offered
pursuant to the Registration Statement and enable such certificates to be in
such denominations or amounts, as the case may be, as the managing underwriter
or underwriters, if any, or the Investors may reasonably request and registered
in such names as the managing underwriter or underwriters, if any, or the
Investors may request, and, within three (3) business days after a Registration
Statement which includes Registrable Securities is ordered effective by the SEC,
the Company shall deliver, and shall cause legal counsel selected by the Company
to deliver, to the transfer agent for the Registrable Securities (with copies to
the Investors whose Registrable Securities are included in such Registration
Statement) an opinion of such counsel in the form attached hereto as Exhibit 1.

p. At the request of any Investor, the Company shall prepare and file
with the SEC such amendments (including post-effective amendments) and
supplements to a Registration Statement and the prospectus used in connection
with the Registration Statement as may be necessary in order to change the plan
of distribution set forth in such Registration Statement.

q. The Company shall comply with all applicable laws related to a
Registration Statement and offering and sale of securities and all applicable
rules and regulations of governmental authorities in connection therewith
(including without limitation the Securities Act and the Securities Exchange Act
of 1934, as amended, and the rules and regulations promulgated by the SEC).

r. The Company shall take all such other actions as any Investor or the
underwriters, if any, reasonably request in order to expedite or facilitate the
disposition of such Registrable Securities.

-9-

<PAGE>

s. From and after the date of this Agreement, the Company shall not, and
shall not agree to, allow the holders of any securities of the Company to
include any of their securities in any Registration Statement under Section 2(a)
hereof or any amendment or supplement thereto under Section 3(b) hereof without
the consent of the holders of a majority in interest of the Registrable
Securities.

t. Any legend required to be place on the Registrable Securities set
forth in the Securities Purchase Agreement shall be removed and the Company
shall issue a certificate without such legend to any Investor holding any
Registrable Securities upon which such legend is stamped, if, unless otherwise
required by state securities laws, (a) the Registration Statement is effective,
or (b) such holder provides the Company with an opinion of counsel, in form,
substance and scope customary for opinions of counsel in comparable
transactions, to the effect that a public sale or transfer of such Registrable
Securities may be made without registration under the Securities Act or (c) such
Investor provides the Company with assurances reasonably satisfactory to the
Company that such Registrable Securities can be sold under Rule 144(k). Each
Investor agrees to sell all Registrable Securities, including those represented
by certificate(s) from which the legend has been removed, pursuant to an
effective Registration Statement or under an exemption from the registration
requirements of the Securities Act. In the event such legend is removed from any
Registrable Securities and thereafter the effectiveness of the Registration
Statement covering such Registrable Securities is suspended or the Company
determines that a supplement or amendment thereto is required by applicable
securities laws, then upon reasonable advance notice to the Investors, the
Company may require that such legend be placed on any such Registrable
Securities and the Investors shall cooperate in the prompt replacement of such
legend.

4. OBLIGATIONS OF THE INVESTORS.

In connection with the registration of the Registrable Securities, the
Investors shall have the following obligations:

a. It shall be a condition precedent to the obligations of the Company
to complete the registration pursuant to this Agreement with respect to the
Registrable Securities of a particular Investor that such Investor shall furnish
to the Company such information regarding itself, the Registrable Securities
held by it and the intended method of disposition of the Registrable Securities
held by it as shall be required to effect the registration of such Registrable
Securities and shall execute such documents in connection with such registration
as the Company may reasonably request. At least five (5) business days prior to
the first anticipated filing date of the Registration Statement, the Company
shall notify each Investor of the information the Company requires from each
such Investor.

b. Each Investor, by such Investor's acceptance of the Registrable
Securities, agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement hereunder, unless such Investor has

-10-

<PAGE>

notified the Company in writing of such Investor's election to exclude all of
such Investor's Registrable Securities from the Registration Statement.

c. In the event Investors holding a majority in interest of the
Registrable Securities being offered determine to engage the services of an
underwriter, each Investor agrees to enter into and perform such Investor's
obligations under an underwriting agreement, in usual and customary form,
including, without limitation, customary indemnification and contribution
obligations, with the underwriter(s) of such offering and the Company and take
such other actions as are reasonably required in order to expedite or facilitate
the disposition of the Registrable Securities, unless such Investor has notified
the Company in writing of such Investor's election not to participate in such
underwritten distribution.

d. Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(f) or
3(g), such Investor will immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement covering such Registrable
Securities until such Investor's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by
the Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice.

e. No Investor may participate in any underwritten distribution
hereunder unless such Investor (i) agrees to sell such Investor's Registrable
Securities on the basis provided in any underwriting arrangements in usual and
customary form entered into by the Company, (ii) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements, and (iii) agrees to pay its pro rata share of all underwriting
discounts and commissions and any expenses in excess of those payable by the
Company pursuant to Section 5 below.

f. Each Investor agrees to offer and sell the Registrable Securities in
compliance with applicable laws and, with respect to Registrable Securities
covered by an effective Registration Statement, (i) in accordance with the plan
of distribution set forth in such Registration Statement and (ii) using no
offering materials other than the prospectus filed with such Registration
Statement.

5. EXPENSES OF REGISTRATION.

All reasonable expenses incurred by the Company or the Investors in
connection with registrations, filings or qualifications pursuant to Sections 2
and 3 above, including, without limitation, all registration, listing and
qualifications fees, printers and accounting fees, the fees and disbursements of
counsel for the Company, the fees and disbursements of one counsel

-11-

<PAGE>

selected by the Investors, but not underwriting discounts and commissions, shall
be borne by the Company. In addition, the Company shall pay all of the
Investors' costs and expenses (including legal fees) incurred in connection with
the enforcement of the rights of the Investors hereunder.

6. INDEMNIFICATION.

In the event any Registrable Securities are included in a Registration
Statement under this Agreement:

a. To the extent permitted by law, the Company will indemnify, hold
harmless and defend (i) each Investor who holds such Registrable Securities, and
(ii) the directors, officers, partners, members, employees and agents of such
Investor and each person who controls any Investor within the meaning of Section
15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), if any, (each, an "Indemnified Person"),
against any joint or several losses, claims, damages, liabilities or expenses
(collectively, together with actions, proceedings or inquiries by any regulatory
or self-regulatory organization, whether commenced or threatened, in respect
thereof, "Claims") to which any of them may become subject insofar as such
Claims arise out of or are based upon: (i) any untrue statement or alleged
untrue statement of a material fact in a Registration Statement or the omission
or alleged omission to state therein a material fact required to be stated or
necessary to make the statements therein not misleading, (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus if used prior to the effective date of such Registration
Statement, or contained in the final prospectus (as amended or supplemented, if
the Company files any amendment thereof or supplement thereto with the SEC) or
the omission or alleged omission to state therein any material fact necessary to
make the statements made therein, in light of the circumstances under which the
statements therein were made, not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any other law,
including, without limitation, any state securities law, or any rule or
regulation thereunder relating to the offer or sale of the Registrable
Securities (the matters in the foregoing clauses (i) through (iii) being,
collectively, "Violations"). Subject to the restrictions set forth in Section
6(c) with respect to the number of legal counsel, the Company shall reimburse
the Investors and each other Indemnified Person, promptly as such expenses are
incurred and are due and payable, for any reasonable legal fees or other
reasonable expenses incurred by them in connection with investigating or
defending any such Claim. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(a): (i) shall
not apply to a Claim arising out of or based upon a Violation which occurs in
reliance upon and in conformity with information furnished in writing to the
Company by such Indemnified Person expressly for use in the Registration
Statement or any such amendment thereof or supplement thereto; (ii) shall not
apply to amounts paid in settlement of any Claim if such settlement is effected
without the prior written consent of the Company, which consent shall not be
unreasonably withheld; and (iii) with respect to any preliminary prospectus,
shall not inure to the benefit of any Indemnified Person if the untrue statement
or omission of material fact contained in the preliminary prospectus was
corrected on a

-12-

<PAGE>

timely basis in the prospectus, as then amended or supplemented, if such
corrected prospectus was timely made available by the Company pursuant to
Section 3(c) hereof, and the Indemnified Person was promptly advised in writing
not to use the incorrect prospectus prior to the use giving rise to a Violation
and such Indemnified Person, notwithstanding such advice, used it. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of the Indemnified Person and shall survive the transfer of
the Registrable Securities by the Investors pursuant to Section 9.

b. In connection with any Registration Statement in which an Investor is
participating, each such Investor agrees severally and not jointly to indemnify,
hold harmless and defend, to the same extent and in the same manner set forth in
Section 6(a), the Company, each of its directors, each of its officers who signs
the Registration Statement, its employees, agents and each person, if any, who
controls the Company within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act, and any other stockholder selling securities
pursuant to the Registration Statement or any of its directors or officers or
any person who controls such stockholder or underwriter within the meaning of
the Securities Act or the Exchange Act (collectively and together with an
Indemnified Person, an "Indemnified Party"), against any Claim to which any of
them may become subject, under the Securities Act, the Exchange Act or
otherwise, insofar as such Claim arises out of or is based upon any Violation,
in each case to the extent (and only to the extent) that such Violation occurs
in reliance upon and in conformity with written information furnished to the
Company by such Investor expressly for use in connection with such Registration
Statement; and subject to Section 6(c) such Investor will reimburse any legal or
other expenses (promptly as such expenses are incurred and are due and payable)
reasonably incurred by them in connection with investigating or defending any
such Claim; provided, however, that the indemnity agreement contained in this
Section 6(b) shall not apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of such Investor, which
consent shall not be unreasonably withheld; provided, further, however, that the
Investor shall be liable under this Agreement (including this Section 6(b) and
Section 7) for only that amount as does not exceed the net proceeds actually
received by such Investor as a result of the sale of Registrable Securities
pursuant to such Registration Statement. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of such
Indemnified Party and shall survive the transfer of the Registrable Securities
by the Investors pursuant to Section 9. Notwithstanding anything to the contrary
contained herein, the indemnification agreement contained in this Section 6(b)
with respect to any preliminary prospectus shall not inure to the benefit of any
Indemnified Party if the untrue statement or omission of material fact contained
in the preliminary prospectus was corrected on a timely basis in the prospectus,
as then amended or supplemented, and the Indemnified Party failed to utilize
such corrected prospectus.

c. Promptly after receipt by an Indemnified Person or Indemnified Party
under this Section 6 of notice of the commencement of any action (including any
governmental action), such Indemnified Person or Indemnified Party shall, if a
Claim in respect thereof is to made against any indemnifying party under this
Section 6, deliver to the indemnifying party a

-13-

<PAGE>

written notice of the commencement thereof, and the indemnifying party shall
have the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying party and the Indemnified Person or the Indemnified Party, as the
case may be; provided, however, that such indemnifying party shall not be
entitled to assume such defense and an Indemnified Person or Indemnified Party
shall have the right to retain its own counsel with the fees and expenses to be
paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the representation by such counsel of the
Indemnified Person or Indemnified Party and the indemnifying party would be
inappropriate due to actual or potential conflicts of interest between such
Indemnified Person or Indemnified Party and any other party represented by such
counsel in such proceeding or the actual or potential defendants in, or targets
of, any such action include both the Indemnified Person or the Indemnified Party
and the indemnifying party and any such Indemnified Person or Indemnified Party
reasonably determines that there may be legal defenses available to such
Indemnified Person or Indemnified Party which are in conflict with those
available to such indemnifying party. The indemnifying party shall pay for only
one separate legal counsel for the Indemnified Persons or the Indemnified
Parties, as applicable, and such legal counsel shall be selected by Investors
holding a majority-in-interest of the Registrable Securities included in the
Registration Statement to which the Claim relates, if the Investors are entitled
to indemnification hereunder, or by the Company, if the Company is entitled to
indemnification hereunder, as applicable. The failure to deliver written notice
to the indemnifying party within a reasonable time of the commencement of any
such action shall not relieve such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this Section 6, except to the
extent that the indemnifying party is actually prejudiced in its ability to
defend such action. The indemnification required by this Section 6 shall be made
by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.

