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

                                   FORM 10-K

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

                  For the fiscal year ended December 31, 1997

                                       OR

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

             For the transition period from --------- to ----------

                         Commission File Number 0-20905

                     UNITED PAYORS & UNITED PROVIDERS, INC.
             (Exact name of registrant as specified in its charter)

                                    Delaware
                        (State or other jurisdiction of
                         incorporation or organization)

                                   51-0374698
                    (I.R.S. Employer Identification Number)

         2275 Research Boulevard, 6th Floor, Rockville, Maryland 20850
               (Address of principal executive offices, Zip Code)

                                 (301) 548-1000
                (Registrant's phone number, including area code)

                                 Not Applicable
              (Former name, former address and former fiscal year,
                         if changed since last report)

Securities registered pursuant to 12(b) of the Act:None
Securities registered pursuant to 12(g) of the Act:Common Stock, $0.01 par value

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: ( X )

The number of shares of Common stock, par value $.01 per share, outstanding on
February 27, 1998 was 11,573,636. As of February 27, 1998, assuming as fair
value the last sale price of $27.00 per share on The Nasdaq Stock Market, the
aggregate fair value of shares held by non-affiliates was approximately
$89,869,000.

                      Documents incorporated by reference:

The Company's Proxy Statement for its annual meeting of stockholders to be held
in June, 1998, a definitive copy of which will be filed within 120 days of
December 31, 1997, is incorporated by reference in Part III of this Report on
Form 10-K.

The Company's Registration Statement filed with the Commission on Form S-1, as
amended, (Registration No. 333-3814) is incorporated by reference in Part IV of
this Report on Form 10-K.


<PAGE>



                     United Payors & United Providers, Inc.
                                and Subsidiaries

                           Fiscal Year 1997 Form 10-K

                                TABLE OF CONTENTS


                                                                           Page
PART I

  Item 1.     Business.........................................................1
  Item 2.     Properties.......................................................9
  Item 3.     Legal Proceedings................................................9
  Item 4.     Submission of Matters for a Vote of Security Holders.............9

PART II

  Item 5.     Market for Registrant's Common Equity and Related Stockholder
              Matters.........................................................10
  Item 6.     Selected Consolidated Financial Data............................10
  Item 7.     Management's Discussion and Analysis of Financial Condition
                 and Results of Operations....................................11
  Item 8.     Financial Statements and Supplementary Data.....................17
  Item 9.     Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosure........................................17

PART III

  Item 10.    Directors and Executive Officers of the Registrant..............18
  Item 11.    Executive Compensation..........................................18
  Item 12.    Security Ownership of Certain Beneficial Owners and Management..18
  Item 13.    Certain Relationships and Related Transactions..................18

PART IV

  Item 14.    Exhibits, Financial Statement Schedules, and 
              Reports on Form 8-K.............................................19

SIGNATURES






<PAGE>



                                     PART I

ITEM 1.  BUSINESS

GENERAL

     United Payors & United Providers, Inc. ("UP&UP" or the "Company"), a
Delaware corporation, was originally incorporated in the State of Iowa on
January 3, 1995. Effective December 31, 1995, the Company's stockholders and a
subsidiary of a stockholder contributed to the Company certain complementary
businesses (collectively the "Contributed Businesses") including certain Payor
Clients (as defined below) transferred to UP&UP under an agreement with
America's Health Plan, Inc. ("AHP"), then an indirect wholly-owned subsidiary of
Principal Mutual Life Insurance Company ("Principal Mutual"). Under the terms of
the agreement, specified Payor Clients representing approximately 45% of AHP's
revenues for the year ended December 31, 1995 were transferred to UP&UP.
Principal Mutual owns approximately 38% of the Company's common stock. Effective
September 1, 1997, UP&UP acquired the remaining operations of AHP. The name of
America's Health Plan, Inc. was changed to UP&UP, Inc. immediately prior to the
closing. In connection with the acquisition, the Company was granted the right
to operate under the name America's Health Plan. UP&UP, Inc. which is hereafter
referred to as "AHP". The Company also has three other direct subsidiaries: (i)
National Health Services, Inc., a Wisconsin corporation ("NHS"), which is a
national health care utilization management services company acquired by UP&UP
in October 1996; (ii) IM&I-NEWCO, Inc., a Delaware corporation ("NEWCO"), which
administers the Continued Health Care Benefit Program ("CHCBP") for the United
States Department of Defense; and (iii) America's Health Card Services, Inc., an
Iowa corporation ("AHCS"), which is 90% owned by the Company and promotes a
multifunction co-branded health insurance identification card and credit card
for distribution by payors. UP&UP and its subsidiaries are hereafter
collectively referred to as the "Company".

     UP&UP and AHP serve as intermediaries between health care payors, such as
insurance companies, and health care providers, such as hospitals and
physicians, by entering into contractual arrangements designed generally to
produce cost savings and other benefits for payors and increased liquidity and
improved efficiency in claims submissions for providers. UP&UP and AHP derive
revenues primarily from a portion of the price concessions offered by the
providers under such contractual arrangements. The Company has integrated the
UP&UP and AHP operational functions, including claims repricing, data base
management, client services, and administrative services, and is currently in
the process of integrating the provider networks.

     UP&UP and AHP enter into contracts with both providers of medical services
("Contracting Providers") and payors of medical claims ("Payor Clients"). The
contracts with Contracting Providers establish price concessions on the charges
for medical services rendered by the Contracting Providers to beneficiaries
covered by medical plans of Payor Clients. The UP&UP and AHP Contracting
Providers collectively constitute the "UP&UP Network". In partial consideration
for the price concessions furnished by the Contracting Providers, the Company
offers the Contracting Providers a Prepayment Option. As of February 27, 1998,
the UP&UP Network of contracting providers consisted of approximately 12,000
medical facilities and 150,000 physicians. See "Business -- UP&UP Network and
Payor Clients -- Provider Network and Prepayment Option."

     The contracts with Payor Clients, such as insurance companies, third party
administrators ("TPAs"), self-insured employers and unions, and government
health plans, provide for specified reductions in the amounts ordinarily payable
by the Payor Clients for medical claims submitted by Contracting Providers. The
Company believes that, consistent with representations generally made by Payor
Clients to their respective state insurance commissioners, plan beneficiaries
receive the same proportionate reduction on the co-insurance portion of the
medical claims payable by such beneficiaries under the terms of those plans.

     The Company has sophisticated information systems capabilities, which
facilitate claims data transmission and cost repricing pursuant to UP&UP Network
price concessions. In addition, the Company conducts extensive data analyses of
encounter and cost data by specific service areas for Payor Clients. The Company
also maintains an extensive, proprietary database of provider charges for
certain medical procedures by geographic area, which is offered to both its
Payor Clients and Contracting Providers.


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     Through its subsidiary, National Health Services, Inc., a national health
care utilization management company, the Company also offers a variety of
utilization management products and services, such as inpatient and outpatient 
utilization review, catastrophic case management, high risk maternity review,
professional clinical opinion, allied or ancillary therapy review, and physician
consultation. NHS' strategic approach to utilization management, is to make its
products and services available separately or as part of an integrated package
tailored to meet specific client needs.

     NHS serves a variety of clients, including state governments, Taft-Hartley
plans, self-insured plans, indemnity insurance carriers, and TPAs, representing
more than two million lives. NHS manages its clients' medical expenses through
determinations of medical necessity and appropriateness, negotiations with
providers regarding charges for services, and the coordination of cost effective
health care alternatives. In 1997, NHS was ranked as the 3rd largest utilization
management organization in the country by "Business Insurance" magazine based on
review volume.

INDUSTRY OVERVIEW

     The health care industry in the United States constitutes a substantial
portion of the Gross National Product, with in excess of $1 trillion estimated
to be spent annually for health care according to the Health Care Financing
Administration. Of this total, over $300 billion annually of services is
estimated to be provided by hospitals and approximately $200 billion to be
provided by physicians. Traditionally, health care services have been provided
on a fee-for-service basis through a generally fragmented system of health care
providers, which includes approximately 6,400 hospitals as of December 31, 1996,
as well as physicians, other health care providers and pharmacies.

     Payment for all or a portion of health care fees traditionally has been
assumed, in many instances, for recipients of the health care services by
indemnity insurance companies and large public or private sector employers or
unions, which offer, at their own risk, certain insurance coverage to their
beneficiaries, employees or members. It is estimated by Foster Higgins National
Survey of Employer-sponsored Health Plans ("Foster Higgins") that in 1997,
approximately 15% of the insured population in the United States was covered by
such traditional, indemnity-type health insurance plans. The Company's Payor
Clients primarily are these traditional, indemnity-type insurance companies,
self-insured companies and unions, government health plans and their agents.

     As a result of escalating health care costs, various concepts of managed
care have evolved and are continuing to evolve. Managed care attempts to
influence and reduce the cost of health care by managing the two variables that
comprise the cost of health benefits. These variables are the frequency of
service (e.g., the number of laboratory tests that might be performed) and the
cost per service (e.g., the cost per laboratory test). Health maintenance
organizations ("HMOs") have emerged as integral components of the health care
system and there have been substantial increases in the population covered for
health insurance purposes by HMO-type organizations. It is estimated by Foster
Higgins that in 1997, approximately 30% of the insured population received
medical benefits through HMOs. The ability of HMOs to direct their beneficiaries
to specific providers by their inherent constraints on the freedom of selection
of providers enables the HMOs to utilize their purchasing power with such
providers to obtain price concessions.

     HMOs have in many instances evolved from paying providers on a
fee-for-service basis to paying on a "capitation" basis. Under a capitation
arrangement, a physician group and/or hospital group receives a prepaid fixed
monthly fee per HMO member (i.e., per capita) in consideration for providing
specified medical benefits to the member. The capitation payment mechanism has
the potential to shift the risk of the cost of medical service from the HMO to
the provider group accepting the capitation. In order to accept a capitation
arrangement, a physician group and/or hospital must have defined protocols to
allocate and disburse the capitation payment to all those providers (e.g.,
hospitals, primary care physicians, specialists, laboratories and pharmacies)
that are responsible for providing health benefits under the capitation
arrangement. Many physician groups and hospital groups do not have the necessary
protocols and information systems to manage the disbursement of a capitation
payment.

     The search for ways to contain medical costs also has involved the
development by non-HMO health coverage insurers of various managed care medical
cost containment protocols and mechanisms for their insured beneficiaries.
Facilitating the migration of the non-HMO insured programs to more of a managed
care product, certain states have created exemptions to state antitrust laws to
permit physicians, hospitals and other providers to participate in joint
ventures such as physician hospital organizations ("PHOs"), which have the
potential to provide comprehensive health

                                        2

<PAGE>



coverage on a capitation basis. As a result, various physicians and hospitals
that do not presently contract with HMOs and/or preferred provider organizations
("PPOs") are joining together to form PHOs or other entities that may accept
risk, in order to potentially participate in capitated health care arrangements.
However, there is still no universal conduit between those payors wishing to
access a national network of "at-risk" providers and physician and hospital
groups seeking to contract with national payors on an at-risk basis.

STRATEGY

     The Company's strategy is: (i) to increase overall claims volume by
expanding the UP&UP Network of Contracting Providers and the number of Payor
Clients; (ii) to develop new services which assist national and other large
Payor Clients to compete more effectively in the marketplace, e.g., the
management of medical networks; and (iii) to build upon its existing
capabilities to promote efficiencies in the relationships between national and
other large payors and local and regional providers, including possibly the
establishment of a national clearinghouse for claims transmissions and
electronic funds transfers ("EFTs"). In pursuing this strategy, the Company
intends to pursue potential acquisition candidates, including businesses such as
TPAs and regional PPOs.

     The strategy of the Company's subsidiary, National Health Services, Inc.,
is: (i) to continue to maintain flexibility in its approach to existing clients
and target markets by providing services and products which are consistent with
the clients' needs; (ii) to develop new products and services based upon a
client's utilization patterns and priorities; (iii) to form strategic alliances
with vendors of complementary products/services in order to offer existing and
potential clients an expanded range of health care services through a single
vendor.

Increase Claims Volume

     To expand the UP&UP Network, the Company markets a Prepayment Option and
enhanced ancillary services to new providers. The Company believes that the
Prepayment Option has been and will continue to be attractive to providers. The
Prepayment Option is intended to enable Contracting Providers to increase their
liquidity by receiving an up-front payment which may reduce their carrying costs
pending receipt of actual payment from payors for services already rendered. The
Prepayment Option and the ancillary information systems services, such as claims
data transmission and cost repricing, are also expected to further solidify the
business and financial relationship between the Company and its Contracting
Providers.

National Clearinghouse

     The Company also intends to seek to acquire businesses that offer services
or technologies that would expand or supplement its current business. In this
regard and in order to increase its ability to facilitate the processing of
claims from Contracting Providers and the payment of claims by Payor Clients,
the Company may seek to acquire a claims processing clearinghouse. The Company
views its ability to act as a clearinghouse as a value-added service for its
Contracting Providers and Payor Clients that reduces their internal costs of
claims handling through an increase in efficiency and a possible reduction in
the price they pay for claims transmission service.

     In May 1996, the Company and EDIComm, Inc. ("EDIComm") entered into an
agreement (the "EDIComm Agreement") whereby EDIComm agreed to assign to the
Company its existing contracts (the "Assigned Contracts") with 19 hospital or
other medical care facilities. Under the Assigned Contracts, EDIComm acted as an
agent for such hospitals or other facilities to electronically transmit or
distribute the claims of such providers to appropriate payors. The EDIComm
Agreement provides that EDIComm will continue to administer the Assigned
Contracts and provide the technical assistance necessary to support the Assigned
Contracts until both parties mutually agree to discontinue such arrangements.
The EDIComm Agreement has enabled the Company to gain experience in the business
of acting as an agent for the provider in transmitting claims directly to
payors. In August 1997, the Company entered into an agreement with EDIComm,
whereby the Company will market, sell and distribute certain EDIComm software
products for a percentage of the software product revenue. In addition the
Company has an option to acquire a five percent (5%) equity interest in EDIComm
through March 31, 1998.


