<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION

                                    FORM 10-Q


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
           OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998.


                         COMMISSION FILE NO.: 333-15595

                            PHYSICIAN PARTNERS, INC.
--------------------------------------------------------------------------------
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

               DELAWARE                                         93-1217068
---------------------------------------------           ------------------------
(STATE OR OTHER JURISDICTION OF INCORPORATION           (I.R.S. EMPLOYER ID NO.)
OR ORGANIZATION)


111 SW COLUMBIA STREET, SUITE 725
PORTLAND, OREGON                                                 97201
---------------------------------------------           ------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                       (ZIP CODE)


REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:   (503) 224-2249
                                                      ---------------------

                                 NOT APPLICABLE
--------------------------------------------------------------------------------
              (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
                          IF CHANGED SINCE LAST REPORT)


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


As of November 13, 1998, 6,474,196 shares of the Registrant's Class A Common
Stock, par value $0.01 per share, were outstanding.


<PAGE>   2
                            PHYSICIAN PARTNERS, INC.

                                 BALANCE SHEETS

           AS OF SEPTEMBER 30, 1998 (Unaudited) AND DECEMBER 31, 1997
                 (All dollar amounts are expressed in thousands)


<TABLE>
<CAPTION>
                                                                                         SEPTEMBER 30,       DECEMBER 31,
                              ASSETS                                                         1998               1997
                                                                                         -------------      -------------
<S>                                                                                      <C>                <C>          

CURRENT ASSETS:
Cash and cash equivalents                                                                $       4,178      $       1,761

Restricted investments                                                                             250                250
Patient accounts receivable, net of allowances for contractual
  discounts and uncollectible accounts of  $12,005 and $10,591 at
  September 30, 1998 and December 31, 1997, respectively                                        17,543             17,094
Healthcare and other receivables                                                                 2,478              5,702
Inventories of drugs and supplies                                                                  550                408
Prepaid expenses, deposits, and other current assets                                             1,493              1,405
                                                                                         -------------      -------------
         Total current assets                                                                   26,492             26,620

PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation and amortization
   of $27,392 and $25,063 at September 30, 1998  and December 31, 1997, 
   respectively                                                                                 42,014             42,992
OTHER ASSETS:
Receivables from Clinics, net of allowance of $1,000                                             4,431              2,979
Investment in affiliates                                                                         1,318              1,003
Other                                                                                              218                237
                                                                                         -------------      -------------
         Total assets                                                                    $      74,473      $      73,831
                                                                                         =============      =============

          LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
Line of credit                                                                           $       5,410      $       5,460
Current portion of long-term debt and capital and direct financing lease                         
    obligations                                                                                  1,059              1,112
Drafts payable                                                                                     906              3,026
Accounts payable and accrued expenses                                                            3,768              4,001
Accrued healthcare costs                                                                         6,684              6,565
Accrued compensation and related expenses                                                        8,102              5,079
Deferred revenue                                                                                   174                488
                                                                                         -------------      -------------
         Total current liabilities                                                              26,103             25,731

DIVIDENDS PAYABLE                                                                                1,647                635
LONG-TERM DEBT, net of current portion                                                           7,615              8,177
CAPITAL AND DIRECT FINANCING LEASE OBLIGATIONS, net of current portion                          17,580             17,841
DEFERRED COMPENSATION AND OTHER                                                                  4,427              4,899
REDEEMABLE PREFERRED STOCK AND RELATED WARRANT                                                  17,000             17,910
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock:
Class A - Voting; $0.01 par value; 20,000,000 shares authorized; 6,474,196 and
  6,435,696 shares issued and outstanding at September 30, 1998
  and December 31, 1997, respectively                                                               65                 64
Class B  - Voting; $0.01 par value; 30,000,000 shares authorized; no shares 
  issued or outstanding                                                                             --                 --
Treasury stock, at cost                                                                           (748)              (748)
Additional paid in capital                                                                       9,646              9,626
Accumulated deficit                                                                             (7,472)            (8,661)
Notes receivable from stockholders                                                                (653)              (736)
Unamortized value of restricted stock awards                                                      (737)              (907)
                                                                                         -------------      -------------
         Total stockholders' equity (deficit)                                                      101             (1,362)
                                                                                         -------------      -------------
         Total liabilities and stockholders' equity (deficit)                            $      74,473      $      73,831
                                                                                         =============      =============
</TABLE>


      The accompanying notes are an integral part of these balance sheets.