7. CONTRIBUTION.

To the extent any indemnification by an indemnifying party is prohibited or
limited by law, the indemnifying party agrees to make the maximum contribution
with respect to any amounts for which it would otherwise be liable under Section
6 to the fullest extent permitted by law; provided, however, that (i) no
contribution shall be made under circumstances where the maker would not have
been liable for indemnification under the fault standards set forth in Section
6, (ii) no person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation, and (iii)
contribution (together with any indemnification or other obligations under this
Agreement) by any seller of Registrable Securities shall be limited in amount to
the net amount of proceeds received by such seller from the sale of such
Registrable Securities.

8. REPORTS UNDER THE EXCHANGE ACT.

-14-

<PAGE>

With a view to making available to the Investors the benefits of Rule 144
promulgated under the Securities Act or any other similar rule or regulation of
the SEC that may at any time permit the Investors to sell securities of the
Company to the public without registration ("Rule 144"), the Company agrees to:

a. file with the SEC in a timely manner and make and keep available all
reports and other documents required of the Company under the Securities Act and
the Exchange Act so long as the Company remains subject to such requirements (it
being understood that nothing herein shall limit the Company's obligations under
Section 4(c) of the Securities Purchase Agreement) and the filing and
availability of such reports and other documents is required for the applicable
provisions of Rule 144; and

b. furnish to each Investor so long as such Investor owns Preferred
Shares, Warrants or Registrable Securities, promptly upon request, (i) a written
statement by the Company that it has complied with the reporting requirements of
Rule 144, the Securities Act and the Exchange Act, (ii) a copy of the most
recent annual or other report of the Company and such other reports and
documents so filed by the Company, and (iii) such other information as may be
reasonably requested to permit the Investors to sell such securities pursuant to
Rule 144 without registration.

9. ASSIGNMENT OF REGISTRATION RIGHTS.

The rights of the Investors hereunder, including the right to have the
Company register Registrable Securities pursuant to this Agreement, shall be
automatically assignable by each Investor to any transferee of all or a portion
of the Preferred Shares, the Warrants or the Registrable Securities if: (i) the
aggregate amount of the Preferred Shares, Warrants or Registrable Securities
transferred to such transferee equals or exceeds twenty-five percent (25%) of
the securities purchased by the Initial Investors pursuant to the Securities
Purchase Agreement, (ii) the Investor agrees in writing with the transferee or
assignee to assign such rights, and a copy of such agreement is furnished to the
Company after such assignment, (iii) the Company is furnished with written
notice of (a) the name and address of such transferee or assignee and (b) the
securities with respect to which such registration rights are being transferred
or assigned, (iv) following such transfer or assignment, the further disposition
of such securities by the transferee or assignee is restricted under the
Securities Act and applicable state securities laws, (v) the transferee or
assignee agrees in writing with the Company to be bound by all of the provisions
contained herein, and (vi) such transfer shall have been made in accordance with
the applicable requirements of the Securities Purchase Agreement.

10. AMENDMENT OF REGISTRATION RIGHTS.

Provisions of this Agreement may be amended and the observance thereof may
be waived (either generally or in a particular instance and either retroactively
or prospectively), only with written consent of the Company and Investors who
hold a majority in interest of the Registrable

-15-

<PAGE>

Securities or, in the case of a waiver, with the written consent of the party
charged with the enforcement of any such provision. Any amendment or waiver
effected in accordance with this Section 10 shall be binding upon each Investor
and the Company.

11. MISCELLANEOUS.

a. A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two (2) or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.

b. Any notices required or permitted to be given under the terms of
this Agreement shall be sent by certified or registered mail (return receipt
requested) or delivered personally or by courier or by confirmed telecopy, and
shall be effective five (5) days after being placed in the mail, if mailed, or
upon receipt or refusal of receipt, if delivered personally or by courier or
confirmed telecopy, in each case addressed to a party. The addresses for such
communications shall be:

If to the Company:

U.S. Physicians, Inc.
220 Commerce Drive,
Fort Washington, PA 19034
Attention: President

Tel: (215) 542-2170
Fax: (215) 542-0380

With a copy to:

Jason M. Shargel, Esq.
Wolf, Block, Schorr and Solis-Cohen LLP
Twelfth Floor Packard Building
S.E. Corner 15th and Chestnut Streets
Philadelphia, PA 19102-2678

Tel: (215) 977-2000
Fax: (215) 977-2334

If to an Investor, at such address as such Investor shall have provided
in writing to the Company or such other address as such Investor furnishes by
notice given in accordance with this Section 11(b).

-16-

<PAGE>

c. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.

d. This Agreement shall be governed by and construed in accordance with
the laws of the State of Pennsylvania applicable to contracts made and to be
performed in the State of Pennsylvania.

e. This Agreement, the Securities Purchase Agreement, the Preferred
Shares (including all schedules and exhibits thereto) and the Warrants
constitute the entire agreement among the parties hereto with respect to the
subject matter hereof and thereof. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein and
therein. This Agreement, the Securities Purchase Agreement, the Preferred Shares
and the Warrants supersede all prior agreements and understandings among the
parties hereto and thereto with respect to the subject matter hereof and
thereof.

f. Subject to the requirements of Section 9 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties hereto.

g. The headings in this Agreement are for convenience of reference only
and shall not limit or otherwise affect the meaning hereof.

h. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which shall constitute one and the
same agreement. This Agreement, once executed by a party, may be delivered to
the other party hereto by facsimile transmission of a copy of this Agreement
bearing the signature of the party so delivering this Agreement.

i. Each party shall do and perform, or cause to be done and performed,
all such further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as the other party may
reasonably request in order to carry out the intent and accomplish the purposes
of this Agreement and the consummation of the transactions contemplated hereby.

j. All consents, approvals and other determinations to be made by the
Investors or the Initial Investors pursuant to this Agreement shall be made by
the Investors holding a majority in interest of the Registrable Securities
(determined as if all Preferred Shares and Warrants then outstanding had been
converted into or exercised for Registrable Securities) then held by all
Investors.

k. For purposes of this Agreement, the term "business day" means any
day other than a Saturday or Sunday or a day on which banking institutions in
the State of New York are authorized or obligated by law, regulation or
executive order to close.

-17-

<PAGE>

[Remainder of Page Intentionally Left Blank]

-18-

<PAGE>

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above written.

U.S. PHYSICIANS, Inc.

By: /s/ Martin G. Chilek
----------------------------------------------
Title: Senior Vice President
-------------------------------------------

CAPITAL VENTURES INTERNATIONAL
By: Heights Capital Management, Inc.,
Authorized Agent

By: /s/ Michael Spolan
----------------------------------------------
Title: Secretary and General Counsel
-------------------------------------------

LANCASTER INVESTMENT PARTNERS, L.P.

By: /s/ Robert A. Berlacher
----------------------------------------------
Title: Managing General Partner
-------------------------------------------

KEYSTONE VENTURE IV, L.P.

By: Keystone Venture IV Management Co., L.P.,
the general partner of
Keystone Venture IV, L.P.

By: Keystone Venture IV Management Co., Group
the general partner of
Keystone Venture IV Management Co., L.P.

By: /s/ Kerry J. Dale
----------------------------------------------
Kerry J. Dale
Title: Vice President

EDISON VENTURE FUND III, L.P.

By: Edison Partners, III, L.P.,
its general partner

By: /s/ Gustav H. Koven, III
----------------------------------------------
Title: General Partner

-19-

<PAGE>

NEPA VENTURE FUND II, L.P.

By: NEPA II Management Partners, L.P.,
its general partner

By: NEPA II Management Corporation,
its general partner

By: /s/ Glen R. Bressner
----------------------------------------------
Title: Secretary and Treasurer
-------------------------------------------

DOMINION FUND IV, A DELAWARE
LIMITED PARTNERSHIP
By: Dominion Management IV,
its general partner

By: /s/ Randolph D. Werner
----------------------------------------------
Randolph D. Werner,
Title: Member

/s/ Thomas J. Keane
--------------------------------------------------
Thomas J. Keane

-20-

<PAGE>

EXHIBIT 1
to
Registration
Rights
Agreement

[Date]

[Name and address of transfer agent]

RE: U.S. PHYSICIANS, INC.

Ladies and Gentlemen:

We are counsel to U.S. PHYSICIANS, INC., a Pennsylvania corporation (the
"Company"), and we understand that [Name of Investor] (the "Holder") has
purchased from the Company (i) shares of the Company's Series C Preferred Stock
(the "Preferred Shares") which are convertible into shares (the "Conversion
Shares") of the Company's Common Stock, par value $.01 per share (the "Common
Shares") and (ii) warrants (the "Warrants") to purchase Common Shares. The
Preferred Shares were issued by the Company pursuant to a Series C Convertible
Preferred Stock Purchase Agreement, dated as of January __, 1998, by and among
the Company and the signatories thereto (the "Agreement"). Pursuant to a
Registration Rights Agreement, dated as of January __, 1998, by and among the
Company and the signatories thereto (the "Registration Rights Agreement"), the
Company agreed, among other things, to register the Registrable Securities (as
that term is defined in the Registration Rights Agreement) under the Securities
Act of 1933, as amended (the "Securities Act"), upon the terms provided in the
Registration Rights Agreement. In connection with the Company's obligations
under the Registration Rights Agreement, on _____ __, 1998, the Company filed a
Registration Statement on Form S-1 (File No. 333- 39987) (the "Registration
Statement") with the Securities and Exchange Commission (the "SEC") relating to
the Registrable Securities, which names the Holder as a selling stockholder
thereunder.

[Other customary introductory and scope of examination language to be
inserted]

Based on the foregoing, we are of the opinion that the Registrable
Securities have been registered under the Securities Act.

[Other customary language to be included.]

Very truly yours,

<PAGE>

THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR
TRANSFERRED UNLESS SUCH SALE OR TRANSFER IS IN ACCORDANCE WITH THE REGISTRATION
REQUIREMENTS OF SUCH ACT AND APPLICABLE LAWS OR SOME OTHER EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF SUCH ACT AND APPLICABLE LAWS IS AVAILABLE WITH
RESPECT THERETO.

COMMON STOCK PURCHASE WARRANT

Warrant No. WC- Number of Shares - ______
U.S. PHYSICIANS, INC.

Void after December 31, 2000

1. Issuance. This Warrant (the "Warrant" and, together with other
Warrants issued to other purchasers of the Company's Series C Convertible
Preferred stock or pursuant to Section 17 below, the "Warrants") is issued to by
U.S. PHYSICIANS, Inc., a Pennsylvania corporation (hereinafter with its
successors called the "Company").

2. Purchase Price; Number of Shares. Subject to the terms and
conditions hereinafter set forth, the registered holder of this Warrant (the
"Holder"), is entitled upon surrender of this Warrant with the subscription form
annexed hereto duly executed, at the office of the Company, 220 Commerce Drive,
Suite 400, Fort Washington, PA 19034 or such other office as the Company shall
notify the Holder of in writing, to purchase from the Company at a price per
share (the "Purchase Price") of $4.15, up to __________ fully paid and
nonassessable shares of Common Stock, $.01 par value, of the Company (the
"Common Stock"). Notwithstanding anything else herein, if the Conversion Price
of the Company's Series C Convertible Preferred Stock becomes the Revised
Conversion Price (as defined in Exhibit A to the Company's Third Amended and
Restated Articles of Incorporation (the "Charter")), the Purchase Price shall
thereupon become the Revised Conversion Price; and if, as a result of the
failure to close by May 29, 1998 of a Qualifying IPO as defined in the Charter,
the Conversion Price of the Company's Series C Convertible Preferred Stock is
adjusted, the Purchase Price shall thereupon become the lower of $3.15 or the
Revised Conversion Price. Until such time as this Warrant is exercised in full
or expires, the Purchase Price and the securities issuable upon exercise of this
Warrant are subject to adjustment as hereinafter provided.