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Flexibility

     Flexibility in NHS' approach to service and product design results in a
utilization management program which is consistent with the evolving needs of
its clients. Clinical department managers, executives responsible for
operations, the Medical Director, and Associate Medical Directors are directly
accessible to clients. Therefore, the unique and specific needs of clients are
accommodated through working relationships with staff at all levels of the
organization. The expertise of NHS' staff includes the ability to analyze and
interpret utilization data in order to identify, recommend and implement
strategies that will maximize the effectiveness of health care dollars. Based
upon a client's utilization experience and priorities, NHS is able to customize
programs such as focused review or high risk maternity/perinatal management
carve-out products.

Strategic Alliances

The more sophisticated purchasers of utilization management services already
recognize the importance of an integrated, coordinated health care delivery
system in ensuring both the quality and cost effectiveness of health care.
Therefore, through NHS, the Company intends to explore strategic alliances with
managed care companies which offer complementary products/services, such as home
health services, specialty networks, demand management, PPOs, and TPAs. The end
result would be a single-source offering that would not only positively impact
on quality and cost effectiveness but would also have a positive impact on
clients' administrative costs by consolidating vendor services.

New Products and Services

     The Company has developed a multifunction co-branded card that serves as
both a health insurance card and a VISA credit card. The Company as of December
31, 1997 entered into an agreement with a credit card issuing bank which has
issued approximately 6,000 credit cards as of December 31, 1997. This
multifunction co-branded card generated approximately $27,000 of ancillary
revenue and, more importantly, should promote communication and facilitate
payments among the Contracting Providers, Payor Clients and the beneficiaries of
those Payor Clients. The Company believes that the availability of the
multifunction co-branded card will enhance the Company's ability to attract and
retain Contracting Providers.

     The Company currently maintains an extensive, proprietary database of
provider charges and other encounter data by geographic areas. The Company is
continuing to expand this database, which it offers to both Payor Clients and
Contracting Providers. The Company believes that the availability of its
constantly updated database that tracks various reimbursement rates and other
key indicators will assist it in maintaining its relationships with its Payor
Clients.

     The Company has developed administrative and systems solutions to assist
health care payors in managing their local and regional PPO relationships. These
network management services include evaluations of the payors' existing PPO
arrangements, claims repricing, provider data base management, provider
directory development and provider locator services.

     NHS is in the process of developing and refining two new products: an
enhanced mental health and substance abuse review program, and a disease
management program. The mental health and substance abuse review product will
initially be geared toward state government, Medicaid and self-insured clients.
The review concept will include the application of NHS' Physician Developed
Criteria for mental health and substance abuse to assist the review staff in
validating the clinical diagnosis under which each patient is admitted,
evaluating the appropriateness of the proposed treatment for the reported
symptoms, and documenting the expected results of services delivered. The
proposed treatment will be evaluated for both medical necessity and level of
care, with an emphasis on discharge readiness and alternative care settings.

     NHS has also developed a disease management program that models particular
diseases and the typical drivers of cost in the treatment of such diseases. The
disease management program involves a clinical approach to patient care that
coordinates all aspects of health care delivery. The program provides integrated
clinical management of a disease state

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which should result in improved quality of life, improved clinical outcomes, and
overall reduction in total health care costs. In collaboration with the
physician provider, the NHS disease manager develops a clinical care plan that
would seek to improve quality of life and clinical outcomes, while achieving an
overall reduction in total health care costs.

UP&UP NETWORK AND PAYOR CLIENTS

Provider Network and Prepayment Option

     The UP&UP Network is a nationwide network of medical care providers which,
as of February 27, 1998, consisted of approximately 12,000 medical facilities
and 150,000 physicians located in 50 states and the District of Columbia. The
UP&UP Network was organized to meet the medical service, financial and
geographic needs of Payor Clients and their beneficiaries and to provide health
benefit services in a cost-effective manner to beneficiaries of such Payor
Clients. The Company intends to expand the number of Contracting Providers. In
its marketing to health care providers, the Company focuses on recruiting for
the UP&UP Network those providers who could best serve Payor Clients and their
beneficiaries.

     The Company contracts directly with individual hospitals and groups of
hospitals, physicians and physician groups and other health care providers for
such providers to participate in the UP&UP Network and to grant price
concessions to the Payor Clients. Price concessions are individually negotiated
with each Contracting Provider and generally consist of either discounts from
billed charges or per diem rates. The Company's standard contract with a
Contracting Provider includes a one-year term renewable automatically for
successive one-year terms, unless the Contracting Provider gives written notice
of termination, typically at least 90 days prior to the renewal date.

     Moreover, the Company believes that the attractiveness of the UP&UP Network
to Contracting Providers is significantly enhanced by the Company's Prepayment
Option. Cash payments to Contracting Providers under the Prepayment Option are
computed for selected Contracting Providers based upon annual claims volume for
beneficiaries of the Company's Payor Clients who utilize the services of such
Contracting Provider. The cash payments are made at the option of the
Contracting Provider, either at the end of the contract period based upon one-
twelfth of the actual claims presented for the preceding 12-month period or at
the beginning of the contract period based upon one-twelfth of the estimated
claims for the following 12-month period.

     The Company believes its operations are distinguishable from the
objectionable operational characteristics some have attributed to purported
Silent PPOs. First, the Company's practices permit its Payor Clients to take
discounts from Contracting Providers only if both the Payor Client and
Contracting Provider have a signed contract with the Company (or with another
entity with which the Company has contracted for access to such entity's
provider network) at the time a medical service was rendered and Contracting
Providers are apprised of their contractual relationships with the Company's
Payor Clients through the receipt of a Payor Client Directory that lists each
Payor Client (or in some cases an affiliate of the Payor Client). Such Payor
Client Directory is regularly updated. Second, the Company believes that,
consistent with representations made by its Payor Clients to their respective
state insurance commissioners, plan beneficiaries receive the same proportionate
reduction on any co-insurance portion of the medical claims payable by such
beneficiaries under the terms of those plans. This serves as a financial
incentive to the beneficiary to use the Company's Contracting Providers. Third,
the Company also offers Contracting Providers the Prepayment Option.

Payor Clients

     In order to maximize its marketing efforts, the Company has focused on
establishing relationships with Payor Clients who have a nationwide presence and
who, therefore, insure in the aggregate large numbers of beneficiaries. The
Company intends to continue to market to national payors because of the
significant claims volume which any single national payor represents. In
addition, as the Company expands its Payor Client base, it may enter into
contracts with regional and local payors. During 1997, two Payor Clients,
Pioneer Financial Services, Inc. and the State of Kentucky, accounted for 20%
and 13% , respectively, of the Company's total revenue. The loss of any of these
Payor Clients could have a material adverse effect on the Company.



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     The duration of the Company's contracts with its Payor Clients typically is
one year with automatic renewals on the anniversary date. However, such
contracts may be terminated by either party at any time, generally, upon 90 days
notice. The contracts do not preclude the Payor Clients from contracting with
other networks or developing or offering other products or services which do not
use the Company's services and/or Contracting Providers.

     Payor Clients generally compensate the Company based on a percentage of the
price concessions from Contracting Providers on claims for such Payor Clients.
Such compensation generally is due to the Company by Payor Clients at the time
the Payor Client pays claims either directly to the Contracting Provider or
indirectly through the Company to the Contracting Provider. Compensation to the
Company varies depending upon the terms of individual contracts and the
aggregate amount of claims volume for the individual Payor Clients. Larger
claims volume can result in a decreased share of price concessions.

SOFTWARE SYSTEMS CAPABILITIES

Information Systems

     In order to influence and control health care costs, payors and providers
must have the ability to monitor costs. Because of the number of variables that
may affect total health care-related expenses, effective monitoring of medical
costs is difficult. The Company utilizes a broad range of information systems
applications to support its business and to enhance its ability to service its
Payor Clients and Contracting Providers. The Company believes that its systems
provide for the high level of flexibility and functionality necessary to service
both its Payor Clients and Contracting Providers.

     The systems are able to accommodate a variety of insurance products,
changes and modifications of contractual arrangements with Contracting Providers
and generate a range of encounter data reports. Such reports include both the
cost per service and the frequency of service by a Contracting Provider to a
beneficiary of a Payor Client.

Claims Data Transmission and Repricing Systems

     In order for the Company's Payor Clients to access the contractual
arrangements which the Company has with its Contracting Providers, the Company
has installed, in the facilities of its larger Payor Clients, the appropriate
hardware and software necessary to provide such Payor Clients with direct access
to the Company's provider database. To facilitate the repricing of medical
claims received by Payor Clients, the Company has developed a system for the
electronic transmission of claims and repricing data to such Payor Clients. The
Company has also installed the necessary software at these same facilities to
access the repricing database. All information in the provider database and in
the repricing database is updated monthly by electronic interface between the
Company and the Payor Clients. The Company believes that the availability of
these products and services to Payor Clients strengthens the relationship
between the Payor Clients and the Company and adds value to the Company's
contracts with such Payor Clients.

     For Contracting Providers, the Company calculates the repricing of all
claims from such Contracting Providers to its Payor Clients in accordance with
the price concessions of the individual contract with that Contracting Provider.
This calculation is furnished to the Contracting Provider in the form of a
transmittal notice so that it can verify the accuracy of payments it receives
from Payor Clients.

Provider Database

     A wide range of reimbursement rates exists among providers for the same
procedures and services. These variations are not based solely on geographic
location and there can be a wide variety of reimbursement rates within one
geographic area. The Company has developed a provider database that tracks
various reimbursement rates and other key indicators among medical facilities.
These indicators include charges per day, occupancy rates and the volume of
medical claims being generated by each Contracting Provider for each of the
Payor Clients. This database is available to all Payor Clients to assist them in
evaluating which providers may be cost effective.


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ADMINISTRATION OF CHCBP PROGRAM

     NEWCO administers CHCBP which is a benefit program that allows certain
groups of military health service beneficiaries to continue receiving benefits
under CHAMPUS when they lose their eligibility for military health care. The
Company processes applications, tracks and maintains enrollment, and collects
premiums for individuals or families who enroll in the CHCBP program.

COMPETITION

     The health care industry is fragmented, competitive and evolving. The
traditional functions of payors and providers are beginning to overlap in
certain arenas and there is no consensus as to the ultimate structure of the
health care industry.

     The Company potentially competes with any entity that contracts with payors
to offer them a means to contain or reduce the cost of their medical claims
expenses. These groups of potential competitors could include HMOs, preferred
provider organizations, PHOs and other managed care providers, including
networks, organizations and companies owned directly or indirectly by Principal
Mutual.

     Payors could, to the detriment of the Company's business strategy, elect to
establish their own proprietary provider contractual relationships, thus
eliminating their need to access provider price concessions made available by
third parties such as the Company. Likewise, providers could elect to contract
directly with payors. Such action, if taken by the majority of providers, could
jeopardize the business of the Company.

     Several potential competitors are significantly larger and better
capitalized than the Company. Many competitors have ongoing access to greater
resources, provide a more comprehensive range of services, and have greater
experience in providing those services offered by the Company. Furthermore,
various competitors have longer term business relationships with payors and
providers than does the Company. The health care industry is considered to be a
growing industry. Accordingly, the industry may attract additional potential
competitors to the Company.

     With respect to the Company's subsidiary, National Health Services, Inc.,
competition in the utilization management market is typically on two levels. The
large utilization management companies compete for insurance companies and large
employer groups, while the smaller companies compete for the TPA and small
self-insured markets. The key to success in the large group market, which is
NHS' focus, is a combination of price, service, and flexibility. As the level of
client sophistication grows, there appears to be more interest in a
shared-savings (shared-risk) approach to fee structuring as opposed to
fee-for-service or capitated arrangements. Also, with the profitability pressure
in the insurance industry and the rise in health benefit costs for large
self-insured employers, utilization management companies are expected more than
ever to deliver on their commitments involving both savings and client support.

GOVERNMENT REGULATION

General

As an entity conducting business within the health care industry, the Company's
operations (including the operations of NHS) are potentially subject to
extensive and increasing regulation by a number of governmental entities at the
federal, state and local levels. The Company and its affiliates are also subject
to laws and regulations relating to business corporations in general. The
Company believes its operations are in material compliance with applicable laws
as currently interpreted. Nevertheless, because of the structure of the Company,
certain aspects of the Company's current or anticipated business operations
could fall within the regulatory oversight of federal or state authorities, and
there can be no assurance that a review of the Company's business by courts or
regulatory authorities will not result in a determination that could adversely
affect the operations of the Company. There also can be no assurance that the
regulatory environment in which the Company operates will not change
significantly in the future, which change could restrict the Company's existing
operations, expansion, financial condition or opportunities for success. See
"Business -- UP&UP Network and Payor Clients -- Provider Network and Prepayment
Option."


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Health Care Reform

     The agencies and legislative bodies of states and the federal government
recently have focused significant attention on reforming the health care system
in the United States. Within the past three years, a broad range of health care
reform measures have been introduced in Congress and in certain state
legislatures. Additional health care reform measures have been brought before
the public in state voter initiatives. These initiatives range from those that
would tend to encourage managed care, such as allowing physician and hospital
groups to accept risk, to those that would impede managed care, such as
mandating that any willing provider could participate in any health plan. Among
the proposals that have been considered are cost controls on hospitals,
insurance market reforms to increase the availability of group health insurance
to small businesses, requirements that all businesses offer health insurance
coverage to their employees and the creation of a single government health
insurance plan at the state or federal level that would cover all citizens.
Legislative interest recently has focused on the effect of managed care
reimbursement mechanisms on health care service utilization and quality of
service. 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.
Certain proposals, such as containment of health care costs that could include a
freeze on prices charged by physicians, hospitals or other health care
providers, could adversely affect the Company. There can be no assurance that
currently proposed or future health care legislation or policies or other
changes in the administration or interpretation of governmental health care
programs, laws, regulations or policies will not have a material adverse effect
on the Company's business, financial condition or results of operations.

