SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998

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

COMMISSION FILE NUMBER 0-21910

CONTINUCARE CORPORATION
(Exact Name of Registrant as Specified in its Charter)

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]

At November 2, 1998, the Registrant had 14,606,283 shares of $0.0001 par value
common stock outstanding.

CONTINUCARE CORPORATION

INDEX

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Consolidated Balance Sheets - September 30, 1998 (Unaudited) and June 30, 1998..................... 3
Consolidated Statements of Operations - Three Months Ended September 30, 1998 (Unaudited)
and 1997 (Unaudited)............................................................................ 4
Consolidated Statements of Cash Flows - Three Months Ended September 30, 1998 (Unaudited)
and 1997 (Unaudited)............................................................................ 5
Notes to Consolidated Financial Statements September 30, 1998 (Unaudited).......................... 6

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................................................................... 8

PART II - OTHER INFORMATION

SIGNATURE PAGE..................................................................................... 14

PART I - FINANCIAL INFORMATION

ITEM 1. - FINANCIAL STATEMENTS

CONTINUCARE CORPORATION

CONSOLIDATED BALANCE SHEETS

ASSETS SEPTEMBER 30, 1998 JUNE 30, 1998
------------------ -------------
(UNAUDITED)

Current assets
Cash and cash equivalents ................................................ $ 5,189,626 $ 7,435,724
Accounts receivable, net of allowance for doubtful accounts of
$2,322,000 at September 30, 1998 and $2,071,000 at June 30, 1998......... 8,946,803 9,009,462
Other receivables ........................................................ 940,338 1,091,744
Prepaid expenses and other current assets ................................ 728,569 595,086
Income taxes receivable .................................................. 1,800,000 1,800,000
------------ ------------
Total current assets ................................................. 17,605,336 19,932,016
Notes receivable, net of allowance for doubtful accounts of
$5,510,000 at September 30, 1998 and at June 30, 1998 ..................... 1,633,262 1,644,420
Equipment, furniture and leasehold improvements, net ........................ 5,447,374 5,496,025
Cost in excess of net tangible assets acquired, net of
accumulated amortization of $3,490,000 at September 30, 1998 .............. 39,987,208 38,621,561
and $2,252,000 at June 30, 1998
Other intangible assets net of accumulated amortization of
$120,000 at September 30, 1998 ............................................ 6,604,917
Deferred financing costs, net of accumulated amortization of
$588,700 at September 30, 1998 and $400,000 at June 30, 1998 .............. 3,115,299 3,373,999
Other assets, net ........................................................... 430,867 418,084
------------ ------------
Total assets ......................................................... $ 74,824,263 $ 69,486,105
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
Accounts payable ......................................................... $ 685,732 $ 816,844
Accrued expenses ......................................................... 5,167,409 5,223,153
Medical claims payable ................................................... 807,230 966,251
Current portion of long term debt ........................................ 2,112,150 850,000
Accrued interest payable ................................................. 1,518,657 623,556
Current portion of capital lease obligations ............................. 329,474 328,295
------------ ------------
Total current liabilities ............................................ 10,620,652 8,808,099
Long term debt .............................................................. 5,415,621
Convertible subordinated notes payable ...................................... 45,000,000 46,000,000
Deferred tax liability ...................................................... 954,894 954,894
Obligations under capital lease ............................................. 365,641 496,766
------------ ------------
Total liabilities .................................................... $ 62,356,808 $ 56,259,759
------------ ------------
Commitments and contingencies
Shareholders' equity
Common stock; $0.0001 par value; 100,000,000 shares authorized, 17,536,283
shares issued at September 30, 1998 and 16,661,283 at June 30, 1998;
14,606,203 shares outstanding at September 30, 1998 and 13,731,283 at
June 30, 1998 .......................................................... 1,462 1,374
Additional paid-in capital ............................................... 32,910,465 31,099,303
Retained deficit ......................................................... (15,201,792) (12,631,651)
Treasury stock (2,930,000 shares) ........................................ (5,242,680) (5,242,680)
------------ ------------
Total shareholders' equity ............................................. 12,467,455 13,226,346
------------ ------------
Total liabilities and shareholders' equity ............................. $ 74,824,263 $ 69,486,105
============ ============