-1-

<PAGE>

3. Exercisability. This Warrant will become exercisable upon issuance.

4. Payment of Purchase Price. The Purchase Price may be paid (i) in
cash or by check, (ii) by the surrender by the Holder to the Company of any
promissory notes or other obligations issued by the Company, with all such notes
and obligations so surrendered being credited against the Purchase Price in an
amount equal to the principal amount thereof plus accrued interest to the date
of surrender, (iii) through delivery by the Holder to the Company of other
securities issued by the Company, with such securities being credited against
the Purchase Price in an amount equal to the fair market value thereof, as
determined in good faith by the Board of Directors of the Company (the "Board"),
or (iv) by any combination of the foregoing. The Board shall promptly respond in
writing to an inquiry by the Holder as to the fair market value of any
securities the Holder may wish to deliver to the Company pursuant to clause
(iii) above.

5. Net Issue Election. The Holder may elect to receive, without the
payment by the Holder of any additional consideration, shares equal to the value
of this Warrant or any portion hereof by the surrender of this Warrant or such
portion to the Company, with the net issue election notice annexed hereto duly
executed, at the office of the Company. Thereupon, the Company shall issue to
the Holder such number of fully paid and nonassessable shares of Common Stock as
is computed using the following formula:

X = Y (A-B)
A

where X = the number of shares to be issued to the Holder pursuant to this
Section 5.

Y = the number of shares covered by this Warrant in respect of which the
net issue election is made pursuant to this Section 5.

A = the fair market value of one share of Common Stock as at the time the
net issue election is made pursuant to this Section 5. For this
purpose, the fair market value shall be determined as follows: (i)
the closing per share sale price of the Common Stock, as of the
trading day immediately prior to the applicable date, on whichever of
the Nasdaq SmallCap Market or the Nasdaq National Market
(collectively, "Nasdaq"), on which the Common Stock is included for
quotation at such date; (ii) if the Common Stock is not then included
for quotation on Nasdaq, the closing per share sale price of the
Common Stock on the trading day immediately prior to the applicable
date on the principal securities exchange on which the Common Stock
is then listed or admitted to trading; or (iii) if the Common Stock
is not then included for quotation on Nasdaq or traded on a
securities exchange, the fair market value as determined in good
faith by the Board.

-2-

<PAGE>

B = the Purchase Price in effect under this Warrant at the time the net
issue election is made pursuant to this Section 5.

The Board shall promptly respond in writing to an inquiry by the Holder as to
the fair market value of one share of Common Stock.

6. Partial Exercise. This Warrant may be exercised in part, and the
Holder shall be entitled to receive a new warrant, which shall be dated as of
the date of this Warrant, covering the number of shares in respect of which this
Warrant shall not have been exercised.

7. Issuance Date. The person or persons in whose name or names any
certificate representing shares of Common Stock is issued hereunder shall be
deemed to have become the holder of record of the shares represented thereby as
at the close of business on the date this Warrant is exercised with respect to
such shares, whether or not the transfer books of the Company shall be closed.

8. Expiration Date; Automatic Exercise. This Warrant shall expire at
the close of business on December 31, 2000 and shall be void thereafter.
Notwithstanding the foregoing, this Warrant shall automatically be deemed to be
exercised in full pursuant to the provisions of Section 5 hereof, without any
further action on behalf of the Holder, immediately prior to the time this
Warrant would otherwise expire pursuant to the preceding sentence.

9. Reserved Shares; Valid Issuance. The Company covenants that it will
at all times from and after the date hereof reserve and keep available such
number of its authorized shares of Common Stock, free from all preemptive or
similar rights therein, as will be sufficient to permit the exercise of this
Warrant in full. The Company further covenants that such shares as may be issued
pursuant to the exercise of this Warrant will, upon issuance, be duly and
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges with respect to the issuance thereof.

10. Dividends. If after January , 1998 (the "Original Issue Date") the
Company shall subdivide the Common Stock, by split-up or otherwise, or combine
the Common Stock, or issue additional shares of Common Stock in payment of a
stock dividend on the Common Stock, the number of shares issuable on the
exercise of this Warrant shall forthwith be proportionately increased in the
case of a subdivision or stock dividend, or proportionately decreased in the
case of a combination, and the Purchase Price shall forthwith be proportionately
decreased in the case of a subdivision or stock dividend, or proportionately
increased in the case of a combination.

11. Mergers and Reclassifications. If after the Original Issue Date
there shall be any reclassification, capital reorganization or change of the
Common Stock (other than as a result of a subdivision, combination or stock
dividend provided for in Section 10 hereof), or any consolidation of the Company
with, or merger of the Company into, another corporation or other business
organization (other than a consolidation or merger in which the Company is the
continuing corporation and which does not result in any reclassification or
change of the

-3-

<PAGE>

outstanding Common Stock), or any sale or conveyance to another corporation or
other business organization of all or substantially all of the assets of the
Company, then, as a condition of such reclassification, reorganization, change,
consolidation, merger, sale or conveyance, lawful provisions shall be made, and
duly executed documents evidencing the same from the Company or its successor
shall be delivered to the Holder, so that the Holder shall thereafter have the
right to purchase, at a total price not to exceed that payable upon the exercise
of this Warrant in full, the kind and amount of shares of stock and other
securities and property receivable upon such reclassification, reorganization,
change, consolidation, merger, sale or conveyance by a holder of the number of
shares of Common Stock which might have been purchased by the Holder immediately
prior to such reclassification, reorganization, change, consolidation, merger,
sale or conveyance, and in any such case appropriate provisions shall be made
with respect to the rights and interest of the Holder to the end that the
provisions hereof (including without limitation, provisions for the adjustment
of the Purchase Price and the number of shares issuable hereunder) shall
thereafter be applicable in relation to any shares of stock or other securities
and property thereafter deliverable upon exercise hereof.

12. Adjustments for Issuances Below Purchase Price. In case the Company
shall at any time or from time to time after the Original Issue Date issue or
sell any shares of Common Stock (other than shares issued in transactions to
which Sections 10 or 11 of this Warrant apply) for a consideration per share
less than the Purchase Price in effect for this Warrant immediately prior to the
time of such issue or sale, or pay any dividend or make any other distribution
upon the Common Stock payable in cash, property or securities of the Company
other than Common Stock or in securities of a corporation other than the
Company, then forthwith upon such issue or sale, or upon the payment of such
dividend or the making of such other distribution, as the case may be, the
Purchase Price shall (until another such issue or sale, or dividend or other
distribution) be reduced to a price (calculated to the nearest cent) determined
by dividing (i) an amount equal to the sum of (X) the number of shares of Common
Stock outstanding immediately prior to such issue or sale or the payment of such
dividend or the making of such other distribution, multiplied by the Purchase
Price in effect immediately prior to such event plus (Y) the consideration, if
any, received by the Company upon such issue or sale minus (Z) the amount of
such dividend or other distribution in respect of Common Stock, by (ii) the
total number of shares of Common Stock outstanding immediately after such issue
or sale or dividend or other distribution. Further, the number of shares
purchasable hereunder shall be increased to a number determined by dividing (i)
the number of shares purchasable hereunder immediately prior to such issue or
sale or dividend or other distribution, multiplied by the Purchase Price
hereunder immediately prior to such event, by (ii) the Purchase Price in effect
immediately after the foregoing adjustment. Anything herein to the contrary
notwithstanding, the Company shall not be required to make any adjustment of the
Purchase Price in the case of the issuance from and after December 31, 1996: (i)
of up to an aggregate of 3,282,577 shares (appropriately adjusted to reflect the
occurrence of any event described in Section 10) of Common Stock (directly or
through the grant of options or other convertible securities) to directors,
officers, employees, consultants or affiliated physicians of the Company in
connection with their service to the Company; (ii) of Common Stock made solely
in consideration for the acquisition (whether by merger or otherwise) by the
Company or by an affiliate of the Company of all or substantially

-4-

<PAGE>

all of the stock or assets of any other entity engaged primarily in the practice
of medicine or other operating business; (iii) in connection with the employment
by the Company or an affiliate of the Company of a physician, provided that the
issuances contemplated by this clause; (iii) shall be limited to 600,000 shares
(appropriately adjusted to reflect the occurrence of any event described in
Section 10) of Common Stock in the aggregate; (iv) of Warrants on or prior to
January 15, 1997 (or the issuance of Common Stock upon the exercise of
Warrants); or (v) the issuance of warrants to purchase 43,573 shares of Common
Stock in December 1997 and warrants to purchase 77,110 shares of Common Stock,
both in connection with obtaining debt financing or (vi) the issuance of
warrants to the purchasers of Series C Convertible Preferred Stock pursuant to
the terms of the stock purchase agreement relating thereto.

For the purpose of this Section 12, the following provisions shall
also be applicable:

A. In case the Company shall in any manner offer any rights to
subscribe for or to purchase shares of Common Stock, or grant any options for
the purchase of shares of Common Stock, at a price less than the Purchase Price
in effect immediately prior to the time of the offering of such rights or the
granting of such options, as the case may be, all shares of Common Stock which
the holders of such rights or options shall be entitled to subscribe for or
purchase pursuant to such rights or options shall be deemed to be issued or sold
as of the date of the offering of such rights or the granting of such options,
as the case may be, and the minimum aggregate consideration named in such rights
or options for the Common Stock covered thereby, plus the consideration received
by the Company for such rights or options, shall be deemed to be the
consideration actually received by the Company (as of the date of the offering
of such rights or the granting of such options, as the case may be) for the
issue or sale of such shares.

B. In case the Company shall in any manner issue or sell any
shares of any class or obligations directly or indirectly convertible into or
exchangeable for shares of Common Stock and the price per share for which Common
Stock is deliverable upon such conversion or exchange (determined by dividing
(i) the total minimum amount received or receivable by the Company in
consideration of the issue or sale of such convertible or exchangeable shares or
obligations, plus the total minimum amount of premiums, if any, payable to the
Company upon conversion or exchange, by (ii) the total number of shares of
Common Stock necessary to effect the conversion or exchange of all such
convertible or exchangeable shares or obligations) shall be less than the
Purchase Price in effect immediately prior to the time of such issue or sale,
then such issue or sale shall be deemed to be an issue or sale (as of the date
of issue or sale of such convertible or exchangeable shares or obligations) of
the total maximum number of shares of Common Stock necessary to effect the
conversion or exchange of all such convertible or exchangeable shares or
obligations, and the total minimum amount received or receivable by the Company
in consideration of the issue or sale of such convertible or exchangeable shares
or obligations, plus the total minimum amount of premiums, if any, payable to
the Company upon exchange or conversion, shall be deemed to be the consideration
actually received (as of the date of the issue or sale of such convertible or
exchangeable shares or obligations) for the issue or sale of such Common Stock.

-5-

<PAGE>

C. In the case of any dividend or other distribution on the
Common Stock of the Company payable in property, securities of the Company other
than Common Stock or securities of a corporation other than the Company, such
dividend or other distribution shall be deemed to have been paid or made at a
value equal to the fair value of the property or securities so distributed. Any
dividend or distribution referred to in this Subsection C shall be deemed to
have been paid or made on the day following the date fixed for the determination
of stockholders entitled to receive such dividend or distribution.

D. In determining the amount of consideration received by the
Company for Common Stock, securities convertible thereinto or exchangeable
therefor, or rights or options for the purchase thereof, no deduction shall be
made for expenses or underwriting discounts or commissions paid by the Company.
The Board shall determine in good faith the fair value of the amount of
consideration other than money received by the Company upon the issue by it of
any of its securities. The Board shall also determine in good faith the fair
value of any dividend or other distribution made upon Common Stock payable in
property, securities of the Company other than Common Stock or securities of a
corporation other than the Company. The Board shall, in the case that any Common
Stock, securities convertible thereinto or exchangeable therefor, or rights or
options for the purchase thereof are issued with other stock, securities or
assets of the Company, determine in good faith what part of the consideration
received therefor is applicable to the issue of the Common Stock, securities
convertible thereinto or exchangeable therefor, or rights or options for the
purchase thereof.