State Licensure

     The Company's subsidiary, National Health Services, Inc., maintains
utilization management certification in all states in which it is required and
monitors state legislation on a regular basis to ensure ongoing compliance.

     The Company believes that its other current business activities are not
subject to state licensure, other than such general business licensure as may be
required of all domestic or foreign business corporations in a jurisdiction.
However, it is possible that regulatory authorities in some states might
conclude that some of the Company's activities subject it to licensure as a PPO
or similar entity. In some states, such licensure may be conditioned on the
licensed entity engaging in practices, such as quality assurance or utilization
review, that are beyond the scope of the Company's current or anticipated
operations. Although the Company believes that, in general, it would be able to
modify its operations to obtain any licenses that were deemed to be required,
there can be no assurance that the Company would be able to modify its
operations, or otherwise to obtain or to maintain any such licenses.

ERISA Regulation

     It is possible that in the usual course of its business the Company could
be deemed to provide services to employee benefit plans regulated under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), including
self-insured health benefit plans. Recently, the U.S. Department of Labor
("DOL"), the federal agency that administers ERISA, has been auditing certain
insurance companies in connection with their practices involving medical
provider discounts and the transfer of those discounts to self-insured ERISA
plans. In connection with these audits, DOL has indicated that the negotiation
and administration of provider discount arrangements by these insurance
companies for the benefit of ERISA plans could constitute the activities of an
ERISA fiduciary. The Company is not engaged in the business of insurance under
state law nor does it provide administrative services to ERISA-regulated benefit
plans. Although the Company believes that its practices relating to provider
discount arrangements are beyond the scope of ERISA regulation, there can be no
assurance that DOL or some other person would not assert that the Company acts
as an ERISA fiduciary with respect to its limited activities for self-insured
ERISA plans. In the unlikely event that the Company were deemed to be an ERISA
fiduciary, the Company believes that it would be viewed as being in compliance
with applicable ERISA rules.

Anti-Remuneration Laws

     Medicare and Medicaid law provides civil and criminal penalties for paying
or receiving any remuneration to induce the referral of Medicare or Medicaid
patients, or to induce the purchase or the arranging for or recommending of the
purchase of items or services for which payment may be made under Medicare,
Medicaid or other federally-funded state

                                        8

<PAGE>



health care programs. Various exceptions and "safe harbors," including those
applicable to certain properly reported discounts, may be available in
appropriate circumstances. Several states also have similar laws which are not
limited to services for which Medicare or Medicaid payment may be made. State
laws vary and have been infrequently interpreted by courts or regulatory
agencies. It is possible that enforcement officials could seek to review the
fees paid to or by the Company to determine whether such fees should be deemed
to be unlawful remuneration given indirectly by providers in exchange for
arranging for the referral of patients from their Payor Clients. While there can
be no assurance that the Company's position would be upheld if challenged, the
Company believes that their fee arrangements represent reasonable compensation
for legitimate services actually provided to or by the Company and should not be
deemed to be unlawful remuneration under these anti-remuneration laws.

EMPLOYEES

     As of February 27, 1998, the Company employed 367 people on a full-time
basis. The Company believes that its relations with its employees are good.


ITEM 2.  PROPERTIES

     The Company's principal executive office is located in Rockville, Maryland
in approximately 22,500 square feet of leased space. The Company also leases
approximately 29,300 square feet of office space in Louisville, Kentucky and
approximately 19,217 square feet of office space in Bethesda, Maryland. The
Rockville, Maryland and the Louisville, Kentucky leases expire in 2001. The
Bethesda, Maryland lease expires in 2007. The Company believes that its current
facilities are adequate for its existing needs and that suitable additional
space will be available as required.


ITEM 3.  LEGAL PROCEEDINGS

     On April 26, 1996, a civil complaint was filed against the Company in the
United States District Court for the Northern District of Illinois by First
Health Group Corp. formerly HealthCare COMPARE Corporation d/b/a The Affordable
Medical Networks ("HealthCare COMPARE"). HealthCare COMPARE seeks injunctive and
other relief, including possible damages, based generally on allegations that
representatives of the Company, in at least four instances, made various
misrepresentations to prospective Contracting Providers, including to the effect
that the Company's provider network was affiliated with HealthCare COMPARE's
provider network or that HealthCare COMPARE had agreed to utilize the Company's
provider network. The Company denies the allegations in the complaint and
believes the complaint by HealthCare COMPARE is without merit. After
consultation with counsel and review of available facts, management believes
that damages, if any, arising from litigation will not be material to the
consolidated financial statements of the Company. The Company intends to
vigorously defend against the complaint.

     On March 2, 1998, the United States District Court for the Northern
District of Georgia entered a summary judgment on behalf of AHP in reference to
the civil litigation initiated on January 29, 1997 by AmeriCare Health Alliance
of Georgia, L.L.C. ("AmeriCare"), a health care provider organization. AmeriCare
had sought damages for lost profits in the amount of $10 million, as well as
punitive damages, for a breach of a contract that America's Health Plan, Inc.
believes was never executed. Alternatively, AmeriCare had sought fraud damages
against America's Health Plan, Inc. for its failure to enter into a contract
with the plaintiff. The plaintiff may appeal the summary judgment. After
consultation with counsel and review of available facts, management believes
that damages, if any, arising from this litigation will not be material to the
consolidated financial statements of the Company.

     The Company is also a party to other legal actions arising in the ordinary
course of business. Management believes that damages arising from these actions,
if any, will not be material to the consolidated financial statements of the
Company.


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

     There were no matters submitted to a vote of security holders during the
quarter ended December 31, 1997.

                                        9

<PAGE>



                                     PART II

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

     The Company's common stock has traded on the Nasdaq National Market under
the symbol UPUP since the effective date of the Company's registration statement
which registered shares of the Company's common stock in its initial pubic
offering on June 28, 1996. The high and low sales prices for each quarter from
July 1, 1996 to December 31, 1997 by Nasdaq are set forth below.

<TABLE>
<CAPTION>
        Quarter Ended                                 High       Low
        -------------                                ------     ------
      <S>                                            <C>        <C>
      September 30, 1996..........................   14 3/4     11
      December 31, 1996...........................   15         11 3/4
      March 31, 1997..............................   14 1/4     10 3/8
      June 30, 1997...............................   14 1/4     11 3/4
      September 30, 1997..........................   18 1/2     12 1/2
      December 31, 1997...........................   21 3/8     17
</TABLE>

     The high and low sales price for the Company's stock as reported by Nasdaq
on February 27, 1998 were $23.375 and $27.00, respectively.

     As of February 27, 1998, there were approximately 1,050 holders of record
of the Company's common stock. The Company did not pay any cash dividends in
1996 or 1997 and has no plans to do so in the foreseeable future.


ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA
         (In thousands, except per share data)

     The following selected consolidated financial data for 1997, 1996 and 1995
have been derived from the audited financial statements of the Company. The
unaudited pro forma consolidated financial data for the year ended December 31,
1995 have been derived from the financial statements of the Contributed
Businesses and the Company. The pro forma consolidated financial data have not
been audited but, in the opinion of management, include all adjustments
necessary to present fairly the information set forth therein. The selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements of the Company, including notes thereto.
The pro forma consolidated financial data are provided for comparative purposes
only and may not be indicative of the results that would have been achieved if
the transactions reflected therein had occurred at the beginning of the period
for which the pro forma data is presented or of future results.

<TABLE>
<CAPTION>
                                                                      Pro Forma
                                        1997       1996       1995       1995
                                      -------    -------    -------    -------
<S>                                   <C>        <C>        <C>        <C>
Statement of Operations Data
Revenue
  Provider network ................   $41,195    $31,259    $   877    $26,581
  Utilization management services .    19,833      4,190         --         --
                                      -------    -------    -------    -------
    Total revenue .................    61,028     35,449        877     26,581
Operating expenses
  Direct contract expenses ........    29,173     15,295      2,238     14,192
  General and administrative ......     6,221      2,783        334      1,768
  Depreciation and amortization ...     1,695        538        114        172
                                      -------    -------    -------    -------
    Total operating expenses ......    37,089     18,616      2,686     16,132
Operating income (loss) ...........    23,939     16,833     (1,809)    10,449
Other income ......................     1,426        971        699        764
                                      -------    -------    -------    -------
  Income (loss) before income taxes    25,365     17,804     (1,110)    11,213
Income tax (expense) benefit ......   (10,388)    (7,158)       399     (4,378)
                                      -------    -------    -------    -------
Net income (loss) .................   $14,977    $10,646    $  (711)   $ 6,835
                                      =======    =======    =======    =======
</TABLE>

                                       10

<PAGE>




<TABLE>
<CAPTION>
                                                                             Pro Forma
                                              1997       1996       1995       1995
                                             -------    -------    -------    -------
<S>                                          <C>        <C>        <C>        <C>
Distributions to stockholders(1) ........     $  --      $  --      $  --      $8,379

Net income (loss) per share - basic(2) ..     $1.30      $1.05     $(0.08)     $ 0.78
Weighted average common shares - basic ..    11,493     10,126      8,800       8,800

Net income (loss) per share - diluted(2).     $1.28      $1.05     $(0.08)     $ 0.78
Weighted average common shares - diluted.    11,658     10,128      8,800       8,800
</TABLE>

<TABLE>
<CAPTION>
                                    1997      1996       1995
                                   -------   -------   -------
<S>                                <C>       <C>       <C>
Balance Sheet Data
Working capital ................   $24,513   $28,113   $ 3,384
Total assets ...................    82,515    53,248    12,763
Note payable to stockholder.....        --        --     3,700
Long-term debt .................    12,110       324        50
Total stockholders' equity......    58,297    45,176     5,296
</TABLE>
---------------
(1)  Represents distributions to the owner of the Transfer Client Group and the
     stockholder of IM&I prior to the respective transfers to the Company.
(2)  The pro forma information assumes the automatic mandatory conversion of the
     Principal Preferred Stock into common stock pursuant to its terms
     immediately prior to the sale of the Company's Common Stock in its initial
     public offering.


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

       This Form 10-K may contain forward-looking statements (see "Certain
   Factors That May Affect Future Operating Results or Stock Prices") within the
   meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
   These forward-looking statements involve a number of risks and uncertainties.
   The Company undertakes no obligation to revise any forward-looking statements
   in order to reflect events or circumstances that may arise after the date of
   this report. Readers are urged to carefully review and consider the various
   disclosures made by the Company in this report and in the Company's other
   filings with the Securities and Exchange Commission that attempt to advise
   interested parties of the risks and factors that may affect the Company's
   business.

GENERAL

     UP&UP, a Delaware corporation, was originally incorporated in the State of
Iowa on January 3, 1995. Effective December 31, 1995, the Company's stockholders
and a subsidiary of a stockholder contributed to the Company certain
complementary businesses (collectively the "Contributed Businesses") including
certain payor clients transferred to UP&UP under an agreement with America's
Health Plan, Inc. ("AHP"), an indirect wholly-owned subsidiary of Principal
Mutual Life Insurance Company ("Principal Mutual"). Under the terms of the
agreement, specified payor clients representing approximately 45% of AHP's
revenues for the year ended December 31, 1995 were transferred to UP&UP and
continued to access AHP's proprietary health care provider network. Principal
Mutual owns approximately 38% of the Company's Common Stock.

     Because the contributions were non-monetary in nature and made by existing
stockholders of UP&UP, the assets and liabilities contributed have been recorded
at the transferor's historical cost as of December 31, 1995. Since the
contributions were effective December 31, 1995, the historical Selected
Consolidated Financial Data for the year ended December 31, 1995 do not include
the results of operations of the Contributed Businesses. The results of
operations of the Contributed Businesses are included in the Pro Forma Selected
Consolidated Financial Data for the year ended December 31, 1996.

                                       11

<PAGE>



     The Company filed a Registration Statement on Form S-1 with the Securities
and exchange Commission which offered to the public 2,400,000 shares (2,760,000
shares, including the over allotment) of the Company's common stock. This
registration statement was declared effective on June 28, 1996. The closings of
the sale of stock for an aggregate of 2,760,000 shares were effected on July 8,
1996 and July 15, 1996 for which the Company received proceeds (net of
underwriters' commissions and expenses) of $23.4 million and $3.5 million,
respectively.

     Effective October 1, 1996, the Company acquired National Health Services,
Inc. ("NHS"), a national health care utilization management services company.
The acquisition has been accounted for as a purchase and, accordingly, the
results of operations of NHS have been included in the Selected Consolidated
Financial Data since the effective date of the acquisition.

     Effective September 1, 1997, UP&UP acquired the remaining operations of
AHP. The name of America's Health Plan, Inc. was changed to UP&UP, Inc.,
immediately prior to the closing. In connection with the acquisition, the
Company was granted the right to operate the health care provider network under
the name AMERICA'S HEALTH PLAN. UP&UP, Inc. is hereafter referred to as "AHP".
The acquisition has been accounted for as a purchase and, accordingly, the
results of operations of AHP have been included in the Selected Consolidated
Financial Data since the effective date of the acquisition. UP&UP, NHS and AHP
are hereafter collectively referred to as the "Company".