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

CONTINUCARE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
------------ ------------

Operations continuing at June 30, 1998
Revenue
Medical services, net .............................. $ 48,674,972 $ 2,205,165
Management fees .................................... 282,927 384,023
------------ ------------
Subtotal ......................................... 48,957,899 $ 2,589,188
Expenses
Medical services ................................... 41,385,623 585,577
Payroll and employee benefits ...................... 4,026,953 1,202,735
Provision for bad debt ............................. 250,525 63,323
Professional fees .................................. 260,842 10,954
General and administrative ......................... 3,098,292 796,530
Depreciation and amortization ...................... 1,734,576 103,563
------------ ------------
50,756,811 2,762,682
Operations disposed of during fiscal 1998
Revenue .............................................. -- 1,074,596
Expenses ............................................. -- 802,474
------------ ------------
Subtotal ........................................... -- 272,122
Income (loss) from operations ........................... (1,798,912) 98,628
Other income (expense)
Interest income .................................... 53,658 62,102
Interest expense ................................... (955,864) (35,753)
------------ ------------
(Loss) income before income taxes and extraordinary items (2,701,118) 124,977
(Benefit) provision for income taxes .................... -- 49,677
------------ ------------
Net (loss) income before extraordinary items ............ (2,701,118) 75,300
Gain on extinguishment of debt, net of taxes ............ 130,977 --
------------ ------------
Net (loss) income ....................................... $ (2,570,141) $ 75,300
============ ============
Net income (loss) per share before extraordinary items
Basic .............................................. $ (.19) $ .01
Diluted ............................................ $ (.19) $ .01
Extraordinary items
Basic .............................................. $ .01 $ --
Diluted ............................................ $ .01 $ --
Net income (loss) per share
Basic .............................................. $ (.18) $ .01
Diluted ............................................ $ (.18) $ .01
Shares used in earnings per share calculations
Basic .............................................. 14,063,892 10,888,993
Diluted ............................................ 14,063,892 11.112.883

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

CONTINUCARE CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1998 1997
-------------- ----------------
(UNAUDITED) (UNAUDITED)

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ....................................................... $(2,570,141) $ 75,300
Adjustments to reconcile net income to cash used in operating activities:
Depreciation and amortization including amortization
of deferred loan costs ................................................ 1,734,576 103,563
Bad debt expense ...................................................... 250,525 89,083
Gain on extinguishment of debt, net of taxes .......................... (130,977) --
Changes in assets and liabilities, excluding the effect of acquisitions:
Increase in accounts receivable ....................................... (187,866) (601,251)
Increase in prepaid expenses and other current assets ................. (133,483) (72,269)
Decrease (increase) in other receivables .............................. 151,406 (600,000)
Decrease in intangible assets ......................................... -- 237,137
Increase in other assets .............................................. (12,783) (50,761)
Decrease in medical claims payable .................................... (159,021) --
Increase (decrease) in accounts payable and accrued expenses .......... (186,856) 444,295
Increase (decrease) in accrued interest payable ....................... 895,101 (4,923)
Decrease in income and other taxes payable ............................ -- (539,798)
----------- -----------
Net cash used in operating activities ...................................... (349,519) (919,624)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisitions .............................................. (579,137) (3,406,411)
Cash paid for purchase of contracts ..................................... (4,225,000) --
-----------
Property and equipment additions ........................................ (352,402) (46,373)
Proceeds from notes receivable .......................................... 11,158 --
----------- -----------
Net cash used in investing activities ...................................... (5,145,381) (3,452,784)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment to extinguish debt ............................................ (720,000) --
Principal repayments under capital lease obligation ................... (129,946) (10,620)
Payment on acquisition notes .......................................... (901,252)
Proceeds from note payable ............................................ 5,000,000 2,500,000
Repayment of shareholder note ......................................... -- (599,000)
----------- -----------
Net cash provided by financing activities .................................. 3,248,802 1,890,380
----------- -----------
Net increase (decrease) in cash and cash equivalents ....................... (2,246,098) (2,482,028)

Cash and cash equivalents at beginning of period ........................... 7,435,724 6,989,580
----------- -----------
Cash and cash equivalents at end of period ................................. $ 5,189,626 $ 4,507,552
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

