<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

   
                                    FORM 10-K/A
    

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

                      For the 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 0-11488

                            PHYSICIAN PARTNERS, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

          Delaware                                     91-1217068
-------------------------------                  ------------------------
(State or other jurisdiction of                  (I.R.S. Employer ID No.)
incorporation or organization)

111 SW Columbia Street, Suite 725
Portland, Oregon                                         97201
----------------------------------------               ----------
(Address of Principal Executive Offices)               (Zip Code)

Registrant's telephone number, including area code:

                                 (503) 224-2249
                                 --------------

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

None
--------------------------------------------------------------------------------
(Title of Class)

None
--------------------------------------------------------------------------------
(Title of Class)

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 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 the Registrant's Common Stock outstanding as of
March 30, 1998 was 6,464,196.


                       DOCUMENTS INCORPORATED BY REFERENCE

None.


<PAGE>   2



                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                                                  PAGE
                                                                                                  ----

                                    PART I

<S>       <C>                                                                                      <C>
Item 1:   Business                                                                                
Item 2:   Properties                                                                              
Item 3:   Legal Proceedings                                                                        
Item 4:   Submission of Matters to a Vote of Security Holders                                     


                                    PART II

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


                                   PART III

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

                                    PART IV

Item 14:  Exhibits, Financial Statement Schedules, and Reports on Form 8-K                         
</TABLE>



<PAGE>   3




                                     PART I

ITEM 1: BUSINESS

OVERVIEW

Physician Partners, Inc. ("PPI" or "Company") is a physician practice management
("PPM") company that operates primary care and multi-specialty clinics in the
Pacific Northwest. PPI was formed in June 1996 in connection with certain
reorganization and merger transactions (the "Transactions") contemplated by the
Amended and Restated Agreement and Plan of Reorganization and Merger (the
"Reorganization and Merger Agreement") among Medford Clinic, PC ("Old Medford"),
HealthFirst Medical Group, PC ("Old HealthFirst"), The Corvallis Clinic, PC
("Old Corvallis" and, together with Old Medford and Old HealthFirst, referred
to herein, collectively, as the "Old PCs"), and PPI, which Transactions were
consummated on February 1, 1997.

   
The Transactions resulted in a separation of operations of each of the Old PCs
between medical professional services activities (i.e., providers of medical
services) and the physician practice management activities of the business.
Pursuant to the Merger, the physician practice management business, along with
substantially all of the assets and liabilities of the Old PCs (including cash,
receivables, inventories, prepaids, property, plant and equipment, payables,
accruals, debt, and certain contractual commitments) became the assets and
liabilities of PPI. The New PCs are responsible for providing medical services
and incur the related costs for provider compensation and benefits. The assets
transferred to the New PCs, which had nominal value, include the employment
agreements between each Old PC and its providers, certain provider contracts
under which the New PCs will be receiving fee-for-service compensation and
patient medical records.
    

As an integral part of the Transactions, PPI and each of the New PCs entered
into a 40-year management agreement (the "Management Agreement") whereby PPI 
provides physician practice management services to such New PCs. PPI provides 
to the new PCS, among other things, management and administrative services, 
capital resources, facilities, equipment and supplies. As consideration, PPI is
entitled to (a) reimbursement of all management costs and expenses ("Manager's 
Expenses") incurred by PPI in connection with the Management Agreement  and (b)
a management fee equal to 16% of (i) net revenues relating to services provided
by the New PCs less (ii) Manager's Expenses.

The Management Agreement provides for the establishment of the Joint 
Management Board of the New PC. The Joint Management Board is designed to 
represent the clinical and physician perspective and the management and 
business perspective. The Joint Management Board consists of six members, 
with three members appointed by the New PC (physician members of the New PC) 
and three members appointed by PPI (one of whom must be a local PPI group 
practice administrator). The Medical Director of the New PC serves as a
seventh ex officio, non-voting member of the Joint Management Board. The Joint
Management Board provides local expertise and develops and approves all
proposals submitted to PPI for it's approval regarding the New PC's growth, 
annual budgets, payor relations, local strategic initiatives and capital 
improvements.



<PAGE>   4

GENERAL

The mission of PPI is to pioneer innovative health care delivery into the 21st
century as a leading primary care-based multi-specialty physician practice
management company. To achieve such goal, PPI endeavors to enable its affiliated
clinics to deliver health care with sound ethical standards by involving
physicians at every level of PPI, including clinical and business policy
development and decisions. PPI continuously seeks to innovate to enable the New
PCs to deliver quality patient care and services efficiently. PPI also actively
seeks opportunities to grow through acquisition of quality primary care based
multi-specialty group practices. PPI operates as a PPM organization, focusing on
the long-term management of high quality, well-positioned primary care based
multi-specialty group practices. PPI typically acquires certain assets of
established medical groups, such as their equipment and accounts receivable, and
manages such medical groups under a long-term management agreement. Because PPI
does not employ physicians and does not practice medicine, it does not acquire
provider professional services business assets such as Medicare provider
numbers.

While PPI is similar to other multi-specialty group practice PPMs, PPI can be
distinguished and differentiated in several important aspects. PPI is the first
PPM to originate in the Pacific Northwest. As of December 31, 1997, PPI has
significant geographical presence and strength in the State of Oregon with
nearly 302 providers practicing in the New PCs and various clinical delivery 
sites. PPI is also distingushable in that it is owned by group practice 
physicians. PPI employs a full-time Chief Medical Officer responsible for 
managing the clinician and clinical issues with each New PC's Medical Director.
PPI's business and clinical managers have extensive experience with managed 
care under a variety of payment methodologies due to the fact that PPI is the 
surviving corporation of a merger of three successful primary care-based 
multi-specialty groups which have, collectively, more than 150 years of
group practice and group practice management experience.