     UP&UP and AHP serve as intermediaries between health care payors (e.g.
insurance companies) and health care providers (e.g. hospitals and physicians)
by entering into contractual arrangements designed generally to produce cost
savings and other benefits for payors ("Payor Clients") and increased liquidity
and improved efficiency in claims submissions for providers ("Contracting
Providers"). UP&UP and AHP derive revenue primarily from a portion of the price
concessions offered by the providers under such contractual arrangements. NHS
offers medical utilization management services to insurance underwriters,
self-insured businesses, provider organizations, and others. Such services
include precertification of in-patient and out-patient medical care, and case
management.

REVENUE

     A majority of the Company's provider network revenues are based on a
percentage of the price concessions from the Contracting Providers on claims to
its Payor Clients.

     Provider network revenues are influenced by, among other variables: (i) the
number of Contracting Providers and Payor Clients; (ii) the volume of claims
submitted by Contracting Providers to Payor Clients; (iii) the amount of price
concessions the Company negotiates with Contracting Providers; and (iv) the
contractual price concession sharing arrangements negotiated by the Company with
Payor Clients. In effect, these variables correspond to breadth (number of
Contracting Providers and Payor Clients), volume (claims per period) and depth
(amount of price concession), all of which define savings and the Company's
resultant revenues.

     Medical utilization management services revenues are based on contractual
arrangements. Contracts may reflect a capitated rate, fee for service or hourly
rate. Precertification revenues are generally based on monthly capitation
calculations. Case management revenues are generally based on fee for service or
hourly rates.

DIRECT CONTRACT EXPENSES

     Direct contract expenses include access fees paid by the Company for the
utilization of other provider networks, marketing commissions, and other direct
costs of services such as personnel related to repricing of claims, client
services, and other costs incurred in connection with the generation of revenue
and the development of the Company's provider network. NHS direct contract
expenses include the costs of medical personnel (nurses and doctors) and other
expenses related to administering its contracts.

     Marketing commissions are payable to consultants and marketing
organizations who became entitled to such commissions for their role in
obtaining contracts with certain Payor Clients.


                                       12

<PAGE>



GENERAL AND ADMINISTRATIVE EXPENSES

     General and administrative expenses include salaries and related costs for
personnel involved in the administration of the Company and other costs such as
professional services and general overhead expenses.

HISTORICAL RESULTS OF OPERATIONS

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

     Total revenue increased $25.6 million from $35.4 million in 1996 to $61
million in 1997. Provider network revenue increased by $9.9 million, from $31.3
million in 1996 to $41.2 million in 1997. Of this increase, $5.8 million was
attributable to the addition of new Payor Clients, the growth in the overall
claims volume from existing Payor Clients and the expansion of the Company's
provider network. The remainder of the increase was attributable to the
acquisition of AHP. At December 31, 1997 the provider network (including AHP)
consisted of approximately 11,000 medical facilities and approximately 150,000
physicians compared to approximately 2,600 medical facilities at December 31,
1996. Utilization management services revenue increased $15.6 million primarily
as a result of the inclusion of the operations of NHS for a full year in 1997 as
compared to three months in 1996.

     Direct contract expenses increased by $13.9 million, from $15.3 million in
1996 to $29.2 million in 1997. Access fees to other provider networks as a
percentage of provider network revenue were 18.0% ($5.6 million) in 1996
compared to 11.8% ($4.9 million) in 1997. This decrease was attributable to the
growth in the number of providers contracting directly with UP&UP, Payor Clients
accessing more direct contracts and the negotiation of lower rates in agreements
with other provider networks. Other direct costs of services increased
approximately $14.6 million, from $8.6 million in 1996 to $23.2 million in 1997.
Of this increase, approximately $11.2 million represented expenses of NHS and
AHP which were acquired effective October 1, 1996 and September 1, 1997,
respectively. The remainder of the increase was attributable to an overall
increase in expenses resulting primarily from a significant increase in the
number of employees to accommodate growth in the provider network business,
increased provider network development activities and the development of new
businesses.

     General and administrative expenses increased approximately $3.4 million,
from approximately $2.8 million in 1996 to approximately $6.2 million in 1997.
Of this increase, approximately $1.6 million represented expenses of NHS and
AHP. The remainder of the increase was attributable to an overall increase in
expenses resulting from the addition of employees in the administrative and
executive areas, expenses related to bonus and other benefit programs which
became effective subsequent to the initial public offering and an increase in
professional fees for accounting and legal services.

     Depreciation and amortization increased approximately $1.2 million from
approximately $0.5 million in 1996 to approximately $1.7 million in 1997. The
increase was primarily attributable to the depreciation expense and amortization
of goodwill of NHS and AHP, as well as depreciation on increased capital
expenditures to accommodate growth.

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

     The Company was incorporated and commenced operations on January 3, 1995.
During 1995, the Company focused its efforts on the development of its
contracting provider network and marketing to prospective clients. At December
31, 1995, the UP&UP Network consisted of approximately 700 medical facilities
and the Company had contracts with eight Payor Clients. The Company entered into
contracts with such providers and payors primarily during the last six months of
1995. As a result, the Company had an operating loss of $1.8 million for the
year. The operating loss was primarily offset by net realized gains of $452,000
on the sale of marketable securities, $191,000 of interest income and $436,000
from the tax benefit from the recognition of the year's net operating loss carry
forward. Net loss for the year was $711,000.



                                       13

<PAGE>



     The results of operations for the year ended December 31, 1996 include the
results of operations of the Contributed Businesses for the year and the results
of operations of NHS since October 1, 1996. As of December 31, 1996, the Company
had approximately 2,600 Contracting Providers.

     Direct contract expenses of $15.3 million consisted of $5.4 million in
access fees to other provider networks, $1.3 million in marketing commissions
and $8.6 million in other direct costs of services. Access fees to other
provider networks and marketing commissions represented 17.3% and 4.2% of
provider network revenue, respectively. Other direct costs represented 24.1% of
total revenues.

     General and administrative expenses of $2.8 million represented 7.9% of
total revenue. Net income was $10.6 million or 30.0% of total revenue.

PRO FORMA RESULTS OF OPERATIONS

     The following table sets forth certain unaudited pro forma consolidated
financial data of the Company and the Contributed Businesses and such data
expressed as a percentage of total consolidated revenue for the Company and the
Contributed Businesses for the year ended December 31, 1995, as if the
contributions had been consummated as of January 1, 1995. The pro forma
financial data have not been audited but, in the opinion of management, include
adjustments necessary to present fairly the information set forth therein. The
pro forma financial data may not be indicative of the results that would have
been achieved if the transactions reflected therein had occurred at the
beginning of the period for which the pro forma data is presented or of future
results.

<TABLE>
<CAPTION>
                                                   Consolidated Financial Data
                                            ----------------------------------------
                                               Historical              Pro Forma
                                            -----------------      -----------------
                                                  1996                    1995
                                            -----------------      -----------------
                                                          (in thousands)
<S>                                         <C>        <C>         <C>        <C>
Revenue
  Provider network......................    $31,259     88.2%      $26,581    100.0%
  Utilization management services.......      4,190     11.8            --       --
                                            -------    -----       -------    ----- 
    Total revenue.......................    $35,449    100.0%      $26,581    100.0%
                                            =======    =====       =======    =====  
Operating expenses
  Direct contract expenses..............    $15,295     43.1%      $14,192     53.4%
  General and administrative............      2,783      7.9         1,768      6.7
  Depreciation and amortization.........        538      1.5           172      0.6
                                            -------    -----       -------    ----- 
    Total operating expenses............    $18,616     52.5%      $16,132     60.7%
                                            =======    =====       =======    =====  
</TABLE>


Historical Year Ended December 31, 1996 Compared to Pro Forma Year Ended
December 31, 1995

     Provider network revenue increased by $4.7 million, from $26.6 million in
1995 to $31.3 million in 1996. This increase was attributable to the addition of
new Payor Clients, the growth in the claims volume from existing Payor Clients
and the expansion of the Company's provider network. At December 31, 1996 the
provider network consisted of approximately 2,600 medical facilities compared to
700 medical facilities at December 31, 1995. Utilization management services
revenue of $4.2 million in 1996 represents the revenue of NHS since October 1,
1996, the effective date of the acquisition.

     Access fees to other provider networks as a percentage of provider network
revenue were 17.3% ($5.4 million) in 1996 compared to 24.1% ($6.4 million) in
1995. This decrease was attributable to the growth in the number of providers
contracting directly with the Company, Payor Clients accessing more direct
contracts and the negotiation of lower rates in agreements with other provider
networks.



                                       14

<PAGE>



     Marketing commissions decreased approximately $900,000 from $2.2 million in
1995 to $1.3 million in 1996. Of this decrease, approximately $600,000 was
attributed to the termination of commission agreements relating to certain Payor
Clients of the Contributed Businesses. The remainder of the decrease was
attributable to the restructuring of a marketing commission agreement in 1996.

     Other direct costs of services increased by approximately $3.0 million from
$5.6 million in 1995 to $8.6 million in 1996. Of this increase, approximately
$2.9 million represented expenses of NHS reflected in the results of operations
of the Company since October 1, 1996, the effective date of the acquisition. The
remainder of the increase was directly attributable to the increase in provider
network revenue.

     General and administrative expenses increased approximately $1.0 million,
from $1.8 million in 1995 to approximately $2.8 million in 1996. Of this
increase, approximately $850,000 represented expenses of NHS reflected in the
results of operations of the Company since the effective date of the
acquisition.

LIQUIDITY AND CAPITAL RESOURCES

     During the first six months of 1996, the Company financed its operations
principally through equity contributions. In July 1996, the Company completed
the sale to the public of 2,760,000 shares of the Company's common stock and
received proceeds (net of underwriters' commissions and expenses) of
approximately $26.9 million. At December 31, 1997 the Company had working
capital of approximately $24.5 million. Net cash provided by operating
activities increased from $5.8 million in 1996 to $13.3 million in 1997. In
March 1997, the Company entered into two lines of credit arrangements for loan
commitments totaling $15 million. Of this amount, $10 million was used for the
purchase of AHP. The Company has also entered into a $15 million term loan with
the same bank, $10 million of which was used to replenish the amount drawn under
the line of credit. In addition, the Company has also received a standby
commitment for an additional $10 million.

     The Company's primary capital resources commitment is to fund advances to
Contracting Providers upon exercise of Prepayment Options granted to Contracting
Providers. Depending on increases in claims volume and in the number of
Contracting Providers and Payor Clients, the Company estimates that $10 million
to $15 million could be required to fund Prepayment Options during 1998. During
June 1997, the Board of Directors of the Company approved a common stock
repurchase program of up to $5 million. As of December 31, 1997, the Company had
repurchased 226,250 shares of its outstanding common stock under the program, at
an aggregate purchase price of $3,299,450.

     The Company believes that its existing liquidity sources, anticipated funds
from operations, and credit arrangements will satisfy its cash requirements for
the next 30 months. However, in the event that the advances for Prepayment
Options exceeds the Company's currently anticipated estimates and/or other
available sources of liquidity to fund such payments are not as great as
anticipated, the Company could seek to borrow additional funds or obtain
additional infusions of equity to fund the balance of such advances.

IMPACT OF INFLATION

     Since the Company's revenues are based on medical costs, the impact of
inflation on operating costs and expenses should be offset by the impact of
inflation of medical costs.

CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS OR STOCK PRICES

     The Company's business is dependent on a variety of factors, including its
ability to enter into contracts with payors and providers on terms attractive to
all parties and the absence of substantial changes in the health care industry
that would diminish the need for the services offered by the Company.

     A significant portion of the Company's revenue is derived from a small
number of Payor Clients and state governments. The duration of the Company's
contracts with its Payor Clients and state governments are generally for a one
to two-year period, with automatic renewals on the anniversary date. However,
certain contracts may be terminated by either party at any time, generally upon
90 days notice and at the convenience of the state governments.

                                       15

<PAGE>



Such contracts are also subject to fee negotiations and revisions on an annual
basis. There can be no assurance that any of the Company's contracts with Payor
Clients will not be terminated early or will be renewed, and, if renewed, will
contain favorable terms. The loss of a contract with a major Payor Client and
the inability to replace any such client with significant new clients could have
a material adverse effect on the Company's business, financial condition or
results of operations. During October 1996, Wellpoint Health Networks, Inc.
announced the acquisition of the health insurance business of one of the
Company's clients, John Hancock Mutual Life Insurance Company. During May 1997,
Conseco, Inc. completed its merger with Pioneer Financial Services, Inc., also
one of the Company's clients. The Company has not been advised of and does not
anticipate any changes, at least in the short term, in its contracts with these
clients.

     The Company's standard contract with a Contracting Provider includes a
one-year term, renewable automatically for successive one-year terms, unless the
Contracting Provider gives written notice of termination, typically at least 90
days prior to the renewal date. These contracts are also subject to negotiation
and revisions on an annual basis with respect to the level and amount of price
concessions for medical services. The termination of a significant number of
contracts with Contracting Providers having a high volume of claims with the
Company's Payor Clients, the inability to replace such contracts with contracts
with similar Contracting Providers and/or the renegotiation of contracts
resulting in reduced price concessions could have a material adverse effect on
the Company. A number of health care providers and/or hospital systems are
merging with or acquiring other hospitals or hospital systems to create large
integrated delivery systems. The formation of these delivery systems may impact
the future ability of the Company to contract directly with the individual
hospital facilities or obtain price concessions at the same level currently
obtained.

     Certain interest groups within the health care industry have expressed
concern with certain activities of entities that have been referred to as
"Silent PPOs". The Company understands that some provider-sponsored professional
or trade associations may be considering a legal challenge against one or more
such organizations, and that regulatory agencies in certain states may be
investigating the activities of such organizations. Although it is unclear what
legal theories would support such a challenge or warrant such an investigation,
there can be no assurance that the Company would not be a target of such
challenge or investigation.