Stock issued for acquisition ............................................... $ 1,811,250 $ --
=========== ===========
Note payable for purchase of contracts ..................................... $ 2,500,000 $ --
=========== ===========
Cash paid for income taxes ................................................. $ -- $ 607,671
=========== ===========
Cash paid for interest ..................................................... $ 60,763 $ 68,297
=========== ===========

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)

NOTE 1 - UNAUDITED INTERIM INFORMATION

The accompanying interim consolidated financial data for Continucare
Corporation ("Continucare" or the "Company") are unaudited; however, in the
opinion of management, the interim data include all adjustments, consisting of
normal recurring accruals, necessary for a fair presentation of the results for
the interim period. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.

The results of operations for the three months ended September 30, 1998
are not necessarily indicative of the results to be expected for the year ending
June 30, 1999.

The interim unaudited consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and notes
thereto for the year ended June 30, 1998 as set forth in the Company's Form
10-KSB.

NOTE 2 - BASIS OF PRESENTATION

In fiscal 1998, the Company's focus shifted away from the behavioral
health area, an area which had previously been a substantial source of the
Company's revenue. In the fiscal year 1997, the contracts to manage and provide
staffing and billing services for behavioral health programs in hospitals and
freestanding mental health rehabilitation centers represented approximately 86%
of total revenue. In the first quarter of fiscal 1998, the Company assigned its
behavioral health management contracts with freestanding centers and hospitals.
The Company's operations in the behavioral health care area are referred to as
"Results from Operations Disposed of during Fiscal 1998" in the Consolidated
Statements of Operations. Certain prior year amounts have been reclassified
to conform with the current year presentation.

NOTE 3 - BUSINESS COMBINATION

On April 10, 1997, the Company, through Continucare Physician Practice
Management, Inc., a wholly owned subsidiary, acquired all of the outstanding
stock of certain arthritis rehabilitation centers and affiliated physician
practices. The acquisitions included the purchase of AARDS, INC. ("AARDS"), a
Florida corporation formerly known as Norman G. Gaylis, M.D., Inc. In connection
with the purchase the Company entered into a management agreement with ZAG
Group, Inc. ("ZAG"). The management agreement, among other things, provided for
ZAG to perform certain services in exchange for specified compensation. In
addition, the Company entered into a put/call agreement with ZAG, which allowed
each of the parties to require the other party, after a two-year period, to
either sell or purchase all the issued and outstanding capital stock of ZAG for
a specified price to be paid in a combination of cash and common stock of the
Company. In August the Company paid approximately $2 million to ZAG in
connection with the cancellation of the put/call agreement of which $115,000 was
paid in cash and the remaining $1,885,000 was paid by issuing 575,000 shares of
the Company's common stock with a fair market value of approximately $1.6
million. In the event that the common stock issued does not have an aggregate
fair market value of approximately $1,885,000 on October 15, 1999, the Company
is obligated to pay additional cash consideration or issue additional shares of
its common stock so that the aggregate value of the stock issued is
approximately $1,885,000. The management agreement was terminated upon the
cancellation of the put/call agreement. The total amount paid in connection with
the cancellation of the put/call agreement is included in cost in excess of
tangible assets acquired on the accompanying balance sheet and is being
amortized over a weighted average life of 14 years.

6
7

NOTE 4 - OTHER INTANGIBLE ASSETS

In August 1998 the Company purchased contracts with approximately 30
physicians from an unrelated entity. The total purchase price was approximately
$6.7 million of which $4.2 million was paid in cash at closing the remaining
$2.5 million is payable in equal monthly installments over the ensuing 24
months. The total amount is included in other intangible assets on the
accompanying consolidated balance sheet and is being amortized over 10 years,
the term of the contracts.

NOTE 5 - REPURCHASE OF NOTES

In August 1998, the Company purchased $1.0 million face value of its 8%
Convertible Subordinated Notes due 2002 for approximately $744,000, recognizing
a gain of approximately $200,000 which is included in gain on extinguishment of
debt on the accompanying consolidated statement of operations net of the related
income taxes.