E. If there shall be any change in (i) the minimum aggregate
consideration named in the rights or options referred to in Subsection A above,
(ii) the consideration received by the Company for such rights or options, (iii)
the price per share for which Common Stock is deliverable upon the conversion or
exchange of the convertible or exchangeable shares or obligations referred to in
Subsection B above, (iv) the number of shares which may be subscribed for or
purchased pursuant to the rights or options referred to in Subsection A above,
or (v) the rate at which the convertible or exchangeable shares or obligations
referred to in Subsection B above are convertible into or exchangeable for
Common Stock, then the Purchase Price in effect at the time of such event shall
be readjusted to the Purchase Price which would have been in effect at such time
had such rights, options, or convertible or exchangeable shares or obligations
still outstanding provided for such changed consideration, price per share,
number of shares, or rate of conversion or exchange, as the case may be, at the
time initially offered, granted, issued or sold, but only if as a result of such
adjustment the Purchase Price then in effect hereunder is thereby reduced.

13. Fractional Shares. In no event shall any fractional share of Common
Stock be issued upon any exercise of this Warrant. If, upon exercise of this
Warrant as an entirety, the Holder would, except as provided in this Section 13,
be entitled to receive a fractional share of Common Stock, then the Company
shall issue the next higher number of full shares of Common Stock, issuing a
full share with respect to such fractional share.

-6-

<PAGE>

14. Certificate of Adjustment. Whenever the Purchase Price is
adjusted, as herein provided, the Company shall promptly deliver to the Holder a
certificate of a firm of independent public accountants setting forth the
Purchase Price after such adjustment and setting forth a brief statement of the
facts requiring such adjustment.

15. Notices of Record Date, Etc. In the event of:

A. any taking by the Company of a record of the holders of any
class of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right,

B. any reclassification of the capital stock of the Company,
capital reorganization of the Company, consolidation or merger involving the
Company, or sale or conveyance of all or substantially all of its assets, or

C. any voluntary or involuntary dissolution, liquidation or
winding-up of the Company,

then and in each such event the Company will mail or cause to be mailed to the
Holder a notice specifying (i) the date on which any such record is to be taken
for the purpose of such dividend, distribution or right, and stating the amount
and character of such dividend, distribution or right, or (ii) the date on which
any such reclassification, reorganization, consolidation, merger, sale or
conveyance, dissolution, liquidation or winding-up is to take place, and the
time, if any is to be fixed, as of which the holders of record in respect of
such event are to be determined. Such notice shall be mailed at least 20 days
prior to the date specified in such notice on which any such action is to be
taken.

16. Amendment. The terms of this Warrant may be amended, modified or
waived only with the written consent of the Company and the holders of Warrants
representing at least two-thirds of the number of shares of Common Stock then
issuable upon the exercise of the Warrants. No such amendment, modification or
waiver shall be effective as to this Warrant unless the terms of such amendment,
modification or waiver shall apply with the same force and effect to all of the
other Warrants then outstanding.

17. Warrant Register; Transfers, Etc.

A. The Company will maintain a register containing the names and
addresses of the registered holders of the Warrants. The Holder may change its
address as shown on the warrant register by written notice to the Company
requesting such change. Any notice or written communication required or
permitted to be given to the Holder may be given by certified mail or delivered
to the Holder at its address as shown on the warrant register.

-7-

<PAGE>

B. Subject to compliance with applicable federal and state
securities laws, this Warrant may be transferred by the Holder with respect to
any or all of the shares purchasable hereunder. Upon surrender of this Warrant
to the Company, together with the assignment hereof properly endorsed, for
transfer of this Warrant as an entirety by the Holder, the Company shall issue a
new warrant of the same denomination to the assignee. Upon surrender of this
Warrant to the Company, together with the assignment hereof properly endorsed,
by the Holder for transfer with respect to a portion of the shares of Common
Stock purchasable hereunder, the Company shall issue a new warrant to the
assignee, in such denomination as shall be requested by the Holder hereof, and
shall issue to such Holder a new warrant covering the number of shares in
respect of which this Warrant shall not have been transferred.

C. In case this Warrant shall be mutilated, lost, stolen or
destroyed, the Company shall issue a new warrant of like tenor and denomination
and deliver the same (i) in exchange and substitution for and upon surrender and
cancellation of any mutilated Warrant, or (ii) in lieu of any Warrant lost,
stolen or destroyed, upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft or destruction of such Warrant (including a
reasonably detailed affidavit with respect to the circumstances of any loss,
theft or destruction) and of indemnity reasonably satisfactory to the Company,
provided, however, that so long as the original holder of this Warrant is the
registered holder of this Warrant, no indemnity shall be required other than its
written agreement to indemnify the Company against any loss arising from the
issuance of such new warrant.

18. No Impairment. The Company will not, by amendment of its Articles
of Incorporation or through any reclassification, capital reorganization,
consolidation, merger, sale or conveyance of assets, dissolution, liquidation,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms of this Warrant, but
will at all times in good faith assist in the carrying out of all such terms and
in the taking of all such action as may be necessary or appropriate in order to
protect the rights of the Holder.

19. Governing Law. The provisions and terms of this Warrant shall be
governed by and construed in accordance with the internal laws of the
Commonwealth of Pennsylvania.

20. Successors and Assigns. This Warrant shall be binding upon the
Company's successors and assigns and shall inure to the benefit of the Holder's
successors, legal representatives and permitted assigns.

21. Business Days. If the last or appointed day for the taking of any
action required or the expiration of any right granted herein shall be a
Saturday or Sunday or a legal

-8-

<PAGE>

holiday in the Commonwealth of Pennsylvania, then such action may be taken or
right may be exercised on the next succeeding day which is not a Saturday or
Sunday or such a legal holiday.

Dated: January , 1998 U.S. PHYSICIANS, Inc.

By:___________________________

-9-

<PAGE>

SUBSCRIPTION

To:____________________ Date:_________________________

The undersigned hereby subscribes for __________ shares of Common Stock
covered by this Warrant. The certificate(s) for such shares shall be issued in
the name of the undersigned or as otherwise indicated below:

------------------------------
Signature

------------------------------
Name for Registration

------------------------------
Mailing Address

NET ISSUE ELECTION NOTICE

To:____________________ Date:_________________________

The undersigned hereby elects under Section 5 to surrender the right to
purchase _______ shares of Common Stock pursuant to this Warrant. The
certificate(s) for the shares issuable upon such net issue election shall be
issued in the name of the undersigned or as otherwise indicated below.

------------------------------
Signature

------------------------------
Name for Registration

------------------------------
Mailing Address

-10-

<PAGE>

ASSIGNMENT

For value received ____________________________ hereby sells, assigns
and transfers unto ____________________________________________________________

- ------------------------------------------------------------------------------
Please print or typewrite name and address of Assignee

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

the within Warrant, and does hereby irrevocably constitute and appoint

_______________________ its attorney to transfer the within Warrant on
the books of the within named Company with full power of substitution on the
premises.

Dated:_______________________

In the Presence of:

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

-11-

<PAGE>

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT is entered into as of April
10, 1997 by and between U.S. PHYSICIANS, Inc. (the "Company"), a Pennsylvania
corporation, and Lewis S. Sharps, M.D., F.A.C.S. (the "Employee").

W I T N E S S E T H T H A T :

The Company desires to employ the Employee and the Employee desires to
enter into the employ of the Company in such capacity and on the terms and
conditions contained in this Agreement.

NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties, intending to be legally bound, agree as follows:

1. Employment and Term. The Company agrees to employ the Employee, and the
Employee agrees to be employed by the Company, upon the terms and conditions
contained in this Agreement, for an initial period commencing on March 21, 1996
and continuing until March 21, 1999. This Agreement shall automatically renew
for additional renewal terms of one year, unless terminated by either party, by
written notice, at least sixty (60) days prior to the end of the initial term or
any renewal term. The Employee hereby represents and warrants that he has the
legal capacity to execute and perform this Agreement, that it is a valid
agreement binding upon him according to its terms, and that its execution and
performance by him does not violate the terms of any existing agreement or
understanding to which the Employee is a party. In addition, the Employee
represents and warrants that he knows of no reason why he is not physically
capable of performing his obligations under this Agreement in accordance with
its terms.

2. Position and Duties. During the Term, the Company agrees to employ the
Employee to serve as Chief of Medical Operations. The Employee will have such
duties as are commensurate with such position, as may be assigned to him from
time to time by the Company's Board of Directors (the "Board") or the Company's
Chief Executive Officer. During the Term, the Employee shall devote substantial
business time (a minimum of 80 hours per month), attention, skill and efforts to
the business and affairs of the Company and its subsidiaries and affiliates. The
term "affiliates" includes any entity for which the Company is providing
management services pursuant to a management agreement.

3. Compensation. For all services rendered by the Employee in any capacity
required hereunder during the Term, including, without limitation, services as
an employee, officer, director, or member of any committee of the Company, or
any subsidiary, affiliate or division thereof, the Employee shall be compensated
as follows:

a. Base Salary. The Company shall pay the Employee a fixed salary of
$75,000 per annum; provided, however, that the obligation to pay salary
hereunder

<PAGE>

shall not commence until March 24, 1997 ("Base Salary"). Base Salary for the
portion of the term hereof beginning on March 24, 1997 shall be payable in
accordance with the customary payroll practices of the Company, but in no event
less frequently than monthly.

b. Stock Options. The Company shall grant the Employee options
("Options") to purchase shares of the Company's common stock, par value $.01 per
share (the "Stock"), according to the following terms and conditions:

The Company shall grant as of April 10, 1997, Options to purchase
281,899 shares of Stock, at a per share price of $3.15 per share, which
represents the fair market value of the Stock on such date. These Options shall
be "incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code") to the extent possible under
applicable law. To the extent that such Options do not qualify as "incentive
stock options," they shall be considered to be "non-qualified stock options."
Such options shall be granted under and subject in all respects to the terms of
the U.S. PHYSICIANS, Inc. 1995 Stock Option Plan (the "Stock Option Plan") and
the Grant Letter executed by the Company and delivered to Employee (the "Grant
Letter"), and shall provide that the shares subject to such option shall become
exercisable in accordance with the vesting schedule attached hereto as Exhibit
"A," and except in the event of any earlier termination of employment as
described in the Option Plan or the Grant Letter, or as otherwise provided in
this Agreement, the option shall remain exercisable until ten years from the
date of grant.

c. No Additional Benefits. To the maximum extent permitted by law, the
Employee shall receive no additional employee benefits from the Company.

4. Business Expenses. The Company shall pay or reimburse the Employee for
all reasonably necessary and usual business expenses incurred by the Employee in
connection with the performance of his duties and obligations under this
Agreement, subject to the Employee's presentation of appropriate vouchers in
accordance with such procedures as the Company may from time to time establish,
consistent with the need to preserve any deductions to which the Company may be
entitled for federal income tax purposes.

5. Termination of Employment.

a. Termination for Cause. Company may discharge Employee at any time for
"Cause," which shall include any of the following: any act of fraud,
misappropriation, self dealing or personal dishonesty; willful misconduct;
indictment of a crime that constitutes a felony; material violation of any
Company policy; or material breach of any provision of this Agreement. In
addition, subject to applicable law, Company may discharge Employee for "Cause"
in the event Employee becomes physically or mentally disabled and is therefore
unable to substantially carry out his duties for a period of 120 days or more in
any twelve month period. In the event of a discharge for "Cause," Employee shall
be ineligible for any additional salary, severance or other

-2-

<PAGE>

payments or benefits under this Agreement, and any Option granted to Employee
that is not then exercisable shall terminate.

b. Other Termination. If Employee's employment is terminated for any
reason other than death or for Cause (as defined in subparagraph 5(a)), then the
Company agrees to continue Employee's then current base salary for a period of
three months or until such time as Employee commences other full-time
employment, whichever occurs earlier.