     The potential impact of all of the above factors is difficult for the
Company to forecast, and these or other factors, such as sales of substantial
amounts of the Company's common stock in the public market, the Company's common
stock repurchase program, and changes in earnings estimates by securities
analysts, can materially affect the Company's operating results and stock price.
Further, in recent years, the stock market has experienced extreme price and
volume fluctuations that have particularly affected the market prices of
securities of many companies, for reasons frequently unrelated to the
performance of the specific companies. These fluctuations, as well as general
economic, political and market conditions, may materially adversely affect the
market price of the Company's common stock. There can be no assurances that the
trading price of the Company's common stock will remain at or near its current
level.

YEAR 2000 TECHNOLOGY

     The Company, like other organizations, is in the process of assessing and
modifying its computer applications to ensure their functionality with respect
to the "year 2000" millennium change. At present, the Company does not
anticipate that material incremental costs will be incurred in any single future
year. The Company is also dependent on its Contracting Providers and Payor
Clients to successfully address their respective "year 2000" technology issues
in connection with their claims processing functions.

NEW PRONOUNCEMENTS

     The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income", and
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information", in June 1997 which are both effective
for the year ending December 31, 1998. SFAS No. 130 establishes standards for
reporting comprehensive income in a full set of general purpose financial
statements either in the income statement or in a separate statement. SFAS No.
131 establishes standards for reporting information about operating segments,
including related disclosures about products and services, geographic areas and
major customers. The Company is in the process of evaluating the impact of the
disclosures required by these standards and on its financial statements.


                                                        16

<PAGE>



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The Company's Audited Consolidated Financial Statements are contained in a
separate section of this Annual Report on Form 10-K on pages F-1 through F-19,
attached hereto. Information with respect to selected quarterly financial data
has been omitted because it is not applicable.


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

     None.


                                       17

<PAGE>



                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information required under this item is contained in the section entitled
"Executive Officers and Directors" in the Company's 1998 Proxy Statement and is
incorporated herein by reference.


ITEM 11.  EXECUTIVE COMPENSATION

     Information required under this item is contained in the sections entitled
"Directors Compensation" and "Executive Compensation" in the Company's 1998
Proxy Statement and is incorporated herein by reference.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information required under this item is contained in the section entitled
"Stock Ownership" in the Company's 1998 Proxy Statement and is incorporated
herein by reference.


ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information required under this item is contained in the section entitled
"Certain Transactions" on the Company's 1998 Proxy Statement and is incorporated
herein by reference.




                                       18

<PAGE>



                                     PART IV

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

  (a) Documents filed as part of this report

      (1)  Financial Statements
           Report of Independent Accountants
           Consolidated Balance Sheets as of December 31, 1997 and 1996
           Consolidated Statements of Operations for the Years Ended December
               31, 1997 and 1996 and the Period From January 3, 1995 (Date of
               Incorporation) to December 31, 1995
           Consolidated Statements of Stockholders' Equity for the Years
              Ended December 31, 1997 and 1996 and the Period from January 3,
              1995 (Date of Incorporation) to December 31, 1995
           Consolidated Statements of Cash Flows for the Years Ended December
              31, 1997 and 1996 and the Period From January 3, 1995 (Date of
              Incorporation) to December 31, 1995
           Notes to Consolidated Financial Statements

      (2)  All schedules have been omitted because they are not applicable, not
           required or the information is included elsewhere in the Company's
           consolidated financial statements or notes thereto.

  (b) Reports on Form 8-K

     The Company filed a Current Report on Form 8-K dated October 13, 1997
reporting Items 2 and 7 in connection with the Company's acquisition of UP&UP,
Inc. (formerly America's Health Plan, Inc.). The following financial statements
and pro forma financial information were filed:

   UP&UP, Inc. (formerly America's Health Plan, Inc.) Balance Sheets as of 
      December 31, 1996 and 1995.

   UP&UP, Inc. (formerly America's Health Plan, Inc.) Statements of Operations
     for the Years Ended December 31, 1996 and 1995.

   UP&UP, Inc. (formerly America's Health Plan, Inc.) Statements of
     Stockholder's Equity for the Years Ended December 31, 1996 and 1995.

   UP&UP, Inc. (formerly America's Health Plan, Inc.) Statements of Cash Flows
     for the Years Ended December 31, 1996 and 1995.

   Notes to Financial Statements.

   Report of Independent Auditors.

   UP&UP, Inc. (formerly America's Health Plan, Inc.) Unaudited June 30, 1997
     Balance Sheet.

   UP&UP, Inc. (formerly America's Health Plan, Inc.) Unaudited Statements of
     Operations and Cash Flows for the Six Months Ended June 30, 1997 and 1996.

   Notes to the Unaudited June 30, 1997 Financial Statements.

     Unaudited Pro Forma Consolidated Balance Sheet as of June 30, 1997.

     Unaudited Pro Forma Consolidated Statements of Operations for the Six
     Months Ended June 30, 1997 and the Year Ended December 31, 1996.

     Notes to Unaudited Pro Forma Consolidated Financial Statements.

                                                        19

<PAGE>



  (c) Exhibits

     The following exhibits are filed as part of this report unless noted
otherwise:

  Exhibit No.                                      Description

     2.1      Agreement with America's Health Plan, Inc. (1)
     2.2      Plan and Agreement of Merger of IM&I, Inc. into PB Newco (1)
     2.3      Plan and Agreement of Merger of PB Newco, Inc. into United Payors
                 & United Providers, Inc. (1)
     3.1      Certificate of Incorporation of United Payors & United Providers,
                 Inc. (1)
     3.2      Bylaws of United Payors & United Providers, Inc. (1)
     4.1      Specimen Stock Certificate of United Payors & United Providers,
                 Inc. (1)
     4.2      Shareholder Agreement (1)
     10.1     Employment Agreement between United Payors & United Providers,
                 Inc. and Thomas L. Blair (1)
     10.2     Employment Agreements between United Payors & United Providers,
                 Inc. and each of Spiro A. Karadimas, S. Joseph Bruno and
                 Michael A. Smith (1)
     10.3     Form of Indemnification Agreement (1)
     10.4     Stock Purchase Agreement between Preferred Health Choice and
                 United Payors & United Providers, Inc. dated October 22,
                 1996 (2)
     10.5     Warrants to Purchase 150,000 Shares of Common Stock of United
                 Payors & United Providers, Inc. Issued to Preferred Health
                 Choice, Inc. dated October 23, 1996 (3)
     10.6     Warrants to Purchase 168,000 Shares of Common Stock of United
                 Payors & United Providers, Inc. Issued to Preferred Health
                 Choice, Inc. dated October 27, 1996 (3)
     10.7     Stock Purchase Agreement between United Payors & United Providers,
                 Inc. and Principal Holding Company, a wholly-owned subsidiary
                 of Principal Mutual Life Insurance Company, dated September 29,
                 1997 (4)
     10.8     Employment Agreement By and Between United Payors & United
                 Providers, Inc., Thomas L. Blair, Chairman of the Board and
                 Chief Executive Officer of United Payors & United Providers,
                 Inc., and Edward S. Civera (filed herewith)
     11.1     Statement Regarding Computation of Earnings Per Common Share
                 (filed herewith)
     21.1     Subsidiaries of United Payors & United Providers, Inc.
                 (filed herewith)
     27.1     Financial Data Schedule (filed herewith)
--------------
(1)  Incorporated herein by reference into this document from the Exhibits to
     the Form S-1 Registration Statement, as amended, Registration No. 333-3814,
     initially filed on April 19, 1996.
(2)  Incorporated herein by reference into this document from the Exhibits to
     the Form 10-Q for the quarter ended September 30, 1996.
(3)  Incorporated herein by reference into this document from the Exhibits A-1
     and A-2 to the Stock Purchase Agreement filed as Exhibit 10.4 to the Form
     10-Q for the quarter ended September 30, 1996.
(4)  Incorporated herein by reference into this document from the Exhibits to
     the Form 8-K dated October 13, 1997.




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


                     UNITED PAYORS & UNITED PROVIDERS, INC.


Date: March 9, 1997                     By:    /s/   THOMAS L. BLAIR
                                           -----------------------------------
                                           Thomas L. Blair
                                           Chairman of the Board, President and
                                           Chief Executive Officer

                                       20

<PAGE>



                                   SIGNATURES


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



                                         UNITED PAYORS & UNITED PROVIDERS, INC.


Date: March 9, 1998                      By:    /s/   THOMAS L. BLAIR
                                            -----------------------------------
                                         Thomas L. Blair
                                         Chairman of the Board and
                                         Chief Executive Officer

Date: March 9, 1998                      By:    /s/   EDWARD S. CIVERA
                                            -----------------------------------
                                         Edward S. Civera
                                         President and Chief Operating Officer

Date: March 9, 1998                      By:    /s/   S. JOSEPH BRUNO
                                            -----------------------------------
                                            S. Joseph Bruno
                                            Chief Financial Officer

Date: March 9, 1998                      By:    /s/   EDUARDO V. FEITO
                                            -----------------------------------
                                            Eduardo V. Feito
                                            Chief Accounting Officer

Date: March 9, 1998                      By:    /s/   BETTE B. ANDERSON
                                            -----------------------------------
                                            Bette B. Anderson
                                            Director

Date: March 9, 1998                      By:    /s/   WILLIAM E. BROCK
                                            -----------------------------------
                                            William E. Brock
                                            Director

Date: March 9, 1998                      By:    /s/   DAVID J. DRURY
                                            -----------------------------------
                                            David J. Drury
                                            Director

Date: March 9, 1998                      By:    /s/   THOMAS J. GRAF
                                            -----------------------------------
                                            Thomas J. Graf
                                            Director

Date: March 9, 1998                      By:    /s/   FREDERICK H. GRAEFE
                                            -----------------------------------
                                            Frederick H. Graefe
                                            Director

Date: March 9, 1998                      By:    /s/   JULIA LAWLER
                                            -----------------------------------
                                            Julia Lawler
                                            Director




                                       21

<PAGE>










                        REPORT OF INDEPENDENT ACCOUNTANTS


The Stockholders
   United Payors & United Providers, Inc.

     We have audited the accompanying consolidated balance sheets of United
Payors & United Providers, Inc. (the "Company"), as of December 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years ended December 31, 1997 and 1996, and the
period from January 3, 1995 (date of incorporation) to December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of United Payors &
United Providers, Inc. as of December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for the years ended December
31, 1997 and 1996, and the period from January 3, 1995 (date of incorporation)
to December 31, 1995 in conformity with generally accepted accounting
principles.





                                                  COOPERS & LYBRAND L.L.P.


Washington, D.C.
February 6, 1998, except for
Note 17, as to which the date
is March 2, 1998

                                       F-1

<PAGE>


                     UNITED PAYORS & UNITED PROVIDERS, INC.
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1997 AND 1996


                                     ASSETS
<TABLE>
<CAPTION>
                                                        1997            1996
                                                    ------------    ------------
<S>                                                 <C>             <C>
Current assets:
  Cash and cash equivalents .....................   $ 14,456,069    $ 16,034,184
  Short-term investments ........................      8,366,547      10,448,564
  Accounts receivable ...........................     11,233,277       8,108,015
  Deferred income taxes .........................        811,059         342,300
  Other current assets ..........................        441,343         227,922
                                                    ------------    ------------
    Total current assets ........................     35,308,295      35,160,985
Fixed assets, net ...............................      3,858,532       2,782,601
Advances to contracting providers, net...........     17,265,730       4,300,730
Investments .....................................      1,496,051       1,079,354
Intangible and other assets, net ................     24,586,245       9,924,253
                                                    ------------    ------------
    Total assets ................................   $ 82,514,853    $ 53,247,923
                                                    ============    ============


                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable and accrued expenses .........   $  5,791,505    $  5,758,025
  Income and other taxes payable ................      1,871,934         958,991
  Notes payable and capital leases, current
    portion .....................................      3,131,772         330,912
                                                    ------------    ------------
    Total current liabilities ...................     10,795,211       7,047,928
Non-current accrued expenses ....................      1,313,333         700,000
Notes payable and capital leases, less current
  portion .......................................     12,109,606         324,281
                                                    ------------    ------------
    Total liabilities ...........................     24,218,150       8,072,209

Commitments and contingencies

Stockholders' equity:
  Convertible preferred stock, $0.01 par value,
    5,000,000 shares authorized, none issued
    and outstanding at December 31, 1997 and
    1996 ........................................             --              --
  Common stock, $0.01 par value, 35,000,000
    shares authorized, 11,573,636 shares issued
    at December 31, 1997 and 1996 ...............        115,736         115,736
  Additional paid-in capital ....................     37,181,755      35,154,820
  Treasury stock, at cost, 205,150 and 22,500
    at December 31, 1997 and 1996, respectively..     (3,029,450)        (30,000)
  Retained earnings .............................     24,911,862       9,935,158
  Deferred compensation, net ....................      (883,200)              --
                                                    ------------    ------------
    Total stockholders' equity ...................    58,296,703      45,175,714
                                                    ------------    ------------

    Total liabilities and stockholders' equity ...  $ 82,514,853    $ 53,247,923
                                                    ============    ============
</TABLE>

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


                                       F-2

<PAGE>


                     UNITED PAYORS & UNITED PROVIDERS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
             FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND THE
    PERIOD FROM JANUARY 3, 1995 (DATE OF INCORPORATION) TO DECEMBER 31, 1995


<TABLE>
<CAPTION>
                                        1997            1996            1995
                                    ------------    ------------    ------------
<S>                                 <C>             <C>             <C> 
Revenue
  Provider network revenue ......   $ 41,195,238    $ 31,258,853    $    877,423
  Utilization management services     19,832,853       4,190,476              --
                                    ------------    ------------    ------------
    Total revenue ...............     61,028,091      35,449,329         877,423
                                    ------------    ------------    ------------