NOTE 6 -CONTINGENCIES

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

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

The Company is a party to the case of KAMINE CREDIT CORP. AS ASSIGNEE
OF TRICOUNTY HOME HEALTH CARE SERVICES, INC. (KAMINE) V. CONTINUCARE
CORPORATION. Kamine is seeking in excess of $5 million damages for alleged
breach of contract. The Company believes the claim has little merit and intends
to vigorously defend the claim.

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

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

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS

This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. When used in this Form 10-Q, the words
"believe," "anticipate," "think," "intend," "plan," "will be," and similar
expressions, identify such forward-looking statements. Such statements regarding
future events and/or the future financial performance of the Company are subject
to certain risks and uncertainties, which could cause actual events or the
actual future results of the Company to differ materially from any
forward-looking statement. Certain factors that might cause such a difference
are set forth in the Company's Form 10-K for the period ended June 30, 1998,
including the following: (1) limited operating history of Continucare in current
business, (2) various risks associated with the acquisition of businesses
including the expenses associated with the integration of the acquired
businesses, difficulties in assimilating the operations of the acquired
entities, and diversion of management resources; (3) statutory and regulatory
changes, retroactive and prospective rate adjustments, administrative rulings
and funding restrictions, any of which could limit or reduce reimbursement
levels; (4) ability to attract and retain a sufficient number of qualified
medical professionals; and (5) fluctuations in the volume of services rendered
and/or the number of patients using the Company's services.

GENERAL

Continucare is a provider of integrated outpatient healthcare services
in Florida. The Company provides a broad continuum of healthcare services
through its network of physician practices, outpatient clinics, rehabilitation
centers, home healthcare services, diagnostic imaging services and laboratory
services (within its group physician practices). As a result of its ability to
provide a quality continuum of healthcare services through approximately 300
locations, the Company has become a preferred healthcare provider in Florida to
some of the nation's largest managed care organizations, including (i) Humana
Medical Plans, Inc., for which, as of September 30, 1998, it managed the care
for approximately 22,000 patients on a capitated basis and (ii) Foundation
Health Corporation Affiliates, for which, as of September 30, 1998, it managed
the care for approximately 33,000 patients on a capitated basis. As of September
30, 1998, the Company's Florida delivery services network included approximately
300 physicians.

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

RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction
with the unaudited consolidated statements and notes thereto appearing elsewhere
in this Form 10-Q.

8
9

THE FINANCIAL RESULTS DISCUSSED BELOW RELATED TO THE OPERATION OF CONTINUCARE
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AS COMPARED TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1997

REVENUE FROM OPERATIONS CONTINUING AT SEPTEMBER 30, 1998

Medical Services revenue increased from approximately $2,205,000 for
the three months ended September 30, 1997 to approximately $48,700,000 for the
three months ended September 30, 1998. The Company made a number of acquisitions
during fiscal 1998 as it developed its outpatient services strategy. The
substantial increase of approximately $46,470,000 in medical services revenues
for the three months ended September 30, 1998 was a result of these
acquisitions.

Approximately 21.8% of the Company's medical services revenue is
derived from fee-for-service arrangements and 78.2% from capitated payments from
HMOs.

Fee-for-service revenue represents amounts realized that relate
directly to medical services provided by a facility owned by the Company.
Capitated revenue represents a fixed monthly fee from an HMO in exchange for the
Company assuming responsibility for the provision of medical services for each
covered individual. The Company also has arrangements with hospitals whereby a
percentage of the hospital's charges are remitted to the Company for services
provided to patients of the hospital.

EXPENSES FROM OPERATIONS CONTINUING AT SEPTEMBER 30, 1998

Medical services expense of approximately $41,386,000 for the three
months ended September 30, 1998, represent the direct cost of providing medical
services to patients as well as the medical claims incurred by the Company under
the capitated contracts with HMOs. The costs of the medical services provided
include the salaries and benefits of health professionals providing the
services, insurance and other costs necessary to operate the centers. Medical
claims costs represent the cost of medical services provided by providers other
than the Company but which are to be paid by the Company for individuals covered
by capitated arrangements with HMOs. Medical services of approximately $586,000
for the three months ended September 30, 1997 represent the direct cost of
providing medical services to patients, including salaries and benefits and
insurance and other costs. The increase of approximately $40,800,000 was
attributable to the acquisitions noted above.