                                                                               2
<PAGE>   3
                            PHYSICIAN PARTNERS, INC.

                            STATEMENTS OF OPERATIONS

         FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
 (All dollar amounts are expressed in thousands, except earnings (loss) per
                                share amounts)

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                          Three months ended                      Nine months ended
                                                              September 30,                         September 30,
                                                         1998               1997               1998               1997
                                                      ----------         ----------         ----------         ----------
<S>                                                   <C>                <C>                <C>                <C>       

REVENUES:
Reimbursement of manager's expenses                   $   29,791         $   27,820         $   88,103         $   73,731
Management fee                                             1,850              1,567              5,758              4,280
                                                      ----------         ----------         ----------         ----------
Net revenues                                              31,641             29,387             93,861             78,011

OPERATING EXPENSES:
Clinic salaries, wages and benefits                       12,126             11,495             36,418             30,981
Purchased medical services                                 6,193              5,545             18,002             14,587
Medical and office supplies                                4,999              4,668             14,495             11,340
General and administrative expenses                        3,287              3,058              9,812              8,654
Lease and rent expense                                     1,104                945              3,039              2,494
Depreciation and amortization                              1,260              1,188              3,806              3,123
Corporate costs                                            1,755                819              4,555              1,784
                                                      ----------         ----------         ----------         ----------

Total operating expenses                                  30,724             27,718             90,127             72,963
                                                      ----------         ----------         ----------         ----------

Operating income                                             917              1,669              3,734              5,048

OTHER INCOME (EXPENSE):
Reorganization costs                                        --                  (42)              --                 (719)
Revaluation of redeemable preferred stock                  
 warrant                                                   4,116               --                4,116               --  
Interest and other income                                    107                198                228                198
Interest expense                                            (888)              (921)            (2,671)            (2,552)
                                                      ----------         ----------         ----------         ----------

Income before provision for income taxes                   4,252                904              5,407              1,975
                                                      ----------         ----------         ----------         ----------

PROVISION FOR INCOME TAXES                                  --                 --                 --                 --
                                                      ----------         ----------         ----------         ----------

NET INCOME                                                 4,252                904              5,407              1,975

ACCRETION FOR PREFERRED STOCK                               --                   57              3,206                 57

PREFERRED STOCK DIVIDENDS                                    337                298              1,012                298
                                                      ----------         ----------         ----------         ----------

NET INCOME APPLICABLE TO COMMON STOCKHOLDERS          $    3,915         $      549         $    1,189         $    1,620
                                                      ==========         ==========         ==========         ==========

EARNINGS PER SHARE - Basic                            $     0.61         $     0.09         $     0.18         $     0.28
                                                      ==========         ==========         ==========         ==========
EARNINGS (LOSS) PER SHARE - Diluted                   $    (0.02)        $     0.07         $    (0.36)        $     0.25
                                                      ==========         ==========         ==========         ==========
</TABLE>


        The accompanying notes are an integral part of these statements.


                                                                               3
<PAGE>   4
                            PHYSICIAN PARTNERS, INC.

                            STATEMENTS OF CASH FLOWS

            FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
                (All dollar amounts are expressed in thousands)

                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                             Nine months ended
                                                                                September 30,
                                                                           1998               1997
                                                                       ------------       ------------
<S>                                                                    <C>                <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income                                                             $      5,407       $      1,975
Adjustments to reconcile net income to net cash provided by 
  (used in) operating activities:
Depreciation and amortization                                                 3,999              3,179
Loss on disposal of property, plant and equipment                                48                 --
Revaluation of redeemable preferred stock warrant                            (4,116)                --
Changes in operating assets and liabilities (excluding assets
  and liabilities assumed by Physician Partners, Inc):
Patient accounts receivable, net                                               (449)               275
Healthcare and other receivables                                              3,224                (99)
Receivables from Clinics, net                                                (1,452)            (3,082)
Inventories of drugs and supplies                                              (142)                15
Prepaid expenses, deposits, and other current assets                            (88)              (457)
Investment in affiliates                                                       (585)              (561)
Other assets                                                                     10                 83
Drafts payable                                                               (2,120)              (332)
Accounts payable and accrued expenses                                          (233)             1,381
Accrued healthcare costs                                                        119               (112)
Deferred revenue                                                               (314)                63
Accrued compensation and related expenses                                     3,023             (1,904)
Deferred compensation and other long term liabilities                          (472)              (637)
                                                                       ------------       ------------
   Net cash provided by (used in) operations                                  5,859               (213)