Operating expenses
  Direct contract expenses ......     29,173,204      15,294,892       2,238,173
  General and administrative ....      6,221,269       2,783,212         334,376
  Depreciation and amortization .      1,695,142         538,593         113,514
                                    ------------    ------------    ------------
    Total operating expenses ....     37,089,615      18,616,697       2,686,063
                                    ------------    ------------    ------------

Other income
  Realized gain on sale of
    marketable securities .......        355,325         149,383         452,327
  Interest income, net of
    interest expense ............      1,045,350         693,003         163,127
  Other income, net .............         25,553         128,781          83,545
                                    ------------    ------------    ------------
    Total other income, net .....      1,426,228         971,167         698,999
                                    ------------    ------------    ------------

Income (loss) before income taxes     25,364,704      17,803,799      (1,109,641)

Income tax (provision) benefit ..    (10,388,000)     (7,158,000)        399,000
                                    ------------    ------------    ------------

Net income (loss) ...............   $ 14,976,704    $ 10,645,799    $   (710,641)
                                    ============    ============    ============


Net income (loss) per share -
   basic ........................   $       1.30    $       1.05    $      (0.08)
                                    ============    ============    ============

Weighted average shares
   outstanding - basic ..........     11,492,710      10,125,599       8,800,000
                                    ============    ============    ============


Net income (loss) per share -
   diluted ......................   $       1.28    $       1.05    $      (0.08)
                                    ============    ============    ============

Weighted average shares
   outstanding - diluted ........     11,657,645      10,128,390       8,800,000
                                    ============    ============    ============
</TABLE>

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


                                       F-3

<PAGE>


                     UNITED PAYORS & UNITED PROVIDERS, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
             FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND THE
    PERIOD FROM JANUARY 3, 1995 (DATE OF INCORPORATION) TO DECEMBER 31, 1995

<TABLE>
<CAPTION>
                  Convertible
                   Preferred                       
                     Stock         Common Stock       Additional                   Retained
                 ------------- --------------------    Paid-in       Treasury      Earnings      Deferred
                 Shares Amount   Shares     Amount     Capital        Stock        (Deficit)   Compensation    Total
                  ----- -----  ---------  ---------  ------------  ------------   -----------   ----------  -----------

<S>                 <C>  <C>   <C>        <C>        <C>           <C>            <C>           <C>         <C>
Issuance of stock
  at incorporation .  1  $--   4,400,000  $  44,000  $  5,956,000  $        --    $       --    $      --   $  6,000,000
Transfer of stock
  from existing
  stockholder to
  employees ........ --   --          --         --       126,109           --            --           --        126,109
Net deficit at
  December 31,
  1995 of contri-
  buted companies .. --   --          --         --      (119,010)          --            --           --       (119,010)
Net loss ........... --   --          --         --            --           --      (710,641)          --       (710,641)
                     --  --- -----------  ---------  ------------  -----------  ------------  -----------   ------------
Balance at
  December 31, 1995   1   --   4,400,000     44,000     5,963,099           --      (710,641)          --      5,296,458

Conversion of
  preferred stock .. (1)  --   4,400,000     44,000       (44,000)          --            --           --             --
Shares issued in
  public offering .. --   --   2,760,000     27,600    26,847,857           --            --           --     26,875,457
Shares issued in
  connection with .. --   --      13,636        136       149,864           --            --           --        150,000
  investment
Warrants issued in
  connection with .. --   --          --         --     1,088,000           --            --           --      1,088,000
  acquisition
Stock options
  issued in
  connection with
  non-compete and
  restructuring of
  marketing
  agreement ........ --   --          --         --     1,150,000           --            --           --      1,150,000
Acquisition of
  treasury stock ... --   --     (22,500)        --            --      (30,000)           --           --        (30,000)
Net income ......... --   --          --         --            --           --    10,645,799           --     10,645,799
                     --  --- -----------  ---------  ------------  -----------  ------------  -----------   ------------
Balance at
  December 31, 1996  --   --  11,551,136    115,736    35,154,820      (30,000)    9,935,158           --     45,175,714

Acquisition of
  treasury stock ... --   --    (226,250)        --            --   (3,299,450)           --           --     (3,299,450)
Treasury shares
  reissued in
  connection with
  acquisition ...... --   --      25,000    300,000            --           --       300,000
Stock options issued --   --          --         --     1,643,350           --            --           --      1,643,350
Treasury shares
  reissued ......... --   --      18,600         --       233,585           --            --           --        233,585
Options issued in
  connection with
  network management
  agreement ........ --   --          --         --       150,000           --            --           --        150,000
Deferred compensa-
  tion, net ........ --   --          --         --            --           --            --     (883,200)      (883,200)
Net income ......... --   --          --         --            --           --    14,976,704           --     14,976,704
                     --  --- -----------  ---------  ------------  -----------  ------------  -----------   ------------
Balance at
  December 31, 1997  --  $--  11,368,486  $ 115,736  $ 37,181,755  $(3,029,450) $ 24,911,862  $  (883,200)  $ 58,296,703
                     ==  === ===========  =========  ============  ===========  ============  ===========   ============
</TABLE>

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


                                       F-4

<PAGE>


                     UNITED PAYORS & UNITED PROVIDERS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
             FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND THE
    PERIOD FROM JANUARY 3, 1995 (DATE OF INCORPORATION) TO DECEMBER 31, 1995

<TABLE>
<CAPTION>
                                             1997           1996           1995
                                         ------------   ------------   -------------
<S>                                      <C>            <C>            <C> 
Operating activities
  Net income (loss) ...................  $ 14,976,704   $ 10,645,799   $   (710,641)
  Adjustment to reconcile net income
    (loss) to net cash provided by
    (used in) operations
    Realized gain on sale of marketable
      securities ......................      (355,325)      (149,383)      (452,327)
    Depreciation and amortization .....     1,695,142        538,593        113,514
    Loss on sale of assets ............       143,138             --             --
    Amortization of deferred costs ....       384,000             --             --
    Noncash compensation expense ......       705,435             --        126,109
    Deferred income taxes .............      (180,459)       274,700       (399,000)
    Changes in reserves and allowances        148,000        115,000             --
    Changes in assets and liabilities,
      net of effects from purchase of
      AHP in 1997 and NHS in 1996:
      Accounts receivable .............    (6,912,399)    (4,998,837)      (503,970)
      Accounts payable and accrued
        expenses ......................     1,944,024     (1,324,495)     1,240,344
      Current and other assets ........       (10,622)        (1,307)      (545,768)
      Income and other taxes payable ..       787,981        730,691           --
                                         ------------   ------------   ------------
  Net cash provided by (used in)
    operating activities ..............    13,325,619      5,830,761     (1,131,739)
                                         ------------   ------------   ------------

Investing activities
    Purchases of fixed assets .........    (1,495,599)      (865,827)    (1,082,420)
    Purchases of marketable securities     (4,989,131)    (5,958,812)    (3,994,993)
    Proceeds from sale of marketable
      securities ......................     5,307,940      6,108,195      4,447,320
    Purchases of short-term investments    (8,330,031)   (10,448,564)            --
    Proceeds from sale of short-term
      investments .....................    10,448,564             --             --
    Advances to contracting providers .   (13,113,000)    (4,290,730)      (125,000)
    Payment for purchase of NHS, net of
      cash acquired ...................            --     (5,304,221)            --
    Payment for purchase of AHP, net of
      cash acquired ...................   (13,447,439)            --             --
    Cash acquired from Contributed
      Businesses ......................            --             --      1,187,967
    Other, net ........................      (379,392)      (629,354)      (300,000)
                                         ------------   ------------   ------------
  Net cash provided by (used in)
    investing activities ..............   (25,998,088)   (21,389,313)       132,874
                                         ------------   ------------   ------------

Financing activities
    Proceeds from initial public
      offering ........................            --     26,875,457             --
    Proceeds from bank borrowing ......    15,000,000             --             --
    Purchase of treasury stock ........    (3,299,450)       (30,000)            --
    Issuance of capital stock .........            --             --      6,000,000
    Loan from stockholder .............            --             --      4,000,000
    Repayment of loan from
      stockholder .....................            --     (3,700,000)      (300,000)
    Repayment of other debt ...........      (606,196)      (253,856)            --
                                         ------------   ------------   ------------
  Net cash provided by financing
    activities ........................    11,094,354     22,891,601      9,700,000
                                         ------------   ------------   ------------

Increase (decrease) in cash and
  cash equivalents ....................    (1,578,115)     7,333,049      8,701,135
Cash and cash equivalents
    Beginning of the period ...........    16,034,184      8,701,135             --
                                         ------------   ------------   ------------
    End of the period .................  $ 14,456,069   $ 16,034,184   $  8,701,135
                                         ============   ============   ============
Supplemental disclosures of cash
  flow information
    Interest paid during the year .....  $    194,044   $     85,497   $     14,009
    Taxes paid during the year ........  $ 10,183,484   $  6,509,000   $         --
</TABLE>

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


                                       F-5

<PAGE>


                     UNITED PAYORS & UNITED PROVIDERS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION

     United Payors & United Providers, Inc. ("UP&UP" or the "Company"), a
Delaware corporation, serves as an intermediary between health care payors
(e.g., insurance companies) and health care providers (e.g., hospitals) by
entering into contractual arrangements designed generally to produce cost
savings and other benefits for payors and increased liquidity and improved
efficiency in claims submissions for providers. UP&UP derives its revenue
primarily from a portion of the price concessions offered by the providers under
such contractual arrangements. Effective October 1, 1996, UP&UP acquired
National Health Services, Inc. ("NHS"), a national health care utilization
management services company. NHS offers medical utilization management services
to insurance underwriters, self-insured businesses, provider organizations, and
others. Such services include pre-certification of in-patient and out-patient
medical care, and case management.

     Effective December 31, 1995, UP&UP entered into an agreement with America's
Health Plan, Inc., an indirect wholly-owned subsidiary of Principal Mutual Life
Insurance Company ("Principal Mutual"), whereby specified payor clients
representing approximately 40% of America's Health Plan, Inc.'s revenues for the
year ended December 31, 1995, were transferred to UP&UP. Principal Mutual owns
approximately 38% of the Company's Common Stock. Effective September 1, 1997,
UP&UP acquired the remaining operations of America's Health Plan, Inc.

     America's Health Plan, Inc. develops and markets its proprietary health
care provider network for access by payors of health care costs such as
insurers, third-party administrators and unions. The name of America's Health
Plan, Inc. was changed to UP&UP, Inc. immediately prior to the acquisition. In
connection with the acquisition, the Company was granted the right to operate
the health care provider network under the name America's Health Plan. UP&UP,
Inc. is hereafter referred to as "AHP". UP&UP, NHS and AHP are hereafter
collectively referred to as "the Company".

2.   INITIAL PUBLIC OFFERING

     The Company filed a Registration Statement on Form S-1 with the Securities
and Exchange Commission which offered to the public 2,400,000 shares at $11.00
per share (2,760,000 shares, including the overallotment) of the Company's
common stock. This registration statement was declared effective on June 28,
1996.

     The closings of the sale of stock for an aggregate of 2,760,000 shares were
effected on July 8, 1996 and July 15, 1996 for which the Company received
proceeds (net of underwriters' commissions and expenses) of $23.4 million and
$3.5 million, respectively.

3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

     The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and include the
accounts and operations, after intercompany eliminations, of the Company and its
subsidiaries.

                                       F-6

<PAGE>


                     UNITED PAYORS & UNITED PROVIDERS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Revenue recognition

     The Company recognizes provider network revenue, under the accrual method,
based on a contracted percentage of the amount of cost savings realized by payor
clients which access the Company's contracting provider network. Revenue is
recorded in the period in which claims are repriced.

     For medical utilization management services revenue is recorded based on
the contractual arrangements. Contracts may reflect a capitated rate, fee for
service or hourly rate. Pre-certification revenue is generally based on monthly
capitation calculations and is earned during the month for which the services
are provided. Case management revenue is generally based on fee for service or
hourly rates over the term of the contractual agreements.

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
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period.
Actual results could differ from those estimates.

Fair value information

     The carrying amounts of financial instruments, principally cash, accounts
receivable, accounts payable, long-term notes payable, and short-term notes
payable reported in the balance sheet approximate their fair values.

Reclassifications

     Certain amounts in the 1995 and 1996 financial statements have been
reclassified to conform to the 1997 presentation.

Cash equivalents

     The Company considers all highly liquid instruments with original
maturities of three months or less to be cash equivalents. The Company maintains
its cash and cash equivalents in bank accounts which, at times, may exceed
federally insured amounts. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant credit risk on cash
and cash equivalents. At December 31, 1997 and 1996, the Company had
approximately $4,257,200 and $6,651,000, respectively, of cash and cash
equivalents on deposit with commercial banks in excess of insured amounts.

Short-term investments

     During 1997 and 1996, the Company purchased certain marketable securities.
Management considers all marketable securities to be available for sale as
defined by Statement of Financial Accounting Standards

                                       F-7

<PAGE>


                     UNITED PAYORS & UNITED PROVIDERS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
Available for sale securities are reported at fair value with net unrealized
gains and losses reported in stockholders' equity. From time to time, the
Company engages in the trading of marketable securities. All marketable
securities were sold prior to December 31, 1995 and 1996. At December 31, 1997,
marketable securities totaled $36,516. Cost was determined using the specific
identification method, which resulted in realized gains of $602,012 and realized
losses of $246,687 in 1997, realized gains of $402,197 and realized losses of
$252,814 in 1996, and realized gains of $564,988 and realized losses of $112,661
in 1995. At December 31, 1996, all available funds were invested in short-term
investments. Short-term investments in 1997 and 1996 consist of $5,489,368 and
$8,474,574, respectively, of securities backed by the United States Government;
$997,524 and $963,990, respectively, of other debt securities; and certificates
of deposit in the amount of $1,843,139 and $1,010,000, respectively. These
investments are reflected at fair value which approximates the respective
amortized cost. There were no unrealized gains or losses on these investments in
1997.