6. Other Duties of Employee During and After Term.

a. Confidential Information. The Employee recognizes and acknowledges
that all information pertaining to the affairs, business, clients, or customers
of the Company or any of its subsidiaries or affiliates (any or all of such
entities being hereinafter referred to as the "Business"), as such information
may exist from time to time, other than information that the Company has
previously made publicly available or which is in the public domain, is
confidential information and is a unique and valuable asset of the Business,
access to and knowledge of which are essential to the performance of the
Employee's duties under this Agreement. The Employee shall not divulge to any
person, firm, association, corporation, or governmental agency, any information
concerning the affairs, business, clients or customers of the Business (except
such information as is required by law to be divulged to a government agency or
pursuant to lawful process), or make use of any such information for his own
purposes or for the benefit of any person, firm, association or corporation
(except the Business) and shall use his reasonable best efforts to prevent the
disclosure of any such information by others. All records, memoranda, letters,
books, papers, reports, accountings, experience or other data, and other records
and documents relating to the Business, whether made by the Employee or
otherwise coming into his possession, are confidential information and are,
shall be, and shall remain the property of the Business. No copies thereof shall
be made which are not retained by the Business, and the Employee agrees, on
termination of his employment or on demand of the Company, to deliver the same
to the Company.

b. Non-compete. Through the Term of this Agreement, and for a period of
one year thereafter (the "Restricted Period"), the Employee shall not in the
Restricted Area (as defined below), without express prior written approval of
the Company's Board, directly or indirectly, own or hold any proprietary
interest in, or be employed by or receive remuneration from, a Competitor (as
defined below). The Employee also agrees that, during the Restricted Period, he
will not solicit for the account of any Competitor, any customer or client of
the Business, or, in the event of the Employee's termination of employment, any
entity or individual that was such a customer or client preceding the Employee's
termination of employment. The Employee also agrees, during the Restricted
Period, not to interfere with the relationship between the Business and its
employees by soliciting their employment for any entity other than the Business
or otherwise.

-3-

<PAGE>

For purposes of the preceding paragraph, (i) the term "proprietary
interest" means legal or equitable ownership, whether through stockholdings or
otherwise, of any equity interest in a business, firm or entity; (ii) the term
"Competitor" means any person or entity which is engaged in, or during the
Restricted Period becomes engaged in any of the following activities: (A) the
business of (x) managing the medical practices of physicians, or (y) providing
managed medical care for patients requiring treatment by physicians with medical
specialties of a type managed by the Company, or (B) any other business engaged
in by the Business; and (iii) the term "Restricted Area" means an area within
fifty miles of any city in which the Business engages in any of the activities
listed in the definition of Competitor above or has plans to conduct such
activities (which plans are publicly announced, are communicated to Employee or
which otherwise became known to Employee).

c. Remedies. The Company's obligation to make payments, deliver shares
of Stock subject to Options (except to the extent then exercisable) or provide
for any benefits under this Agreement shall cease upon a violation of the
preceding provisions of this section. Employee acknowledges that the Company may
be severely and irreparably damaged in the event Employee violates the
provisions of subparagraphs 6(a) or 6(b) above, and that the extent of the
damage may be difficult or impossible to determine. Therefore, the Employee
agrees that, in addition to the remedies provided above, the Company shall be
entitled to equitable relief, including a preliminary as well as a permanent
injunction (without the necessity of posting a bond). The Employee's Agreement
as set forth in this Paragraph 6 shall (i) continue throughout the duration of
the Employee's employment with the Company; and (ii) survive the Employee's
termination of this Agreement and/or Employee's employment with the Company,
whether or not such termination is voluntary or is the result of termination of
Employee by the Company with or without Cause.

d. Modification of Terms. If any restriction in this Paragraph 6 is
adjudicated to exceed the time, geographic, service or other limitations
permitted by applicable law in the applicable jurisdiction, the Employee agrees
that such a restriction may be modified and narrowed, either by a court or the
Company, to the maximum time, geographic, service or other limitations permitted
by applicable law so as to preserve and protect the Company's legitimate
business interest, without negating or impairing any other restrictions or
undertaking set forth in this Agreement.

7. Withholding Taxes. The Company may directly or indirectly withhold from
any payments made under this Agreement all federal, state, city or other taxes
as shall be required pursuant to any law or governmental regulation or ruling.

8. Consolidation, Merger, or Sale of Assets. Nothing in this Agreement
shall preclude the Company from consolidating or merging into or with, or
transferring all or substantially all of its assets to, another corporation
which assumes this Agreement and all obligations and undertakings of the Company
hereunder. Upon such a consolidation,

-4-

<PAGE>

merger or transfer of assets and assumption, the term "Company" as used herein
shall mean such other corporation and this Agreement shall continue in full
force and effect.

9. Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be given in writing and shall be deemed to
have been duly given if delivered or mailed, postage prepaid, by same day or
overnight mail or overnight courier service (e.g. Federal Express) as follows:

a. To the Company:
U.S. PHYSICIANS, Inc.
Attention: Thomas J. Keane
220 Commerce Drive
Fort Washington, PA 19034

b. To the Employee:
Lewis S. Sharps, M.D., F.A.C.S.
254 West Lancaster Avenue
P.O. Box 968
Paoli, PA 19301

or to such other address as either party shall have previously specified in
writing to the other.

10. Contents of Agreement; Amendment. This Agreement supersedes all prior
agreements between Employee and the Company, including without limitation the
Employment Agreement, dated March 21, 1996, between Employee and the Company,
and sets forth the entire understanding between the parties with respect to its
subject matter and cannot be changed, modified, extended or terminated except
upon written amendment executed by the parties.

11. Binding Agreement. This Agreement shall be binding upon, and shall
inure to the benefit of, the Employee and the Company and their respective
permitted successors, assignees, heirs, beneficiaries and representatives.

12. Severability. If any provision of this Agreement or application thereof
to anyone or under any circumstances is adjudicated to be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect any other provision or application and shall not invalidate or render
unenforceable such provision or application in any other jurisdiction.

13. Governing Law. The validity, interpretation, performance, and
enforcement of this Agreement shall be governed by the laws of the Commonwealth
of Pennsylvania.

-5-

<PAGE>

14. Counterparts. This Agreement may be executed in counterparts, each of
which when executed shall be deemed to be an original and all of which together
shall be deemed to be one and the same instrument.

IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by
its duly authorized officer and the Employee has signed this Agreement, all as
of the first date above written.

U.S. PHYSICIANS, INC.

By: /s/ Thomas J. Keane
-----------------------------------
Thomas J. Keane, Chairman and Chief
Executive Officer

EMPLOYEE

/s/ Lewis S. Sharps, M.D.
---------------------------------------
Lewis S. Sharps, M.D., F.A.C.S.

-6-

<PAGE>

EXHIBIT "A"

VESTING DATE NUMBER OF SHARES VESTED
- ------------ -----------------------

4/10/97 140,949

4/10/98 70,475

4/10/99 70,475

<PAGE>

MANAGEMENT AND SERVICES AGREEMENT

This MANAGEMENT AND SERVICES AGREEMENT dated December 1, 1997 (the "Agreement")
by and between U.S. PHYSICIANS, Inc., a Pennsylvania corporation ("Manager") and
U.S. Medical Services of New York, P.C., a Pennsylvania professional corporation
("P.C.").

BACKGROUND

A. P.C. intends to provide specialty and primary medical care and
related medical services (collectively, "Medical Services") to the general
public at various locations in the State of New York (the "Sites") and has filed
an application for authority to do business and conduct a medical practice in
the State of New York.

B. For reasons of quality, efficiency and economy, P.C. has determined
that it should obtain the services of another entity to manage the Sites and to
perform certain administrative, billing and marketing services for P.C.

C. P.C. believes that such delegation of the management aspects of its
practice will enable it to better concentrate on the practice of medicine and
therefore improve the Medical Services provided by P.C.

D. P.C. will maintain the sole responsibility of providing Medical
Services at the Sites and for matters involving patient care.

E. Manager has considerable experience in providing management and
administrative services to medical practices throughout the Mid-Atlantic region.

F. Manager desires to assume the management of the business operations
of P.C. and to negotiate agreements with insurers, employers and other
purchasers of health care services for the provision of Medical Services by P.C.

G. Manager will provide financing to P.C. necessary for the operations
of P.C.

H. Manager has developed facilities and management services designed to
make available to qualified physicians the facilities, equipment, supplies,
management services, capital financing, support staff, marketing and other
support services necessary to permit such physicians to provide medical services
on a cost-efficient basis and to enhance the ability of P.C. to enter into
competitive arrangements with insurers, employers and other purchasers of health
care services.

I. P.C. desires that Manager make available to P.C. such financing,
management services and facilities, and agrees hereby to compensate Manager for
such services as described herein. P.C. anticipates that, in light of the
dynamic changes in health care, particularly in New York, it will be required to
expand the scope of and locations for, the delivery of Medical Services it
provides or makes available to the public. P.C. further anticipates that the
scope of, and cost associated with, the financing and management services to be
rendered and the facilities to be provided by Manager hereunder will change with
the expansion of P.C.'s medical practice and the development of additional
Sites.
<PAGE>

J. Manager is willing to make such financing, management services and
facilities available to P.C. on the terms and conditions provided in this
Agreement.

NOW, THEREFORE, in consideration of the foregoing, and of the promises
and mutual covenants contained herein, the parties hereto, intending to be
legally bound hereby, agree as follows:

1. Agreement to Manage and Provide Administrative and Support Services.
P.C. hereby engages Manager, and Manager accepts such engagement, to manage the
Sites on behalf of P.C. and for its account, to market Medical Services provided
through P.C. to purchasers of health care services and to provide the financing,
services and facilities set forth in this Agreement, on the terms and conditions
set forth herein.

2. Term. The term of this Agreement shall begin as of the date the New
York Department of State approves the P.C.'s application of authority to conduct
business in New York (the "Commencement Date") and shall end on the fortieth
(40th) anniversary of such date unless sooner terminated in accordance with the
provisions of Paragraph 12. Unless either party elects to terminate this
Agreement at the end of the initial term or any renewal term, by giving written
notice to the other party ninety (90) days before the expiration of the then
current term, this Agreement shall be deemed to have been automatically renewed
for an additional term of five (5) years.

3. Duties and Responsibilities of P.C. P.C. shall be responsible for
all Medical Services at the Sites and shall render such Medical Services to the
public as will maximize the quality and efficiency of the treatment of patients.
P.C. shall be solely responsible for the following items:

(a) Physicians and Other Health Care Providers. P.C. shall hire,
engage, supervise, evaluate and terminate all physicians, nurses, physical
therapists, and other health care providers (collectively, "Professionals") at
the Sites, whether they are employees of P.C. or independent contractors of
P.C., and, upon sixty (60) days' prior written notice to and prior consultation
with Manager, establish compensation and benefits for such Professionals. P.C.
shall not increase or decrease the amount of such compensation and/or benefits
without providing Manager sixty (60) days' notice of the change and prior
consultation with Manager. P.C. shall be responsible for the payment of all
compensation payable to Professionals, except to the extent that nurses,
physical therapists, and other health care providers may become employees of
Manager pursuant to subparagraph 4(a)(iv) of this Agreement.

(b) Medical Directors. P.C. shall designate one or more Medical
Directors, each of whom is properly qualified to perform the supervisory,
quality assurance and credentialing (collection and verification of information)
functions necessary for the rendering of appropriate Medical Services at the
Sites.
<PAGE>

(c) Quality and Cost-Effectiveness of Medical Services. P.C.
shall monitor the quality of Medical Services practiced by all Professionals at
the Sites, to assure that such care meets currently accepted standards of
medical competence and is in accordance with currently approved methods and
practices in the medical profession and related fields. P.C. shall adopt a peer
review/quality assessment program to monitor and evaluate the quality and
cost-effectiveness of Medical Services provided by Professionals at the Sites,
and shall assure that appropriate Medical Services are rendered in a
cost-effective manner.