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investments in affiliates                                         270                100
Purchases of property, plant and equipment                                   (2,890)            (1,833)
                                                                       ------------       ------------
   Net cash used in investing activities                                     (2,620)            (1,733)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on line of credit                                                  (50)            (4,550)
Principal payments on long-term debt and capital and direct 
   financing lease obligations                                                 (876)            (7,654)
Issuance of common stock                                                         21               --
Proceeds from repayments of notes receivable from stockholders                   83                211
Reorganization costs funded by Clinics                                           --                342
Proceeds from issuance of preferred stock and warrants                           --             14,705
Cash assigned to Physician Partners, Inc. in merger                              --              1,358
Purchase of treasury stock                                                       --               (600)
                                                                       ------------       ------------
   Net cash provided by (used in) financing activities                         (822)             3,812
   
NET INCREASE IN CASH AND CASH EQUIVALENTS                                     2,417              1,866
CASH AND CASH EQUIVALENTS, beginning of period                                1,761                  4
                                                                       ------------       ------------
CASH AND CASH EQUIVALENTS, end of period                               $      4,178       $      1,870
                                                                       ============       ============
</TABLE>


        The accompanying notes are an integral part of these statements.


                                                                               4
<PAGE>   5
                            PHYSICIAN PARTNERS, INC.

                      STATEMENTS OF CASH FLOWS (CONTINUED)

            FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
                (All dollar amounts are expressed in thousands)

                                   (Unaudited)


<TABLE>
<CAPTION>
                                                            Nine months ended
                                                              September 30,
                                                           1998            1997
                                                        ---------       ---------
<S>                                                     <C>             <C>


SUPPLEMENTAL DISCLOSURE OF CASH  FLOW INFORMATION:

Cash paid for interest                                  $   2,875       $   2,743
Cash paid for income taxes                                    585              --



SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

Accretion for preferred stock                           $   3,206       $      57
Preferred stock dividends                                   1,012             298


On February 1, 1997, as a result of the merger, PPI succeeded to the assets and
liabilities of the Old PCs. The book value of the Old PCs' assets and
liabilities, including $1,358 of cash, at January 31, 1997 are presented below:
 
Current assets                                                           $ 23,769
Property, plant and equipment                                              44,722
Other long-term assets                                                      1,597
Current liabilities                                                        28,777
Long-term liabilities                                                      38,975
Contributed equity                                                          2,336
</TABLE>


        The accompanying notes are an integral part of these statements.


                                                                               5
<PAGE>   6
                            PHYSICIAN PARTNERS, INC.

                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
                (All dollar amounts are expressed in thousands)

                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                                                                            
                                                Class A                                                         Unamortized 
                                                                          Treasury            Additional         Value of   
                                     Number                               Stock, at            Paid in          Restricted  
                                    of Shares           Amount              Cost               Capital         Stock Awards 
                                  ------------       ------------       ------------        ------------       ------------ 
<S>                               <C>                <C>                <C>                 <C>                <C>          

BALANCE,
   December 31, 1997                 6,435,696       $         64       $       (748)       $      9,626       $       (907)
Issuance of common stock                38,500                  1               --                    20               --   
Preferred stock                           --                 --                 --                  --                 --   
   dividends
Accretion on preferred                    --                 --                 --                  --                 --   
   stock
Amortization of                           --                 --                 --                  --                  170 
   stock awards
Repayment of stock
   subscription                           --                 --                 --                  --                 --   
Net income                                --                 --                 --                  --                 --   
                                  ============       ============       ============        ============       ============ 
BALANCE,
   September 30, 1998                6,474,196       $         65       $       (748)       $      9,646       $       (737)
                                  ============       ============       ============        ============       ============ 
</TABLE>


<TABLE>
<CAPTION>
                                    Notes 
                                  Receivable
                                     From             
                                    Stock-            Accumulated
                                   holders              Deficit              Total
                                 ------------        ------------        ------------
<S>                              <C>                 <C>                 <C>          

BALANCE,
   December 31, 1997             $       (736)       $     (8,661)       $     (1,362)
Issuance of common stock                 --                  --                    21
Preferred stock                          --                (1,012)             (1,012)
   dividends
Accretion on preferred                   --                (3,206)             (3,206)
   stock
Amortization of                          --                  --                   170
   stock awards
Repayment of stock
   subscription                            83                --                    83
Net income                               --                 5,407               5,407
                                 ============        ============        ============
BALANCE,
   September 30, 1998            $       (653)       $     (7,472)       $        101
                                 ============        ============        ============
</TABLE>


        The accompanying notes are an integral part of these statements.