Payroll and related benefits increased by approximately $2,824,000, or
234.8%, from approximately $1,203,000 for the three months ended September 30,
1997 to approximately $4,027,000 for the three months ended September 30, 1998.
As a percent of revenue, salary and related benefits fell from 46.5% of total
revenue for the three months ended September 30, 1997 to 8.2% for the three
months ended September 30, 1998. This increase was a direct result of the growth
from the acquisitions made during 1998.

Provision for bad debts was approximately $251,000 or 0.5% of total
revenues for the three months ended September 30, 1998, as compared to
approximately $63,000 or 2.4% of total revenue for the three months ended
September 30, 1997. The dollar amount increase is due to the revenue increase
from the acquisitions during the years ended June 30, 1998 and 1997. The
decrease as a percentage of total revenue is due to the increase in revenue
under capitated managed care contracts.

Professional fees were approximately $261,000, or 0.5% of total
revenue, for the three months ended September 30, 1998 as compared to
approximately $11,000, or 0.4%, of total revenue, for the three months ended
September 30, 1997. The increase of approximately $250,000 is consistent with
the increase in revenue.

General and administrative expenses were approximately $3,098,000, or
6.3% of total revenue, for the three months ended September 30, 1998, as
compared to approximately $797,000, or 30.8% of total revenues, for the three
months ended September 30, 1997. The increase of approximately $2,401,000 was
primarily related to the increased costs attributable to the administrative
costs related to the rehabilitation entities, home health agencies, outpatient
primary care centers and the outpatient radiology and diagnostic imaging
services company acquired during fiscal year 1998.

9
10

Depreciation and amortization increased to approximately $1,735,000, or
3.5% of total revenue, for the three months ended September 30, 1998 as compared
to approximately $104,000, or 4.0% of total revenue, for the three months ended
September 30, 1997 primarily as a result of the amortization of goodwill and
other intangibles related to the acquisitions noted above.

REVENUES AND EXPENSES FROM OPERATIONS DISPOSED OF DURING 1998

The Company had no revenues or expenses during the three months ended
September 30, 1998, associated with operations disposed of during 1998.

INTEREST

Consolidated net interest income (expense) for the three months ended
September 30, 1998, was approximately ($902,000), or (1.8)% of total revenues,
compared to approximately $29,000, or 1.1% of total revenue, for the three
months ended September 30, 1997. Approximately $932,000 of interest expense for
the three months ended September 30, 1998 primarily relates to the $45 million
of 8% Convertible Subordinated Notes due September 30, 2002, (the "Notes")
issued on October 30, 1997 and amortization of deferred financing costs incurred
in connection with issuing the Notes. Interest on the notes is payable
semiannually beginning April 30, 1998.

NET INCOME (LOSS)

Continucare's consolidated net loss for the three months ended
September 30, 1998 was approximately ($2,540,000) compared to net income for the
three months ended September 30, 1997 of approximately $75,000 for the reasons
discussed above.

LIQUIDITY AND CAPITAL RESOURCES

In August 1998, the Company entered into a credit facility (the "Credit
Facility") with First Union National Bank of Florida ("First Union") which
provides for a $5,000,000 Acquisition Facility and a $5,000,000 Revolving Loan.
Under the terms of the Credit Facility, the Company may elect the interest rate
to be either the bank's prime rate or the London InterBank Offered Rate plus 250
basis points. Interest only on each acquisition advance under the Acquisition
Facility is payable monthly in arrears for the first six months. Commencing six
months from the date of each acquisition advance, the advance shall be repayable
in equal monthly amortization payments, based upon a five year amortization. The
Company borrowed the entire $5 million Acquisition Facility to fund acquisitions
in the first quarter of 1999. Interest only on the Revolving Loan advances is
payable quarterly in arrears. In all events, the Revolving Loan matures and all
unpaid principal and interest is due in full on August 31, 2001. The $5,000,000
Revolving Loan is comprised of (i) $2,000,000 reserved for a pending letter of
credit arrangement, and (ii) $3,000,000 which can be drawn commencing September
30, 1999, as long as the Company is in compliance with all covenants of the
Credit Facility. The Credit Facility (a) is secured by substantially all of the
assets of the Company, (b) is decreased by $1.5 million placed in a restricted
account at First Union if the pending letter of credit is issued, which will be
released when certain covenants have been met by the Company and (c) contains
restrictive covenants which, among other things, require the Company to maintain
certain financial ratios and minimum liquidity requirements and limit the
incurrence of additional debt, the payment of dividends and the amount of
capital expenditures. Although the Company is currently in compliance with the
covenants in the Credit Agreement, there can be no assurance that the Company
will be in compliance with the covenants through the maturity date.