Advances to contracting providers

     The Company enters into contracts directly with providers of medical
services ("contracting providers"). The Company's contracts with contracting
providers prescribe specific fee concessions on medical services rendered by the
contracting providers to patients covered by medical plans of payor clients. In
partial consideration for the price concessions furnished by them, the
contracting providers are offered the option by the Company of receiving an
advance (prepayment) of a portion of the estimated annual claims volume that
such contracting providers have with payor clients. As of December 31, 1997 and
1996, the amount of advances (prepayments) was $17,528,730 and $4,415,730,
respectively. Upon termination of a provider contract by either party, the
amount of advances (prepayments) through the date of termination becomes fully
due and payable to the Company. The Company considers deposits with contracting
providers recoverable and only nominal reserves of $263,000 and $115,000 have
been established for these deposits as of December 31, 1997 and 1996,
respectively.

Fixed assets

     Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the various assets which
range from five to seven years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful lives of the
assets or the lease term.

Intangible assets

     Intangible assets represent the cost in excess of net assets of businesses
acquired (goodwill) and the value of options to purchase an aggregate of 182,000
shares of the Company's common stock issued in connection with the Company
obtaining a covenant not to compete upon the restructuring of a marketing
agreement. These intangibles are amortized on a straight-line basis over 3 to 20
years. Accumulated amortization at December 31, 1997 and 1996 amounted to
$1,278,167 and $120,441, respectively. Amortization expense for the years ended
December 31, 1997 and 1996 amounted to $1,157,726 and $120,441, respectively.
The

                                       F-8

<PAGE>


                     UNITED PAYORS & UNITED PROVIDERS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Company annually evaluates the recoverability of intangible assets utilizing
qualitative factors. At such time as an impairment in value is identified, the
impairment will be quantitatively measured using a discounted cash flow
methodology and charged to expense.

Income taxes

     Income taxes have been recorded using the liability method. The income tax
benefit or provision includes federal and state income taxes both currently
payable and changes in deferred taxes due to differences between financial
reporting and tax bases of assets and liabilities. Deferred tax assets and
liabilities are measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse.

Net income (loss) per common share

     The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share (FAS 128), which establishes standards for
computing and presenting basic and diluted earnings per share. Previously
presented earnings per share data for the year ended December 31, 1996 has been
restated to conform with the provisions of FAS 128.

     Net income (loss) per share is based on the weighted average number of
common stock and common stock equivalent shares outstanding during the year.

Concentration of payor clients

     A significant portion of the Company's revenue is derived from a small
number of payor clients. The inability to replace any such clients with
significant new payor clients would have a material adverse effect on the
Company's business. The Company's revenue was concentrated (as a percentage of
total revenue) in the following payor clients during 1997, 1996 and 1995:

<TABLE>
<CAPTION>
                                        1997        1996       1995
                                       ------      ------     ------
     <S>                                 <C>         <C>        <C>
     Payor client A..................    20%         --         --
     Payor client B..................    13          --         --
     Payor client C..................    --          22%        --
     Payor client D..................    --          13         --
     Payor client E..................    --          12         --
     Payor client F..................    --          --         26%
     Payor client G..................    --          --         12
</TABLE>

     No other payor client accounted for 10% or more of the Company's revenue.

     At December 31, 1997, payor clients A and B represented 16% and 13%,
respectively, of the Company's accounts receivable. At December 31, 1996, payor
clients C, D and E represented 20%, 17% and 11%, respectively, of the Company's
accounts receivable.


                                       F-9

<PAGE>


                     UNITED PAYORS & UNITED PROVIDERS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4.   BUSINESS COMBINATION

     Effective October 1, 1996, the Company acquired National Health Services,
Inc. ("NHS") for a purchase price of approximately $7.2 million, consisting of
$5.9 million in cash, warrants to purchase an aggregate of 318,000 shares of the
Company's common stock valued at $1.1 million and the assumption of
approximately $200,000 in liabilities in excess of the fair value of the assets
acquired. NHS is a national health care management services company. The
acquisition has been accounted for as a purchase and, accordingly, the results
of operations of NHS have been included in the accompanying consolidated
statements of operations since the effective date of the acquisition. The
acquisition resulted in goodwill of $7.2 million which is being amortized over
15 years. Accumulated amortization at December 31, 1997 and 1996 amounted to
$602,205 and $120,441, respectively. The unamortized portion of the goodwill at
December 31, 1997 and 1996, is included in intangible assets and other assets in
the accompanying consolidated balance sheets.

     Effective September 1, 1997, the Company acquired AHP for a purchase price
of approximately $15.5 million, consisting of $15.1 million in cash and the
assumption of approximately $400,000 in liabilities in excess of the fair value
of the assets acquired. The purchase price is subject to adjustment through the
year 2001, if AHP revenues exceed pre-determined targets. The acquisition has
been accounted for as a purchase and, accordingly, the results of operations of
AHP have been included in the accompanying consolidated statements of operations
since the effective date of the acquisition. The acquisition resulted in
goodwill of approximately $15.5 million which is being amortized over 20 years.
Accumulated amortization at December 31, 1997 amounted to $257,676. The
unamortized portion of goodwill at December 31, 1997, is included in intangible
and other assets in the accompanying consolidated balance sheet.

     The following unaudited pro forma consolidated results of operations for
the years ended December 31, 1997 and 1996 are presented as though AHP and NHS
had been acquired at the beginning of 1996, after giving effect to purchase
accounting adjustments relating to interest, the amortization of goodwill, and
income taxes.

<TABLE>
<CAPTION>
                                                      1997              1996
                                                  -----------       -----------
                                                           (unaudited)
   <S>                                               <C>               <C>        
   Revenue....................................    $70,281,000       $67,718,000
                                                  ===========       ===========
   Net income.................................    $15,563,000       $13,678,000
                                                  ===========       ===========
   Net income per share - basic...............    $      1.35       $      1.35
                                                  ===========       ===========
   Weighted average shares - basic............     11,493,000        10,126,000
                                                  ===========       ===========
   Net income per share - diluted.............    $      1.33       $      1.35
                                                  ===========       ===========
   Weighted average shares - diluted..........     11,658,000        10,128,000
                                                  ===========       ===========
</TABLE>

     The pro forma results of operations are not necessarily indicative of the
results that would have occurred had the NHS and AHP acquisitions been
consummated as of January 1, 1996, nor are they necessarily indicative of future
operating results.



                                      F-10

<PAGE>


                                      UNITED PAYORS & UNITED PROVIDERS, INC.

                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


5.   FIXED ASSETS

     Fixed assets consist of the following:

<TABLE>
<CAPTION>
                                                December 31,
                                        --------------------------   Depreciable
                                            1997           1996         Lives
                                        -----------    -----------    ---------
   <S>                                  <C>            <C>            <C> 

   Computer equipment.................  $ 2,170,494    $ 1,373,632      5 years
   Furniture, fixtures, and
     office equipment.................    2,165,105      1,149,005    5-7 years
   Leasehold improvements.............      912,054        714,835      5 years
   Vehicles...........................       21,426         95,609      5 years
                                        -----------    -----------    ---------
     Total fixed assets...............    5,269,079      3,333,081
   Accumulated depreciation
     and amortization.................   (1,410,547)      (550,480)
                                        -----------    ----------- 
     Fixed assets, net................  $ 3,858,532    $ 2,782,601
                                        ===========    ===========
</TABLE>


     Depreciation expense for the years ended December 31, 1997, 1996 and 1995
approximated $915,000, $412,000 and $138,000, respectively.

6.   INVESTMENTS

     The Company currently holds a 6% interest in R.J. Associates, Inc. which is
recorded at cost of $233,000 and $265,000 at December 31, 1997 and 1996,
respectively. R.J. Associates, Inc. has a 50% ownership interest in Health
Payors Organization, Ltd. ("HPO"), which maintains a network of medical care
providers. In May 1995 an entity affiliated with R.J. Associates, Inc. assisted
the Company in its marketing effort for which it was paid approximately
$132,000. In June 1995, the Company entered into an agreement with HPO to
utilize its provider network. In 1997, 1996 and 1995, the Company incurred fees
related to this agreement of approximately $779,000, $284,000 and $70,000,
respectively.

     In 1997, the Company and EDIComm, Inc. ("EDIComm") entered into an
agreement in which EDIComm granted the Company an option through March 31, 1998
to acquire a percentage of EDIComm common stock. The Company paid EDIComm
$200,000 in cash and Company stock for this option. In addition, the Company has
advanced EDIComm $99,772 which is collateralized by 13,636 shares of the
Company's common stock.

     During 1996, the Company invested in two health care related entities. The
Company: (a) purchased 23,752 shares of common stock of Wheeler Peak Capital
Corporation for approximately $214,000, and (b) through a private placement,
invested in 500 shares of the common stock of Cimarron Managed Care Corporation
of New Mexico for $250,000.

     During 1997, the Company purchased approximately 106,000 shares (2.6% of
the outstanding common stock) of a financial institution's common stock for
$500,000.

     The Company believes the carrying value of its investments at December 31,
1997 and 1996 are not impaired.

                                      F-11

<PAGE>


                     UNITED PAYORS & UNITED PROVIDERS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


7.   NOTE PAYABLE

     The Company had a loan with a bank with an outstanding balance of $525,000
at December 31, 1996, which was paid off in 1997.

     In connection with the acquisition of AHP, the Company has entered into a
loan agreement with a bank for an aggregate amount of $15 million. The loan
balance outstanding at December 31, 1997 is $15 million and loan bears interest
at the rate of LIBOR plus 11/8% (approximately 6.9% at December 31, 1997). The
principal amount of the loan is to be repaid in equal quarterly installments
over a period of five years, commencing March 31, 1998. Interest is payable in
arrears on the last business day of each quarter, commencing December 31, 1997.

8.   INCOME TAXES

     The provision (benefit) for income taxes consists of the following:

<TABLE>
<CAPTION>
                                         1997             1996          1995
                                      -----------     -----------    ----------
     <S>                              <C>             <C>            <C>       
     Current provision..............  $10,568,400     $ 6,883,300    $       --
     Deferred provision (benefit)...     (180,400)        274,700      (399,000)
                                      -----------     -----------    ----------
       Total provision (benefit)....  $10,388,000     $ 7,158,000    $ (399,000)
                                      ===========     ===========    ==========
</TABLE>

     The provision (benefit) for income taxes varies from the amount of income
tax (benefit) determined by applying the applicable U.S. statutory tax rate to
pre-tax income (loss) as follows:

<TABLE>
<CAPTION>
                                         1997             1996          1995
                                      -----------     -----------    ----------
     <S>                                 <C>              <C>           <C>       
     Statutory U.S. tax rate........     35%              34%           (34)%
     State taxes, net of Federal
       benefit......................      6                6             (2)
                                      -----------     -----------    ----------
       Effective tax rate...........     41%              40%           (36)%
                                      ===========     ===========    ==========
</TABLE>

     A summary of the tax effect of the significant components of deferred
income tax assets follows:


<TABLE>
<CAPTION>
                                         1997             1996   
                                      -----------     -----------
     <S>                              <C>             <C>        
     Deferred compensation..........  $  411,000      $        --
     Depreciation and amortization..      66,000           66,700
     Allowance for doubtful accounts      88,000           37,500
     Accrual versus cash method of
       accounting...................      60,000          116,500
     Other accrued expenses.........     186,000          121,600
                                      -----------     -----------
       Net deferred tax asset.......  $  811,000      $   342,300
                                      ===========     ===========
</TABLE>

9.   STOCKHOLDERS' EQUITY

Stock option plan

     In October, 1996, the Company adopted the United Payors & United Providers,
Inc. Stock Option Plan ("SOP"). Stock options may be granted under the plan as
either incentive stock options or non-qualified stock

                                      F-12

<PAGE>


                     UNITED PAYORS & UNITED PROVIDERS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


options. The maximum number of shares of the Company's common stock reserved for
purchase pursuant to the exercise of options granted under the SOP is 1,550,000
shares. All Company employees, outside directors and consultants are eligible to
receive option awards. A Committee of the Board of Directors determines award
amounts, exercise prices, terms and vesting periods. The maximum term over which
incentive stock options and non-qualified stock options may be exercised may not
exceed 10 years and 12 years, respectively. The following table summarizes
information regarding transactions under the SOP:

<TABLE>
<CAPTION>
                                        1997                        1996
                               ----------------------       --------------------
                                            Weighted                   Weighted
                                             Average                    Average
                                            Exercise                   Exercise
                                Shares        Price         Shares       Price
                               ---------     -------        ------      -------
<S>                            <C>           <C>            <C>         <C>
Outstanding at January 1,....     57,500     $ 11.15            --      $    --
Granted......................  1,142,500       11.88        57,500        11.15
Exercised....................         --          --            --           --
Canceled.....................         --          --            --           --
                               ---------     -------        ------      -------
Outstanding at December 31,..  1,200,000     $ 11.85        57,500      $ 11.15
                               =========     =======        ======      =======
Exercisable at December 31,..    698,750     $ 13.78        24,167      $ 11.36
                               =========     =======        ======      =======
</TABLE>

     The following table summarizes information about stock options outstanding
at December 31, 1997:

<TABLE>
<CAPTION>
                                                                    Weighted
                                               Weighted             Average
        Range of                               Average             Remaining
     Exercise Price          Shares        Exercise Price      Contractual Life
    ---------------          -------       --------------      ----------------
    <S>                      <C>               <C>                 <C>      
    $  6.00 - 11.00          570,000           $  8.81              9.8 years
      11.01 - 14.00          372,500             12.30              9.2 years
      14.01 - 18.00          257,500             17.93             11.0 years
</TABLE>