                                                                               6
<PAGE>   7
                            PHYSICIAN PARTNERS, INC.

                     NOTES TO UNAUDITED FINANCIAL STATEMENTS

                      NINE MONTHS ENDED SEPTEMBER 30, 1998
    (All dollar amounts are expressed in thousands, except earnings per share
                                    amounts)



1.   BASIS OF PRESENTATION:

The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial reporting
and in accordance with Rule 10-01 of Regulation S-X.

In the opinion of the management of Physician Partners, Inc. ("PPI"), the
unaudited interim financial statements contained in this report reflect all
adjustments which are necessary for a fair presentation of the financial
position and the results of operations for the interim periods presented. The
results of operations for any interim period are not necessarily indicative of
results for the full year.

These financial statements, footnote disclosures and other information should be
read in conjunction with the financial statements and the notes thereto included
in PPI's filing under Form 10-K, as amended on Form 10-K/A, for the year ended
December 31, 1997.

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


2.   NET REVENUES:

The following represents amounts included in the determination of net revenue
for the nine months ended September 30, 1998:

<TABLE>
<CAPTION>
                                          Corvallis     HealthFirst         Medford      Combined
                                          ---------     -----------         -------      --------
<S>                                       <C>           <C>                 <C>          <C>     
Net Clinic Revenue                          $34,829         $51,764         $37,498      $124,091
Less:  Manager's Expenses                    24,653          36,651          26,799        88,103
                                            -------         -------         -------      --------
Adjusted Revenue                             10,176          15,113          10,699        35,988
                                              X 16%           X 16%           X 16%         X 16%
                                            -------         -------         -------      --------
Management Fee                              $ 1,628         $ 2,418         $ 1,712         5,758
Reimbursement of Manager's
  Expenses                                                                                 88,103
                                                                                         --------
PPI Net Revenue                                                                          $ 93,861
                                                                                         ========
</TABLE>

3.  INCOME TAXES:

During the three and nine months ended September 30, 1998, PPI reversed a
portion of the valuation reserve against the deferred tax assets. Therefore, the
current period tax provision will be offset by a tax benefit recognized upon the
reversal of the valuation allowance resulting in no net tax provision being
reflected in the accompanying statements of operations.


                                                                               7
<PAGE>   8
4.  EARNINGS PER SHARE:

Effective December 31, 1997, the Company adopted SFAS 128, Earnings Per Share.
Under the new requirements, the Company reports basic and diluted earnings per
share ("EPS"). The computation of diluted EPS includes the effect of stock
options and warrants, if such effect is dilutive:


<TABLE>
<CAPTION>
                                                              Three months ended                          Nine months ended
                                                                 September 30,                              September 30,
                                                          1998                  1997                 1998                  1997
                                                      ------------          ------------         ------------          ------------
<S>                                                   <C>                   <C>                  <C>                   <C>         
EARNINGS:
   Net income applicable to common
    stockholders                                      $      3,915          $        549         $      1,189          $      1,620
   Revaluation of redeemable preferred stock
    warrant                                                 (4,116)                 --                 (4,116)                   --
                                                      ------------          ------------         ------------          ------------
   Net income (loss) attributable to diluted
    EPS                                               $       (201)         $        549         $     (2,927)         $      1,620
                                                      ============          ============         ============          ============

SHARES:
    Weighted average shares outstanding for
     basic EPS                                           6,464,087             6,434,541            6,453,593             5,730,575
    Stock option and warrant dilution                    1,781,894             1,768,456            1,781,894               677,389
                                                      ------------          ------------         ------------          ------------
    Weighted average shares outstanding for
     diluted EPS                                         8,245,981             8,202,997            8,235,487             6,407,964
                                                      ============          ============         ============          ============

Basic EPS                                             $       0.61          $       0.09         $       0.18          $       0.28
                                                      ============          ============         ============          ============

Diluted EPS                                           $      (0.02)         $       0.07         $      (0.36)         $       0.25
                                                      ============          ============         ============          ============
</TABLE>


The number of options to purchase shares of common stock that were excluded from
the table above (as the effect would have been anti-dilutive) was 1,680,747 for
the three and nine months ended September 30, 1998.