(d) Medical Records. P.C. shall maintain the medical records of the
patients of P.C. in accordance with applicable law. Manager may, at P.C.'s
request, assist in the development of policies and procedures for efficient
maintenance and retrieval of medical records, subject to applicable law.
Confidentiality, and availability of medical records for inspection by
authorized agencies or individuals, shall be maintained in accordance with
applicable state and federal laws.

(e) Medical Fees. For purposes of establishing budgetary
assumptions for the Sites, P.C., after providing Manager with sixty (60) days
prior notice and prior consultation with Manager, shall:

(i) determine a fee schedule or schedules for each Site prior to
the inception of operations at that Site; and

(ii) determine revisions to such fee schedule or schedules not
less than thirty (30) days prior to the effective date of any proposed amendment
to such fee schedule. Manager shall be authorized to negotiate fees for services
with third-party payors on behalf of P.C.

(f) Daily Statements. P.C. shall prepare and submit to Manager, or
cause its physicians and, if applicable, other Professionals, to prepare and
submit, daily statements of professional services rendered and any prescribed
related matters, on such form, with such detail and in such manner as Manager
shall from time to time provide to P.C., in order to permit Manager to cause
proper billing for such services to be rendered.

(g) Protocols. P.C. shall, following prior consultation with
Manager, develop and implement utilization review standards, treatment protocols
and similar guidelines to establish measures for the delivery of high quality
and cost-effective medical care.

4. Duties and Responsibilities of Manager.

(a) Management Services. Manager shall be solely responsible for the
business operation of the Sites and assumes responsibility for the management of
all non-medical aspects of the Sites, except as otherwise specifically
prohibited by law or limited by this Agreement, and shall provide the following
services:
<PAGE>

(i) Manager shall lease, acquire or otherwise procure one or
more Sites in which P.C. shall conduct its practice. The selection of the
location and the addition of new practice sites shall be determined by the P.C.
upon providing Manager sixty (60) days' prior written notice of its intent to
change the location of a Site or add a new Site and following consultation with
and recommendations of Manager regarding any such selection or addition.

(ii) Manager shall provide all reasonable and necessary medical
equipment, furnishings and furniture required in the day-to-day operation of the
Sites. MANAGER SUPPLIES THE EQUIPMENT AS IS. MANAGER IS NOT A MANUFACTURER OF,
AND IS NOT ENGAGED IN THE SALE OR DISTRIBUTION OF, THE EQUIPMENT. MANAGER IS NOT
AN AGENT OF THE MANUFACTURER OR THE SELLER OF THE EQUIPMENT. MANAGER MAKES NO
REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, REGARDING THE MERCHANTABILITY,
FITNESS, DESIGN OR SUITABILITY FOR ANY PURPOSE OR ANY CONDITION OF, OR THE
QUALITY OR CAPACITY OF, OR THE MATERIAL OR WORKMANSHIP, IN THE EQUIPMENT.

(iii) Manager shall employ all necessary clerical, secretarial
and bookkeeping personnel reasonably necessary for the conduct of P.C.'s
operations at the Sites. Manager shall determine and cause to be paid the
salaries and fringe benefits of all such personnel.

(iv) Manager shall assist P.C. in negotiating employment
agreements or contracts with nursing staff, technicians and other allied and
ancillary health care personnel. All persons whose services are billed to
Medicare, Medicaid or other third-party payors as under the supervision of
physicians shall be employed by P.C.; provided, however, that employment
agreements may be assumed by and assigned to Manager at the request of Manager
if and to the extent applicable law authorizes billings by P.C. for supervised
services rendered by persons not employed by P.C.

(v) Manager shall administer P.C.'s payroll and
personnel-related activities.

(vi) Manager shall supervise all of Manager's employees;
provided, however, that P.C. shall supervise Professionals to the extent
necessary to maintain P.C.'s responsibility for the medical aspects of the
practice and to comply with requirements of applicable law.

(vii) Manager shall, unless prohibited by law, order and procure
all Medical Supplies (as hereinafter defined), office supplies and other
supplies necessary in the operation of the Sites to enable P.C. to deliver
quality Medical Services in a cost-effective manner. The ultimate oversight,
supervision and ownership for all Medical Supplies is and shall remain the sole
responsibility of P.C. "Medical Supplies" shall mean all drugs, pharmaceuticals,
products, substances, items or devices whose purchase, possession, maintenance,
administration, prescription or security require the authorization or order of a
licensed health care provider or require a permit, registration, certification
or other governmental authorization held by a licensed health care provider as
specified under any applicable federal or state law.
<PAGE>

(viii) Manager shall cause to be placed and kept in force all
forms of insurance needed to protect adequately P.C. and itself, in connection
with the operation of the Sites, including, but not limited to, where
appropriate, workers' compensation insurance, public liability insurance, fire
and extended coverage insurance, surety bonding, business interruption
insurance, burglary and theft insurance; provided, however, that P.C. shall have
the exclusive responsibility for maintaining malpractice liability insurance for
the Professionals pursuant to Paragraph 6, but which the Manager shall procure
and administer for P.C.

(ix) Manager shall maintain a comprehensive system of office
records, books and accounts reflecting the income and expenses of the Sites,
which books and records may be inspected by P.C. at any reasonable time during
regular business hours. Records shall be maintained for at least four (4) years
from the date of service or from any governmental inquiry related thereto, and
made available upon request to officers, representatives or agents of the
Secretary of Health and Human Services or of the Comptroller General of the
United States General Accounting Officer.

(x) Manager shall prepare and submit to P.C. monthly financial
statements with respect to the operation of the Sites.

(xi) Manager shall provide all janitorial, grounds and
maintenance services for the Sites.

(xii) Manager shall maintain, service and repair all equipment,
or use reasonable efforts to have lessors or contracted service providers
perform such necessary maintenance, service and repair.

(xiii) Manager shall provide printing, stationery, forms,
postage, duplicating, telecopying, photocopying and other support services as
are reasonably necessary and appropriate for the operation of the Sites.

<PAGE>

(b) Billing Services. Manager shall provide, or cause to be
provided, the following billing services to P.C.:

(i) a competent management executive for the supervision of the
billing and collection functions of P.C.'s business;

(ii) services with respect to billing of patients, insurance
companies, government entities and third party payors and collecting all charges
made to P.C.'s patients, excluding, however, any obligation to initiate legal
proceedings for collection, although Manager may do so at its sole and absolute
discretion;

(iii) preparation of all necessary medical letters and reports,
insurance forms, governmental agencies' claim forms and workers' compensation
claim forms;

(iv) preparation and mailing of all necessary and required
patient statements and invoices and reasonable follow-up on such preparation and
mailing;

(v) response by telephone or letter with reasonable dispatch and
promptness to any reasonable patient inquiry or request for assistance in the
interpretation of insurance policies or reimbursement programs and handling, to
the best of its ability, of any complaint involving professional services or
fees; and

(vi) operating procedure manuals for clerical staff.

(c) Marketing Services. Manager, at its sole discretion and with due
regard to the economic costs and anticipated benefits, may provide, or cause to
be provided, the following marketing services to P.C.:

(i) promotion of the Sites' services and facilities by marketing
representatives of Manager through contact with referring physicians and
potential referring physicians;

(ii) preparation and distribution of informational and
promotional materials, including descriptions of services, newsletters,
testimonials and other sales promotional pieces, subject to prior approval of
P.C., which shall be deemed to be given unless Manager receives written
disapproval within ten (10) days after P.C. receives the promotional materials;

(iii) subject to the need of certain third party payors to
maintain some form of exclusivity, promotion of the Sites through contact and
continued liaison with administrative directors of area HMO's, PPO's, unions and
self-insured clients and other third-party payors; and

<PAGE>

(iv) conducting open house receptions for new Sites, seminars
for physicians and office staff, speaking engagements for physicians who request
Manager to assist them in organizing such engagements, newspaper interviews and
magazine articles when initiated and requested by an interviewer or magazine.

(d) Provision of Funds. Manager shall arrange financing for P.C. or,
if no financing can be reasonably arranged, Manager shall advance funds to P.C.
in the event P.C. does not have sufficient cash on hand to pay its expenses as
and when due. Any such advance by Manager shall be repaid to Manager together
with interest at the rate from time to time charged to Manager by its primary
lender (or in the event there is no such lender, at an annual rate equal to the
prime rate announced from time to time in the Wall Street Journal plus 2%) out
of available cash in subsequent months prior to the payment of fees due Manager
pursuant to subparagraph 8(a).

(e) Deposit of Collections. Manager, in the name of P.C., shall
deposit in the appropriate bank accounts ("Bank Accounts") all receipts arising
from the operation of the Site(s) received by Manager on behalf of P.C. and
shall use reasonable diligence to see that disbursements from such accounts are
made by and on behalf of P.C. in such amounts and at such times as may be
required by this Agreement. P.C. shall provide Manager with all authorizations
necessary to enable Manager to make the deposits and disbursements required by
this subparagraph (e).

(f) Payment of Expenses. The parties agree and acknowledge that
Manager shall be solely responsible for all costs and expenses incurred in
connection with rendering the services Manager has undertaken as described in
Paragraph 4 above, and that Manager's sole compensation for such services shall
be as described in Paragraph 8 below.

(g) Other Services. Any additional services required by P.C. that
are not listed or identified in this Agreement shall be rendered for P.C. only
by an amendment to this Agreement.

5. Relationship of the Parties.

(a) Independent Contractors. P.C. and Manager are independent
contractors and the relationship between them is that of professional
corporation and an independent supplier of non-medical services and facilities.
Nothing in this Agreement shall be construed to create a principal-agent,
employer-employee, master-servant, partnership or joint venture relationship.

(b) P.C. - Patient - Manager Relationships. The professional
relationship between P.C. and its patients shall, at all times during the term
of this Agreement, be solely between P.C., its physicians and other
Professionals and their patients. P.C. shall have complete responsibility for
its medical practice and that of Professional employees or independent
contractors. Manager shall not interfere with the exercise of medical judgment
by the physicians and other Professionals employed by P.C. nor shall Manager
interfere with, control, direct, or supervise P.C., or any physician or other
Professional employee or independent contractor, in connection with the
provision of medical or ancillary services by P.C. In connection with the care
and treatment of its patients, P.C. shall be solely responsible for supervising
all personnel performing medical or ancillary services. To the extent any act or
service set forth in this Agreement required to be performed by Manager is
construed by a court of competent jurisdiction or by the appropriate licensure
bureaus or divisions of the Pennsylvania Department of State or the New York
Department of Health or Education to constitute the practice of medicine, the
requirement to perform that act or service by Manager shall be deemed waived and
unenforceable. In addition, if in the opinion of counsel to Manager, any act or
service set forth in this Agreement required to be performed by Manager is
likely to be considered to constitute the practice of medicine, the requirement
to perform that act or service by Manager shall be deemed waived and
unenforceable. All decisions as to which individuals shall utilize the services
of P.C. shall be the sole responsibility of P.C.; provided, however, that
Manager may negotiate on behalf of P.C. contracts with employers, unions, health
care insurers, HMOs, PPOs and other third-party payors.
<PAGE>

6. Malpractice Insurance.

(a) Minimum Policy. On its own behalf and on behalf of each
physician or other Professional its employs, and each physician or other
Professional contracting with P.C. for the provision of professional services,
P.C. shall provide and keep in force a malpractice insurance policy or policies
of standard form in the State of New York, with limits mutually acceptable to
Manager and P.C. The policies shall be obtained by P.C. or, as the case may be,
by each such physician or other Professional employed by P.C., or contracting
with P.C., and certificates thereof shall be delivered to Manager prior to the
inception of operations of any Site, together with evidence of the payment of
the premiums thereon, and shall be placed with insurance companies authorized
and licensed to issue such policies in the State of New York at rates deemed
reasonable and appropriate and having reserves in an amount deemed to be
reasonably adequate by P.C. and Manager. P.C. shall use its best efforts to name
Manager as an additional insured party on all malpractice insurance and Manager
may, at its option, participate in the procurement of cost-effective coverage on
behalf of P.C. P.C. shall provide documentation to Manager that all such
insurance is in full force and effect on each subsequent anniversary of the
Commencement Date and not less than ten (10) business days prior to the earlier
of the dates upon which P.C. employs or enters into a contract with any
Professional to provide services at a Site.