     Information regarding stock options exercisable at December 31, 1997 is
summarized as follows:

<TABLE>
<CAPTION>
                                                Weighted
        Range of                                Average
     Exercise Price           Shares        Exercise Price
    ---------------          -------       -------------- 
    <S>                      <C>               <C>          
    $  6.00 - 11.00          156,250           $ 10.00
      11.01 - 14.00          285,000             12.10
      14.01 - 18.00          257,500             17.93
</TABLE>

     During 1995, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 123 (FAS 123), "Accounting for Stock-Based 
Compensation". This pronouncement requires that the Company calculate the fair
value of stock options at the date of grant using an option pricing model. The
Company has elected the "pro forma, disclosure only" option permitted under FAS
123, instead of recording a charge to operations. The following table reflects
pro forma net income and net income per share had the Company elected to adopt
the fair value approach of valuing stock options of FAS 123:


                                      F-13

<PAGE>


                     UNITED PAYORS & UNITED PROVIDERS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                         1997              1996
                                     -----------       -----------
    <S>                              <C>               <C>    
    Net income
      As reported.................   $14,976,704       $10,645,799
      Pro forma...................    14,466,736        10,597,438
    Net inper share
      As reported - basic.........         $1.30             $1.05
      As reported - diluted.......          1.28              1.05
      Pro forma - basic...........          1.26              1.05
      Pro forma - diluted.........          1.24              1.05
</TABLE>

     The weighted-average exercise price and the weighted-average grant date
fair value of options granted whose exercise price equals, exceeds or is less
than the market price of the stock at the date of grant is as follows:

<TABLE>
<CAPTION>
                               1997                            1996
                      -----------------------       -------------------------
                      Weighted                       Weighted
                       Average      Weighted          Average       Weighted
                      Exercise       Average         Exercise        Average
   Exercise Price       Price      Fair Value          Price       Fair Value
   --------------     --------     ----------       -----------    ----------
    <S>                <C>           <C>              <C>             <C> 
    Equals.......      $11.49        $ 8.40           $   --          $  --
    Exceeds......       16.60          7.72               --             --
    Less.........        6.76         10.26            11.15           4.09
</TABLE>

     The estimated fair value of each option is calculated using the
Black-Scholes option-pricing model. The following table summarizes the
weighted-average of the assumptions used for stock options granted during 1997
an 1996:

<TABLE>
<CAPTION>
                                            1997            1996
                                           ------          ------
      <S>                                   <C>             <C> 
      Risk-free interest rate..........      6.9%            6.3%
      Expected years until exercise....      9.5             2.0
      Expected volatility..............     45.0%           34.0%
      Dividend yield...................       --              --
</TABLE>

Other stock options and warrants

     In connection with certain business transactions during 1996, the Company
has granted options and warrants as follows: (a) 182,000 shares of its common
stock (at $12.50 per share) pursuant to a non-compete agreement related to a
marketing commission restructuring; (b) 50,000 shares of its common stock (at
$17.00 per share) pursuant to a contractual arrangement with a client; and (c)
318,000 shares of its common stock (at $16.00 per share) in the form of stock
warrants pursuant to the acquisition of NHS. These options and warrants expire
from 3 to 10 years from the date of the respective agreements. The weighted
average exercise price of the options or warrants granted during 1996 was
$14.93. At December 31, 1997, all these options and warrants were exercisable.

     The options related to the above transactions have been valued using the
modified American Black Scholes economic model. The resultant valuation is
reflected in the accompanying financial statements.

                                      F-14

<PAGE>


                     UNITED PAYORS & UNITED PROVIDERS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Employee stock purchase plan

     In October 1996, the Company established an Employee Stock Purchase Plan
("ESPP") with a maximum of 350,000 shares of the Company's common stock. The
plan was approved by the shareholders on June 3, 1997. The Company will acquire
shares of the Company's common stock in the open market for issuance under the
ESPP. The employee purchase price will generally be at 85% of the fair market
value of the Company's common stock at the determination date.

Treasury stock

     On June 3, 1997, the Board of Directors authorized the Company to
repurchase such number of shares of its common stock that have an aggregate
purchase price not in excess of $5,000,000. Pursuant to this authorization, the
Company began repurchasing and expects to continue repurchasing these shares
from time to time on the open market or in negotiated transactions at prices
deemed appropriate by the Company. Purchased shares are deposited in the
Company's treasury and are to be used principally for its employee stock
purchase plan and for general corporate purposes. As of December 31, 1997, the
Company had repurchased 226,250 shares having an aggregate purchase price of
$3,299,450.

10.  401(k) SAVINGS PLAN

     In October 1996, the Company authorized the establishment of an employee
401(k) Savings Plan. The 401(k) Savings Plan, which became effective in 1997, is
available to all of its employees subject to certain service requirements. For
1997, the Company matched the first $1,000 of the employee's contribution and
50% thereafter. The Company's contribution vests after the employee has
participated in the 401(k) Savings Plan for five years. For 1997, the amount of
the Company's contribution was $404,000.

11.  RELATED PARTY TRANSACTIONS

     The Company utilizes, for corporate business purposes, the services of an
aircraft owned by a corporation of a major stockholder of the Company. The
amount paid by the Company to this corporation in 1997, 1996 and 1995 was
approximately $263,000, $153,000 and $70,000, respectively.

     During 1996, Principal Mutual became a payor client of the Company.
Principal Mutual has also been a payor client of AHP since 1992. Approximately
$2,342,000 and $80,000 of the Company's provider network revenue for 1997 and
1996 respectively, was derived from its contract with Principal Mutual,
including approximately $1,238,000 derived from the AHP contract during the four
months ended December 31, 1997. At December 31, 1997, approximately $341,272 is
due from Principal Mutual and is included in accounts receivable.

     The Company purchases medical and life insurance from Principal Mutual.
Commencing in 1997, Principal Mutual administered the Company's 401(k) plan.
Amounts paid to Principal Mutual in 1997 for these insurance products and
services approximated $386,000.



                                      F-15

<PAGE>


                     UNITED PAYORS & UNITED PROVIDERS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     In December 1996, two stockholders who hold shares in the Company's stock,
aggregating approximately 59%, formed and funded a new entity to pursue the
development and marketing of new products and services for the health care
industry.

12.  BANK LINES OF CREDIT

     During 1997, the Company entered into two credit facilities totaling $15
million. The facilities have one-year revenue terms and an interest rate of
approximately LIBOR plus 11/8%. At December 31, 1997, there was no outstanding
balance on either of the credit facilities.

     During 1996,  the Company had a line of credit with a bank,  with provision
for advances up to a maximum of $200,000.  The outstanding balance of $95,000 at
December 31, 1995 was paid off in 1996. The line of credit expired  December 31,
1996.

13.  LEASE COMMITMENTS

     The Company leases office space under non-cancelable operating leases. The
agreements provide for annual escalations and for the payment by the Company of
a proportionate share of the increase in the costs of operating the building.
For financial reporting purposes, the Company recognizes rent expense on a
straight-line basis over the term of the lease. The Company has also entered
into various operating lease agreements for office equipment. Rent expense under
the Company's non-cancelable operating leases aggregated $1,137,000, $470,000
and $130,000 in 1997, 1996 and 1995, respectively.

     Future minimum lease payments under non-cancelable operating leases are as
follows:

<TABLE>
<CAPTION>
                                            Operating
                                              Leases
                                           -----------
          <S>                              <C>        
          1998.........................    $ 1,324,855
          1999.........................      1,350,147
          2000.........................      1,387,887
          2001.........................        932,794
          2002.........................        531,891
          Thereafter...................      2,187,355
            Total......................    $ 7,714,929
</TABLE>


14.  COMMITMENTS AND CONTINGENT LIABILITIES

     Effective April 1, 1997, the Company entered into a five-year employment
agreement with its President and Chief Operating Officer. The agreement provides
for, among other things, options to purchase 750,000 shares of the Company's
common stock that will vest over an eight-year period (with acceleration
provision based on performance) and a retirement benefit (approximately $1
million) in the form of vested trust arrangements that is earned over a
five-year period. A portion of the stock options have an exercise price which is
lower than the market price of the Company's common stock at the date of grant
("in the money"). The compensation element of these "in the money" options, net
of the related tax effect, has been recorded

                                      F-16

<PAGE>


                     UNITED PAYORS & UNITED PROVIDERS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


as deferred compensation and is being amortized as compensation expense over a
period of eight years. The unamortized portion of the deferred compensation at
December 31, 1997 is included in stockholders' equity. In December 1997, the
Company accelerated the vesting on 500,000 stock options which had an exercise
price at the date of grant equal to or above the market price.

     The Company offers its contracting providers an advance (prepayment) option
based on the percentage of claims volume for the preceding year. The advance
(prepayment) option may be requested at the execution of a contract between the
Company and contracting provider, or at the anniversary date. The Company
estimates that the amount of prepayment options that may be requested in 1998
should not exceed $15,000,000.

     During 1996, the Company restructured the IM&I 1994 marketing commission
agreement with Direct Resource Managers ("DRM"). The restructured agreement
contains provisions for: (a) payment to DRM of $50,000 per month for 26 months
commencing January, 1997 and (b) options to purchase 182,000 shares of the
Company's common stock at $12.50 per share (or alternatively receive cash
consideration in lieu of the options under certain conditions) in exchange for
consulting and marketing assistance and a covenant not to compete for three
years. Amounts paid to DRM in 1997, 1996 and 1995 by the Company approximated
$600,000, $1,425,000 and $1,412,000, respectively. Amounts related to this
commitment are reflected in intangible assets and in accrued expenses and
stockholders' equity, respectively, and are being amortized over a period not to
exceed three years.

     On April 26, 1996, a civil complaint was filed against the Company in the
United States District Court for the Northern District of Illinois. The
Plaintiff seeks injunctive and other relief, including possible damages, based
generally on allegations that representatives of the Company, in at least four
instances, made various misrepresentations to prospective Contracting Providers,
including to the effect that the Company's provider network was affiliated with
the Plaintiff's provider network or that the Plaintiff had agreed to utilize the
Company's provider network. The Company denies the allegations in the complaint
and believes the complaint is without basis. After consultation with counsel and
review of available facts, management believes that damages, if any, arising
from litigation will not be material to the consolidated financial statements of
the Company.

     The Company is also a party to other legal actions arising in the ordinary
course of business. Management believes that damages arising from these actions,
if any, will not be material to the consolidated financial statements of the
Company.

15.  EARNINGS PER SHARE

     The adoption of FAS 128 did not have any impact on previously presented
earnings per share data for the year ended December 31, 1995, as the Company did
not have any potential common shares outstanding during the period. A
reconciliation of the numerators and denominators of the basic earnings per
share computations for the years ended December 31, 1997 and 1996 to the
numerators and denominators of the diluted earnings per share computations for
the respective periods follows:


                                      F-17

<PAGE>


                     UNITED PAYORS & UNITED PROVIDERS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                               1997                            1996
                  ------------------------------  ------------------------------
                                            Per                             Per
                   Net Income     Shares   Share   Net Income    Shares    Share
                  -----------  ----------  -----  -----------  ----------  -----
<S>               <C>          <C>         <C>    <C>          <C>         <C>  
Basic ..........  $14,976,704  11,492,710  $1.30  $10,645,799  10,125,599  $1.05
Effect of 
  Dilutive Stock
  Options ......           --     164,935     --           --       2,791     --
                  -----------  ----------  -----  -----------  ----------  -----
Diluted ........  $14,976,704  11,657,645  $1.20  $10,645,799  10,125,599  $1.05
                  ===========  ==========  =====  ===========  ==========  =====
</TABLE>

     Stock options to purchase 307,500 shares of common stock at a weighted
average exercise price of $17.78 per share and warrants to purchase 318,000
shares of common stock at $16.00 per share were outstanding during 1997 but were
not included in the computation of diluted earnings per share because the
exercise prices of the stock options and warrants were greater than the average
market price of the common shares and, therefore, were antidilutive. These stock
options and warrants have expiration dates ranging from October, 1999 to March,
2009.

16.  SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

1997

     The Company assumed liabilities of $4,802,630 in connection with the
acquisition of AHP.

     The Company issued 25,000 shares from treasury stock valued at $300,000 in
connection with an acquisition.

     The Company issued 18,600 shares valued at $233,585 from treasury stock to
its employees.

1996

     In connection with the acquisition of NHS, the Company assumed liabilities
in the amount of $3,987,192 and issued warrants to purchase common stock of the
Company valued at $1,088,000.

     A capital lease obligation was incurred when the Company entered into a
lease for new equipment.

     Shares of common stock were issued in connection with the investment in
EDIComm.

     Options to purchase shares of common stock were issued in connection with
obtaining a covenant not to compete upon the restructuring of a marketing
agreement.

     Shares of common stock were issued in connection with the conversion of
preferred stock.

17.  SUBSEQUENT EVENT

     On March 2, 1998, the United States District Court for the Northern
District of Georgia entered a summary judgment on behalf of AHP in reference to
the civil litigation initiated on January 29, 1997 by AmeriCare Health Alliance
of Georgia, L.L.C. ("AmeriCare"), a health care provider organization.

                                      F-18

<PAGE>


                     UNITED PAYORS & UNITED PROVIDERS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


AmeriCare had sought damages for lost profits in the amount of $10 million, as
well as punitive damages, for a breach of a contract that America's Health Plan,
Inc. believes was never executed. Alternatively, AmeriCare had sought fraud
damages against America's Health Plan, Inc. for its failure to enter into a
contract with the plaintiff. The plaintiff may appeal the summary judgment.
After consultation with counsel and review of available facts, management
believes that damages, if any, arising from this litigation will not be material
to the consolidated financial statements of the Company.



                                      F-19