5.  PREFERRED REDEEMABLE STOCK AND RELATED WARRANT:

In July 1997, PPI and First Union Capital Partners, Inc. ("First Union") entered
into the Preferred Stock and Warrant Purchase Agreement ("Purchase Agreement").
Pursuant to the Purchase Agreement, First Union purchased from PPI, for a total
purchase price of $15,000 (i) 15,000 shares of Series B Cumulative Redeemable
Preferred Stock of PPI ("Preferred Shares") and (ii) a Common Stock Purchase
Warrant (the "Warrant") to purchase up to 1,799,893 shares ("Warrant Shares") of
Class B Common Stock of PPI. The number of Warrant Shares that First Union may
purchase under the Warrant may be reduced to 942,784 if the Preferred Shares are
redeemed in full by June 30, 1999, and to 1,212,228 if redeemed in full by June
30, 2000.

The Preferred Stock has been accreted up to its redemption value of $15,000 as
of June 30, 1998. The Warrant was originally valued at $6,116 as of July 1997.
The value was based on probability factors assigned to the various share amounts
which may be issued, and the fair market value per share as of July 1997. Due to
several factors, including the significant decrease in stock values of physician
practice management companies, PPI management has determined that the estimated
fair market value of the Warrant is $2,000 as of September 30, 1998. In
accordance with EITF 96-13, the reduction in the Warrant value of $4,116 has
been recorded in the accompanying statements of operations. The valuation of the
Warrant will continue to be assessed and any change in the estimated fair market
value of the Warrant will be adjusted through the statement of operations.


                                                                               8
<PAGE>   9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                                 OF OPERATIONS

The statements contained in this report that are not purely historical or which
might be considered an opinion or projection concerning the Company or its
business, whether express or implied, are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements may include statements regarding the Company's expectations,
intentions, plans or strategies regarding the future, including statements
related to the Year 2000 Issue. All forward-looking statements included in this
report are based upon information available to the Company on the date hereof,
and the Company assumes no obligation to update any such forward-looking
statements. It is important to note that the Company's actual results could
differ materially from those described or implied in such forward-looking
statements because of certain factors which could affect the Company. Such
forward-looking statements should be evaluated in light of factors described in
the Company's periodic filings with the SEC, on Forms 10-K, 10-Q, and 8-K (if
any), and any amendments thereto.


OVERVIEW AND SIGNIFICANT EVENTS

Physician Partners, Inc. ("PPI" or "Company") is a physician practice management
("PPM") company that manages primary care and multi-specialty clinics in the
Pacific Northwest. PPI was incorporated in June 1996 and in February 1997 began
managing the operations of three clinics --Medford Clinic, PC ("Medford"), The
Corvallis Clinic, PC ("Corvallis") and HealthFirst Medical Group, PC
("HealthFirst" and, together with Medford and Corvallis, the "Clinics").

PPI and each of the Clinics have entered into 40-year management agreements (the
"Management Agreement") whereby PPI provides physician practice management
services to the Clinics. PPI provides, among other things, management and
administrative services, capital resources, facilities, equipment and supplies.
As consideration, PPI is entitled to reimbursement of all managerial costs and
expenses ("Manager's Expenses") incurred by PPI and a management fee equal to
16% of the amount by which net revenues of a Clinic exceeds Manager's Expenses.

The three Clinics have 24 clinical delivery sites and employ approximately 300
providers. PPI endeavors to facilitate the delivery of high quality healthcare
by involving physicians at every level of the organization. To increase
revenues, PPI is working with the Clinics to (i) recruit additional physicians,
(ii) add new ancillary services, and (iii) negotiate more
favorable managed care contracts.

During the third quarter of 1998, PPI received an offer from HealthFirst to
purchase the assets used by PPI in managing HealthFirst and to terminate the
Management Agreement. PPI and HealthFirst have engaged in preliminary
discussions with respect to terms of such proposed purchase and termination. If
the Management Agreement with HealthFirst were to be terminated, future
management fee revenues of PPI would decrease by approximately 40%.