(b) Loss of Malpractice Insurance of Medicare/Medicaid Provider
Services. P.C. hereby agrees that it will immediately suspend any physician or
other Professional for whom malpractice insurance cannot be reasonably obtained
or whose malpractice insurance is canceled, and such physician or other
Professional shall not be reinstated or permitted to practice at any Site until
such time as the malpractice policy is reinstated. P.C. will notify Manager
within 24 hours of receipt of notice or information that any physician or other
Professional is not in compliance with the provisions of this Agreement
pertaining to malpractice insurance, or has been suspended or terminated from
participation in Medicare or Medicaid. Failure to suspend a physician or other
Professional who is not in compliance with the provisions of this Agreement
pertaining to Medicare/Medicaid participation status, malpractice insurance,
failure to replace such insurance should it be canceled, or failure to provide
such timely notice, shall constitute a breach of this Agreement pursuant to
Paragraph 12.
<PAGE>

7. Intentionally omitted.

8. Compensation.

(a) Payment of Fees. (i) The parties hereto recognize that Manager's
expenses, and the expenses of the Sites, will vary substantially depending on
the volume and type of patient services. The parties further recognize the
inherent uncertainties and the difficulty of predicting monthly expenses, volume
of services, the extent of obligations and the risks that Manager has taken and
will take with respect to capital expenditures, equipment lease obligations and
other obligations incurred in connection with the establishment and furnishing
of the Sites, and additionally recognize the need to provide Manager with
sufficient revenues to pay all operating expenses and to provide Manager with a
return on its investment commensurate with the risks being assumed by Manager.
Therefore, the parties agree that P.C. shall pay to Manager as compensation for
all the services rendered by Manager pursuant to the terms of this Agreement, an
amount equal to [REDACTED DUE TO REQUEST FOR CONFIDENTIAL TREATMENT] percent
([REDACTED DUE TO REQUEST FOR CONFIDENTIAL TREATMENT] %) of the annual expenses
incurred by Manager in rendering the management and administrative services
described herein (the "Management Fee"). For purposes of this Agreement, such
annual expenses shall include without limitation (i) salaries and benefits and
other costs of providing the administrative and clerical staff necessary for the
operation of the Sites; (ii) salaries and benefits and other costs of any
professional staff engaged or employed by Manager to perform services on behalf
of P.C. in accordance with subparagraph 4(a) above, (iii) cost of leasing office
space for the Site(s); (iv) purchase and maintenance of the management
information systems provided to the P.C., including hardware, software,
installation and maintenance costs; (v) all expenses incurred in maintenance of
the Site(s), including all utilities, security and maintenance; (vi) liability
insurance premiums; (vii) cost of capital to maintain the medical practice of
the P.C. as described in subparagraph 4(d); (viii) cost of Medical Supplies;
(ix) marketing expenses; (x) depreciation expenses; (xi) consultant, legal and
accounting fees incurred in connection with the Site(s) on behalf of the P.C.;
and (xii) all other expenses incurred by Manager in carrying out its obligations
under this Agreement.

(ii) Because of the difficulty of predicting actual monthly
expenses, the parties agree that Manager shall receive a fixed monthly
Management Fee that is intended to approximate the actual expenses incurred by
Manager. The initial monthly Management Fee, subject to mutually and reasonably
agreeable adjustment from time to time in the case of any increase or decrease
in the number of physicians providing Medical Services through P.C., or the
number of locations at which such physicians provide such Medical Services,
shall equal [REDACTED DUE TO REQUEST FOR CONFIDENTIAL TREATMENT]. Manager shall
have the right to reconcile the monthly payments with the amounts actually due
and payable hereunder to Manager on a quarterly basis, and Manager will provide
P.C. with evidence of such reconciliation.

(b) Authorization for Withdrawal from P.C. Bank Account. P.C.
authorizes Manager to make disbursements from the Bank Accounts to pay Manager
amounts owed to it by P.C., including the Management Fee, and amounts owed to
third parties as required hereunder. Payment of the monthly Management Fee (or
any amounts due Manager as a result of any quarterly reconciliation) shall not
be subject to deduction or offset by P.C.
<PAGE>

(c) Grant of Security Interest. As security for the payment by P.C.
of the compensation due to Manager pursuant to this Agreement and for any
advances made by Manager to P.C. pursuant to subparagraph 4(d), P.C. hereby
grants Manager a security interest in all of P.C.'s accounts receivable
(including all rights to payment by the Medicare or Medicaid programs, any
governmental body, insurance company, managed care organization or self-insured
health plan to the extent permitted by law), cash, bank accounts, Medical
Supplies and proceeds of the foregoing (collectively, the "Secured Assets"). At
the request of Manager, P.C. shall execute and deliver to Manager any and all
documents requested by Manager to evidence or perfect the security interest
granted hereby, including, but not limited to, UCC-1 Financing Statements. This
Agreement shall constitute a security agreement.

(d) Review of Books. Each party, at its sole expense, shall have the
right at least annually to have a certified public accountant review the other
party's books to determine whether that party has complied with this Agreement.

9. Books, Office Equipment, Etc.

(a) P.C.'s Ownership. All Medical Supplies (as defined in
subparagraph 4(a)(vii)) and patient records shall at all times be and remain
P.C.'s property; provided, however, that, upon termination of this Agreement,
P.C. shall provide any successor entity providing services at any Site, upon
request by such successor within ninety (90) days after termination of this
Agreement and at the successor's expense, access to, and copies of, such records
relating to Medical Services performed at such Site by P.C. during the term
hereof as such successor feels are reasonably necessary in order for such
successor to provide continuing Medical Services. Notwithstanding the foregoing,
no patient records will be made available without the written consent of the
patient if such is required by law. Manager shall reimburse P.C. the reasonable
cost of making such copies as are required to comply with this subparagraph
9(a).

(b) Manager's Ownership. All professional instruments, equipment,
computers, computer software programs and other management information systems,
supplies, samples, forms, charts, logs, brochures, building information,
policies and procedures, protocols, outcome studies, contracts or any other
materials or information furnished to P.C. by Manager are and shall remain the
sole property of Manager; if Manager requests the return of such equipment or
materials at any time after the term of this Agreement, P.C. shall immediately
deliver the same to Manager.

<PAGE>

10. Exclusivity, Non-Competition and Non-Disclosure Agreement.

(a) Exclusivity. P.C. agrees that during the term of this Agreement
it shall provide Medical Services exclusively at Sites managed by Manager
pursuant to this Agreement unless the parties hereto otherwise expressly agree
in writing.

(b) Non-Competition. During the term of this Agreement and for
twelve (12) months following termination, P.C. shall not:

(i) employ any individual previously working for Manager as its
employee;

(ii) directly or indirectly induce or attempt to influence any
employee of Manager to terminate employment with Manager; or

(iii) engage in, or have any interest in, directly or indirectly
(as proprietor, partner, stockholder, principal, agent, broker, employee,
consultant, or lender) any business or medical facility within the Restricted
Area which is engaged in providing Medical Services such as those provided at
the Sites or providing management services similar to those provided by Manager.
Restricted Area shall mean the area within a six (6) mile radius of any Site
located outside of the New York City metropolitan area (including Westchester
and Nassau counties) and a three (3) mile radius of any Site located with the
New York City metropolitan area.

(c) Non-disclosure. During the term of this Agreement and at all
times thereafter, P.C. shall not disclose, communicate or divulge, or use for
the direct or indirect benefit of any person, firm, association or company
(except any material referred to in subparagraph 9(a) above) any confidential
information regarding the business methods, business policies, procedures,
protocols, techniques, information systems or trade secrets, or other knowledge
or processes of or developed or used by Manager, or any other confidential
information relating to or dealing with the business operations or activities of
Manager (including, but not limited to financial information), made known to
P.C. or its employees or independent contractors or learned or acquired by P.C.,
its employees or independent contractors during the term of this Agreement. In
furtherance of the foregoing, P.C. agrees not to disclose, communicate or
divulge to any third party the terms of this Agreement unless so ordered by act
of law or other governing body having the authority to compel P.C. to do so.

(d) Reasonableness of Restrictions. The parties acknowledge that the
restrictions contained in subparagraphs 10(a), 10(b) and 10(c) are reasonable
and necessary to protect the legitimate interests and substantial investment of
Manager and that any violation of these restrictions would result in immediate
irreparable injury to Manager. If the period of time or geographical area
specified in subparagraph 10(b) and 10(c) should be adjudged unreasonable in any
proceeding, then the period of time or geographic area shall be reduced by the
elimination or reduction of such portion thereof so that such restrictions may
be enforced for such time or area as is adjudged to be reasonable. P.C. and
Manager acknowledge that, in the event of a violation of any such restrictions,
Manager shall be entitled to preliminary and permanent injunctive relief as well
as an equitable accounting of all earnings, profits and other benefits arising
from such violation, which rights shall be cumulative and in addition to any
other rights or remedies to which Manager may be entitled. In the event of a
violation, the period referred to in subparagraph 10(b) shall be extended by a
period of time equal to that period beginning with the commencement of any such
violation and ending when such violation shall have been finally terminated in
good faith.
<PAGE>

(e) Survival. The provision of this Paragraph 10 shall survive the
expiration or termination of this Agreement.

11. Power of Attorney. P.C. hereby appoints Manager, for the term
hereof (including all renewal terms) and thereafter until all amounts due to
Manager have been paid, to be its true and lawful attorney-in-fact, for the
following purposes:

(a) to collect accounts receivable owing to P.C. during the term of
this Agreement in P.C.'s name and on its behalf;

(b) to receive payments from Blue Cross, Blue Shield, insurance
companies, health care plans, Medicare, Medicaid and all other third party
payors in P.C.'s name and on its behalf for deposit in the Bank Accounts;

(c) to take possession of, endorse in the name of P.C. (and/or in
the name of an individual Professional) such payment intended for the payment of
a Professional's bills during the term of this Agreement and deposit in the Bank
Accounts any notes, checks, money orders, cash and other instruments received in
payment of accounts receivable;

(d) to initiate the institution of legal proceedings in P.C.'s name
to collect any account and monies owed to P.C., to enforce the rights of P.C.
under any contract or in connection with the rendering of any service and to
contest adjustments and decisions by government agencies (or fiscal
intermediaries) and third-party payors;

(e) to negotiate payments to P.C. under this Agreement to the extent
otherwise permitted by law;

(f) to perfect a security interest in the Secured Assets of P.C.;
and

(g) to do any other act, make any payment or execute any document on
behalf of P.C. to cure any default by P.C. of this Agreement; provided, such act
by Manager must comply with any applicable law.

<PAGE>

12. Termination and Breach.

(a) General Breach by P.C. In the event that P.C. should be in
default in the performance of any material provision of this Agreement, and such
default is not cured within thirty (30) days after receipt of written notice of
such default from Manager, Manager, at its option, may terminate this Agreement
by delivering written notice to P.C. at any time after expiration of such thirty
(30) day period.