For the three months ended September 30, 1998, net cash used in
operating activities was approximately $350,000 primarily as a result of the net
loss. For the three months ended September 30, 1998, net cash used in investing
activities was approximately $5,145,000, primarily related to the purchase of
contracts with approximately 30 physicians from an unrelated entity. Net cash
provided by financing

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11

activities for the three months ended September 30, 1998 was approximately
$3,249,000 comprised primarily of the $5 million borrowed under the Acquisition
Facility.

The Company's working capital was approximately $6,541,000 at September
30, 1998, compared to $11,124,000 at June 30, 1998.

During the three months ended September 30, 1998, capital expenditures
amounted to approximately $.3 million. Capital expenditures during fiscal 1999
principally for computers and equipment are not expected to exceed $1.0 million.

The Company is taking steps to improve its cash flow position and
profitability, including reduction of annualized salary expense by approximately
$3.0 million and implementation of new procedures to improve billings and
collections. Assuming the successful implementation of these steps and the
compliance by the Company of the financial covenants set forth in the Credit
Agreement, the Company believes that its cash on hand and anticipated cash flow
from operations will be sufficient to meet the Company's obligations during
fiscal 1999, although there can be no assurance that it will be able to do so.

IMPACT OF YEAR 2000

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

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

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

The Company will utilize both internal and external resources to
reprogram, or replace and test the software and patient care equipment for Year
2000 modifications. The Company anticipates completing Year 2000 project by June
30, 1999, which is prior to any anticipated impact on its operating systems. The
total cost of the Year 2000 project is estimated at $1.0 million and is being
funded through operating cash flows. Of the total projected cost, approximately
$800,000 is attributable to the purchase of new software and patient care
equipment, which will be capitalized. The remaining $200,000, which will be
expensed as incurred, is not expected to have a material effect on the results
of operations. Through September 30, 1998, the Company has incurred
approximately $600,000 ($100,000 expensed and $500,000 capitalized for new
systems and equipment).

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

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 2. CHANGES IN THE RIGHTS OF THE COMPANY'S SECURITY HOLDERS

In July 1998, the Company issued 575,000 shares of Common Stock to the
shareholders of ZAG Group, Inc. as partial consideration for a business
combination with the Company. See Note 3 to Notes to Consolidated Financial
Statements. Also in July 1998, the Company issued 300,000 shares of Common Stock
as part of a settlement of a claim by a former shareholder. All such shares were
issued pursuant to an exemption set forth under Section 4(2) of the Securities
Act of 1933, as amended.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

10.16 Employment Agreement between the Company and Bruce
Altman, dated as of the 11th day of August, 1998

10.17 Acquisition Facility ($5,000,000), Revolving Credit
Facility ($5,000,000) and Security Agreement, among
the Company and First Union National Bank of Florida,
dated August 17, 1998

10.18 Physician Employment Agreement, dated as of April
1997, by and between Arthritis and Rheumatic Disease
Specialties, Inc. and Norman Gaylis, M.D.

10.19 Employment Agreement, dated as of the 1st day of
October, 1997, by and between Continucare Corporation
and Steven J. Baldwin.

27.1 Financial Data Schedule

(b) Reports on Form 8-K

The Company filed a Form 8-K, dated August 18, 1998, to report
an acquisition of certain assets under Item 2 of Form 8-K. It
was not necessary to provide financial statements in
connection with the acquisition.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Company has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.

CONTINUCARE CORPORATION

Dated: November 16, 1998 By: /s/ Charles M. Fernandez
---------------------------------
Charles M. Fernandez, Chairman,
Chief Executive Officer, President

Dated: November 16, 1998 By: /s/ Bruce Altman
---------------------------------
Bruce Altman
Senior Vice President and
Chief Financial Officer