                                                                               9
<PAGE>   10
RESULTS OF OPERATIONS

1998 compared to 1997
The reimbursement of Manager's Expenses increased $2.0 million, or 7.1%, to
$29.8 million in the three months ended September 30, 1998 from $27.8 million in
the three months ended September 30, 1997. This increase, as well as the
increase in operating expenses, is mainly the result of increases in clinic
salaries, wages and benefits, purchased medical services and medical and office
supplies. The increase in clinic salaries, wages and benefits of $0.6 million,
or 5.5%, in the third quarter of 1998 compared to 1997 is mainly the result of
standard wage increases. Purchased medical services increased $0.6 million, or
11.7%, in the third quarter of 1998 compared to 1997 due primarily to higher
utilization. The increase in medical and office supplies of $0.3 million, or
7.1%, is mainly due to increased usage of oncology drugs and increased pharmacy
volumes which are partially offset by increased Fee-for-Service Revenues of the
Clinics. The reimbursement of Manager's Expenses increased $14.4 million, or
19.5%, to $88.1 million in the nine months ended September 30, 1998 from $73.7
million in the nine months ended September 30, 1997. This increase, as well as
the increase in operating expenses, is due to the factors discussed above and
the result of a nine month operating period in 1998 as compared to eight months
of operating activity in the nine months ended September 30, 1997.

Management fee revenues increased $0.3 million to $1.9 million in the third
quarter of 1998 and increased $1.5 million to $5.8 million in the nine months
ended September 30, 1998 due to an increase in the Clinics' revenues partially
offset by the increase in Manager's Expenses. In addition, $0.4 million of the
increase in the nine months ended September 30, 1998 in management fee revenues
is due to a nine month operating period in 1998 as compared to eight months of
operating activity in 1997.

Corporate costs consist of all salaries, wages and benefits of PPI management,
outside professional expenses and other operating expenses of the PPI corporate
office. Corporate costs increased $1.0 million to $1.8 million in the third
quarter of 1998 from $0.8 million in the third quarter of 1997 and increased
$2.8 million to $4.6 million in the nine months ended September 30, 1998 from
$1.8 million in the nine months ended September 30, 1997. $0.9 million of the
increase in the nine months ended September 30, 1998 is due to the use of
outside professional services to assist the Company in the evaluation of its
various strategic options. $0.4 million and $1.0 million of the increase in the
three and nine months ended September 30, 1998, respectively, are due to an
increase in the costs of staffing and operating the corporate office (which was
not fully staffed until the first quarter of 1998). The growth in corporate
personnel has enabled the corporate office to enhance services provided to the
Clinics in the areas of finance, managed care contracting, and strategic
planning. Corporate costs include a $0.5 million provision against patient
accounts receivable in the three and nine months ended September 30, 1998. The
Company expects to continue to incur expenses relating to the evaluation of its
various strategic options.

Accretion of preferred stock of $3.2 million in the nine months ended September
30, 1998 and preferred stock dividends of $0.3 million and $1.0 million in the
three and nine months ended September 30, 1998, respectively, are the result of
the Preferred Stock and Warrant Purchase Agreement entered into with First Union
on July 10, 1997. The preferred stock has been accreted up to its redemption
value of $15.0 million as of June 30, 1998 and accordingly, there was no
additional accretion in the three months ended September 30, 1998. Dividends
will continue to accrue at 9% per annum until the preferred stock is redeemed.

Revaluation of redeemable preferred stock warrant of $4.1 million in the three
and nine months ended September 30, 1998 relates to the Warrant held by First
Union. The Warrant was valued at $6.1 million as of July 1997 and was revalued
to $2.0 million as of September 30, 1998 due to various factors, including the
recent decline in PPM stock values. (See Note 5 of the Notes to Unaudited
Financial Statements.)


                                                                              10
<PAGE>   11
LIQUIDITY AND CAPITAL RESOURCES

Liquidity
Working capital decreased slightly from $0.9 million at December 31, 1997 to
$0.4 million at September 30, 1998. In the nine months ended September 30, 1998,
cash flows from operations provided $5.9 million compared to the use of $0.2
million in the nine months ended September 30, 1997. The cash provided in the
nine months ended September 30, 1998 is mainly due to net income, depreciation
and amortization, collection of healthcare and other receivables, and an
increase in accrued compensation and related expenses, partially offset by the
revaluation of redeemable preferred stock warrant, an increase in receivables
from Clinics and a decrease in drafts payable.