(b) Failure to Maintain Malpractice Insurance or Licenses or
Participation Agreements. If P.C. should materially breach any of its
obligations pursuant to Paragraph 6 or its obligation to maintain, or cause to
be maintained, the medical licenses or participation agreements of all
physicians employed by it, or under contract to it, or to dismiss those who do
not maintain their medical licenses and participation agreements under the same
terms and conditions in Paragraph 6 pertaining to the maintenance of malpractice
insurance, and if such breach is not cured within ten (10) business days after
receipt by P.C. of written notification of such breach from Manager, Manager may
either cure the breach itself, where possible, at the expense of P.C., or
terminate this Agreement upon written notice to P.C.

(c) Bankruptcy of Manager. In the event Manager files any voluntary
petition in bankruptcy or any bankruptcy proceeding is filed against Manager
which in either case remains undismissed for a period of 180 days, P.C., at its
option, may terminate this Agreement by delivering written notice to Manager at
any time after such 180 day period and prior to the dismissal of such
proceeding.

(d) Termination by Manager. Manager may, at any time after the first
12 months of the term hereof, terminate this Agreement upon one hundred twenty
(120) days' prior written notice to P.C.

(e) Effect of Termination. Upon the termination of this Agreement,
Manager shall cause a final accounting and reconciliation to be performed no
later than ninety (90) days following the effective termination date hereof, and
P.C. shall pay all amounts remaining due to Manager as the Management Fee for
services rendered prior to the termination of this Agreement within five (5)
days following the completion of the reconciliation. The provisions of this
subparagraph 12(e) shall survive the termination of the Agreement.

13. Indemnification.

(a) P.C. P.C. shall indemnify and hold Manager, its officers,
directors, stockholders, employees, agents, parents and subsidiaries harmless
from and against all claims, demands, costs, expenses, liabilities and losses
(including attorneys' and other professional fees) caused or asserted to have
been caused by or as a result of the negligent performance of Medical Services
or ancillary services or any other negligent acts or omissions by, or willful
misconduct of, P.C. and/or its shareholders, agents, employees or subcontractors
(other than Manager).
<PAGE>

(b) Manager. Manager shall indemnify and hold P.C., its officers,
directors, stockholders, employees, agents, parents and subsidiaries harmless
from and against all claims, demands, costs, expenses, liabilities and losses
(including attorneys' and other professional fees) caused or asserted to have
been caused by or as a result of any negligent acts or omissions by, or willful
misconduct of, Manager and/or its shareholders, agents, employees or
subcontractors.

14. Legislative Limitations. Notwithstanding any other provisions of
this Agreement, if the governmental agencies (or their representatives) that
administer Medicare or Medicaid, or any other payor, or any other federal, state
or local government or agency, passes, issues or promulgates any law, rule,
regulation, standard or interpretation at any time while this Agreement is in
effect which prohibits, restricts, limits or in any way materially changes the
method or amounts of reimbursement or payment for services rendered under this
Agreement, or which otherwise materially affects either party's rights or
obligations hereunder, either party may give the other party notice of intent to
amend this Agreement to the satisfaction of the noticing party, to reflect the
prohibition, restriction, limitation or change, provided, however, that no such
amendment shall alter the basic economic status of the parties pursuant to this
Agreement. If this Agreement is not so amended in writing within sixty (60) days
after such notice is given, the parties agree to submit the issue of such an
amendment to arbitration in accordance with subparagraph 15(k); provided,
however, that if at the election of either party, a formal appeal is filed with
the relevant governmental agency, or a suit is filed in a court of competent
jurisdiction, so as to stay the implementation of any such law, rule,
regulation, standard or interpretation, during the period of such stay, the
right to amend as set forth above shall also be stayed.

15. Miscellaneous.

(a) Indulgences, Etc. The failure or delay on the part of any party
to exercise any right, remedy, power or privilege under this Agreement shall not
operate as a waiver thereof, nor shall any single or partial exercise of any
right, remedy, power or privilege preclude any other or further exercise of the
same or of any other right, remedy, power or privilege, nor shall any waiver of
any right, remedy, power or privilege with respect to any occurrence be
construed as a waiver of such right, remedy, power or privilege with respect to
any other occurrence. No waiver shall be effective unless it is in writing and
is signed by the party asserted to have granted such waiver.

(b) Controlling Law. This Agreement and all provisions relating to
its validity, interpretation, performance and enforcement shall be governed by
and construed in accordance with the laws of the Commonwealth of Pennsylvania.

(c) Notices. All notices, requests, demands and other
communications required or permitted under this Agreement shall be in writing
and shall be deemed to have been duly given, made and received when delivered
(personally, by carrier service such as Federal Express, or by other messenger)
or upon actual receipt of registered or certified mail, postage prepaid, return
receipt requested, addressed as set forth below:
<PAGE>

(i) If to Manager:

U.S. PHYSICIANS, Inc.
220 Commerce Drive, Suite 400
Fort Washington, PA 19034
Attention: President

With a copy, given in the manner prescribed above, to:

Wende W. Young, M.D.
1351 Mt. Hope Avenue
Rochester, NY 14620

(ii) If to P.C.:

U.S. Medical Services of New York, P.C.
220 Commerce Drive
Fort Washington, PA 19034
Attention: President

In addition, notice by mail should be by air mail if posted outside
of the continental United States.

Any party may alter the address to which communications or
copies are to be sent by giving notice of such change of address in conformity
with the provisions of this subparagraph 15(c).

(d) Binding Nature of Agreement; Assignment. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
heirs, personal representatives, successors and assigns. Notwithstanding the
foregoing, P.C. may not assign or transfer its rights or obligations under this
Agreement without the prior written consent of Manager. Manager may assign or
transfer all or any portion of its rights or obligations under this Agreement
without the consent of P.C.

(e) Execution in Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
<PAGE>

(f) Severability and Reformation. The provisions of this Agreement
are independent of and severable from each other, and no provision shall be
affected or rendered invalid or unenforceable by virtue of the fact that for any
reason any other provision may be invalid or unenforceable in whole or in part.
If or to the extent this Agreement is reasonably deemed to violate applicable
law, the parties agree to negotiate in good faith to amend the Agreement to the
extent possible, consistent with its purposes, to conform to law.

(g) Entire Agreement. This Agreement contains the entire
understanding among the parties with respect to the subject matter hereof, and
supersedes all prior and contemporaneous agreements and understandings,
inducements or conditions, express or implied, oral or written, except as herein
contained. This Agreement may not be modified or amended other than by an
agreement in writing.

(h) Paragraph Headings. The paragraph headings in this Agreement are
for convenience only, form no part of this Agreement and shall not affect its
interpretation.

(i) Gender, Etc. Words used herein, regardless of the number and
gender specifically used, shall be deemed and construed to include any other
number, singular or plural, and any other gender, masculine, feminine or neuter,
as the context indicates is appropriate.

(j) Number of Days. Unless otherwise specified herein, in computing
the number of days for purposes of this Agreement, all days shall be counted,
including Saturdays, Sundays and holidays; provided, however, that, if the final
day of any time period falls on a Saturday, Sunday or holiday, then the final
day shall be deemed to be the next day which is not a Saturday, Sunday or
holiday.

(k) Arbitration. Any dispute (including a claimed breach of the
terms hereof) arising out of or in connection with this Agreement, other than a
claimed breach of Paragraph 10 of this Agreement to which this subparagraph
15(k) shall not be applicable, shall be resolved by arbitration conducted by the
American Arbitration Association in Philadelphia, Pennsylvania, in accordance
with its rules then in existence. The arbitrators shall not contravene or vary
in any respect any of the terms or provisions of this Agreement except as
provided in Paragraph 14. The award of the arbitrators shall be final and
binding upon the parties hereto, their heirs, administrators, executors,
successors and assigns, and judgment upon such award may be entered in any court
having jurisdiction thereof. Nothing in this provision shall restrict the
ability of either party hereto to seek any equitable remedy, including
injunctive relief or specific performance, for damages caused by the other
party's breach or attempted breach of this Agreement in any court of competent
jurisdiction. The prevailing party in any arbitration proceeding resulting from
this Agreement shall be entitled to recover its reasonable attorneys' fees and
costs from the non-prevailing party.

(l) Force Majeure. Neither party shall be liable or deemed to be in
default for any delay or failure to perform under this Agreement resulting,
directly or indirectly, from acts of God, civil or military authority, acts of
public enemy, war, accidents, fires, explosions, earthquakes, floods, strikes or
other work interruptions by either party's employees or any other similar cause
beyond the reasonable control of the non-performing party.
<PAGE>

IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement on the date first above written.

U.S. PHYSICIANS, INC.

By: /s/ Thomas J. Keane
------------------------------
Thomas J. Keane
President

U.S. MEDICAL SERVICES OF
NEW YORK, P.C.

By: /s/ Thomas J. Keane
------------------------------
President

<PAGE>

EXHIBIT 11

U.S. PHYSICIANS, INC. AND SUBSIDIARIES
PRO FORMA NET LOSS PER COMMON SHARE CALCULATION

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Pro forma net loss per common share:
Net loss ...................................................... $ $
========== ==========
Weighted average number of shares issued and
outstanding...................................................
Incremental number of shares related to convertible preferred
stock, common stock issuances and common stock options
and warrants granted within twelve months of the
initial public offering
--Convertible preferred stock................................
--Common stock...............................................
--Common stock options and warrants..........................
Dilutive effect of common stock options and warrants...........
Preferred stock converted into common stock upon
consummation of the initial public offering...................
---------- ----------
Shares used in computing pro forma net loss per common share...
========== ==========
Pro forma net loss per common shares .......................... $ $
========== ==========

</TABLE>

<PAGE>

Exhibit 21
Subsidiaries of the Company

The subsidiaries of U.S. PHYSICIANS, Inc. are:

Network Medical, Inc.
RRI Corp.
Bryn Mawr Urology Associates, Inc.
Vermeire Orthopaedic Surgeons, Inc.
South Shore Orthopedics, Inc.
Orthopaedic & Sports Medicine Specialists of the Main Line, Inc.
Orthopaedic Surgery & Sports Medicine, Inc.
Family Care of Lancaster, Inc.
Alan I. Snyder, M.D. Associates, Inc.
Valley Forge Facial Plastic Surgery/Ear, Nose & Throat Associates, Inc.
Cesare, Metzger, Coyle & Henzes, Inc.
Steel Valley Orthopedic Association, Inc.
Main Line Joint Replacement, Inc.
Lehigh Valley Orthopedics, Inc.

EXHIBIT 23.1

Consent of Independent Public Accountants

As independent public accountants, we hereby consent to the use of our reports
and to all reference to our Firm included in or made a part of this
Registration Statement.

Arthur Andersen LLP

Philadelphia, Pa.,
January 29, 1998

CONSENT

We hereby expressly consent to the reference to our firm in the
Registration Statement on Form S-1, file number 333-39987, of U.S. PHYSICIANS,
Inc. (the "Registration Statement") in the prospectus filed as part of such
Registration Statement under the caption "Legal Matters."

COZEN AND O'CONNOR, P.C.

January 30, 1998

By: /s/ Mark H. Gallant
------------------------------
1/30/98

<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US

<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
<EXCHANGE-RATE> 1 1
<CASH> 2,066 1,833
<SECURITIES> 0 0
<RECEIVABLES> 0 218
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,114 3,191
<PP&E> 260 1,655
<DEPRECIATION> 8 116
<TOTAL-ASSETS> 2,632 42,290
<CURRENT-LIABILITIES> 1,417 21,368
<BONDS> 172 10,237
4,087 5,978
0 0
<COMMON> 39 39
<OTHER-SE> (3,392) (6,074)
<TOTAL-LIABILITY-AND-EQUITY> 2,632 42,290
<SALES> 0 208
<TOTAL-REVENUES> 70 2,490
<CGS> 0 704
<TOTAL-COSTS> 2,301 3,865
<OTHER-EXPENSES> 529 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (24) 751
<INCOME-PRETAX> (2,736) (2,762)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,736) (2,762)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,736) (2,762)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0

</TABLE>