At September 30, 1998, PPI had approximately $4.2 million in cash and cash
equivalents and $9.6 million available under its operating line of credit with
U.S. National Bank of Oregon. PPI believes that the cash and cash equivalents,
combined with the line of credit and cash flows from operations, are sufficient
to meet PPI's planned capital expenditures and working capital needs for at
least the next 12 months.

Capital Expenditures
Capital expenditures in the nine months ended September 30, 1998 were $2.9
million. Capital expenditures during 1998 consist mainly of purchases of medical
and office equipment and information systems.

Line of Credit
At September 30, 1998, $5.4 million was outstanding under the line of credit
with U.S. National Bank of Oregon. PPI, at its discretion, may make borrowings
at prime rate (currently 8.0% per annum) or in $0.5 million increments at LIBOR
plus a margin. PPI is required to pay an annual commitment fee on the unused
portion of the commitment at the rate of .375% per annum. The line of credit
contains certain covenants that, among other things, require PPI to meet certain
financial goals. PPI was in compliance with all such covenants at September 30,
1998. PPI had approximately $9.6 million available on the operating line of
credit at September 30, 1998.


Year 2000
The Year 2000 issue involves a flaw in many electronic data processing systems
and electronic devices which prevents them from processing year-date data
accurately beyond the 1999 calendar year. The inability to process such data
could result in computer system failures or miscalculations of critical
financial and operational information.

In 1997, PPI developed its Year 2000 plan and began modifying its information
technology systems to process transactions in the year 2000. PPI has identified
the systems requiring upgrades and has completed a portion of the upgrades.
Testing has been completed on several of the systems and will continue over the
next 12 months. The Company relies on several outside vendors and has either
received or is planning to receive confirmation of compliance, documented
compliance in contracts, or identified an alternative vendor.

The Company estimates on a preliminary basis that the cost of assessment,
renovation, testing and implementation of the system upgrades will range from
approximately $0.6 million to $1.0 million, of which $0.3 million has been
incurred. This estimate, based on currently available information, will be
updated as the Company continues its assessment and proceeds with renovation,
testing and implementation and may be adjusted upon receipt of more information
from the Company's vendors and other third parties and upon the design and
implementation of the Company's contingency plan. In addition, the availability
and cost of consultants and other personnel trained in this area and
unanticipated acquisitions might materially affect the estimated costs.

The Company's Year 2000 issue involves significant risks. There can be no
assurance that the Company will succeed in implementing its Year 2000 plan. If
the Company's renovated or replaced internal information technology systems
fail, significant problems including delays may be incurred in billing and


                                                                              11
<PAGE>   12
collection for services performed by the Clinics. If the computer systems of
third parties with which the Company's systems exchange data do not become Year
2000 compliant both on a timely basis and in a manner compatible with continued
data exchange with the Company's information technology systems, significant
problems may be incurred in billing and reimbursement. If any of these
uncertainties were to occur, the Company's business, financial condition and
results of operations would be adversely affected. However, the Company is
unable to assess the likelihood of such events occurring or the extent of the
effect on the Company.

The Company is developing contingency plans to address the Year 2000 risks with
internal information technology systems and with each of the Clinics. The
contingency plans focus on two main areas: financial operations (involving
billing, collections, financial results, and similar data) and operational
equipment (such as medical equipment, phones, and elevators). The contingency
plans will also identify alternative vendors, develop manual processing systems,
and plan around regional problems (such as power blackout, transportation, and
long distance phone problems). The contingency plans are in different stages at
each of the Clinics and are anticipated to be completed by mid 1999.


                                                                              12
<PAGE>   13
                                     PART II


ITEM 1: LEGAL PROCEEDINGS
None.


ITEM 2: CHANGES IN SECURITIES
None.


ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.


ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.


ITEM 5: OTHER INFORMATION
None.


ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

        (a) Exhibits

           27   Financial Data Schedule

        (b) Reports on Form 8-K 

           None.


                                                                              13
<PAGE>   14
                            PHYSICIAN PARTNERS, INC.

                                   SIGNATURES

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


                                      PHYSICIAN PARTNERS, INC.
                                             (Registrant)

Date:   November 13, 1998                    By:/s/ DAVID GOLDBERG
                                                ----------------------------
                                             David Goldberg,
                                             President and Chief Executive
                                             Officer


Date:   November 13, 1998                    By:/s/ TIM E. DUPELL
                                                ----------------------------
                                             Tim E. Dupell,
                                             Chief Financial Officer,
                                             Senior Vice President


                                                                              14