PPI also has a Medical Ethicist as an advisor to the Board of Directors in 
order to assist the physicians affiliated with PPI in adherence with the
fundamental principles of medical ethics, acting as advocates for their patients
and providing quality patient care. The Medical Ethicist attends board 
meetings of PPI and advises the Board regarding ethical implications of the 
issues with which the PPI Board must deal.

Business Strategy

PPI's strategy is to consolidate medical group practices into networks of health
care providers. Although PPI's operations are currently concentrated in the
Pacific Northwest, PPI intends to explore growth opportunities nationally.
Within each of its managed clinics, PPI seeks to achieve a mix of primary care
and specialty physicians who can provide services necessary to establish a
significant market presence. PPI enhances medical group operations by
standardizing financial reporting; centralizing contract negotiations; seeking
best administrative and clinical practice; improved data management; group
purchasing, and capital investment.

PPI seeks to affiliate with highly productive medical groups with significant
market share where they practice and which have strong reputations among
patients, payors and peers for providing quality medical care. PPI seeks to
acquire the operating assets of these practices and contract with the medical
groups for 40 years for management services in exchange for a management fee.
PPI's profitability then depends, to a certain extent, on enhancing operating
efficiency, expanding health care services provided, increasing market share and
assisting affiliated providers in managing the delivery of health care. PPI's
network integrates practices via financial and clinical systems and offers
groups the opportunity to maintain market competitive compensation, to gain
increased access to capital, greater management expertise, more sophisticated
information systems and more attractive managed care contracts.

The key elements of PPI's strategy include:

    Strengthen Operational Efficiencies.
    Cost reductions can be made through economies of scale in purchasing
    supplies, equipment, insurance and services.

<PAGE>   5

    Operational efficiencies may also be achieved by expanding PPI's market
    coverage and number of health maintenance organization ("HMO") enrollees,
    refining utilization management programs, increasing standardization,
    developing additional in-house specialty and ancillary services, increasing
    emphasis on outpatient care and utilizing sophisticated information systems
    to make available detailed clinical data that can ensure both quality and 
    cost containment.

    Expanding the Existing Markets of the New PCs.
    Growth in greater Portland, Corvallis and Medford, Oregon may occur through
    the acquisition of or affiliation with physicians and medical groups within
    those markets. PPI has invested capital in each of the three New PCS and
    intends to assist these practices in acquiring existing local medical 
    groups. Such new groups will have the opportunity to be incorporated into 
    the governance and leadership structure of the existing PPI hub clinic.

    Expansion into New Hub Markets.
    Expansion into new areas is anticipated to occur primarily through the
    acquisition of physician groups. New PPI hub clinics are expected to be
    primary care-based multi-specialty groups with (i) more than 30 physicians,
    (ii) potential for a significant market share, (iii) a strong group practice
    culture, (iv) experience or interest in managed care and (v) a strong 
    reputation for providing high quality medical care in its community.

    Developing and Acquiring Small Physician Practice Groups.
    In markets including the Pacific Northwest, many communities are too small
    to support the typical PPI primary care-based multi-specialty group practice
    hub. There are many primary care-based medical groups with fewer providers
    that have significant market presence. Opportunities for growth may arise in
    market segments other than the physician-owned, primary care-based
    multi-specialty groups, such as independent practice associations ("IPAs")
    and provider hospital organizations ("PHOs"). PPI may consider acquiring
    the assets of physicians from hospital systems, HMOs or academic medical 
    centers.

SERVICES

Each clinic affiliated with PPI offers a wide range of primary and specialty 
physician care and ancillary services through organized physician groups. 
Approximately 52% of the providers affiliated with PPI are primary care 
providers and approximately 48% practice various medical and surgical 
specialties. The primary care physicians are those concentrating in family 
practice, internal medicine and pediatrics. 

Medical and surgical specialties include:

                Allergy and Asthma                Neurology
                Behavioral Health                 Obstetrics
                Cardiology                        Occupational Medicine
                Critical Care                     Oncology
                Dietician                         Ophthalmology
                Dermatology                       Optometry
                Endocrinology                    Orthopedics
                Gastroenterology                  Otolaryngology
                Gynecology                        Podiatry
                Hematology                        Rheumatology
                Immunology                        Surgery- General and Vascular
                Infectious Disease                Urology
                Nephrology

In addition to medical services, the clinics affiliated with PPI offer a number
of ancillary services through facilities within their offices, including
cardiopulmonary and clinical laboratories, renal dialaysis, physical therapy and
radiology facilities, optical dispensary and pharmacies.



<PAGE>   6

GOVERNMENT REGULATION

Many aspects of the health care industry are presently subject to extensive
federal and state governmental regulation. Applicable federal and state laws
include the fraud and abuse provisions of the federal Medicare and Medicaid
statutes, which prohibit the solicitation, payment, receipt or offering of any
remuneration, either direct or indirect, in exchange for or with the intent to
induce the referral, of Medicare or Medicaid patients or for the recommendation,
arranging, leasing or purchasing of goods or services for which payment may be
made under the Medicare or Medicaid programs. Violation of the fraud and abuse
laws is punishable with criminal and civil penalties. Federal law also imposes
significant penalties for false or improper billings for physician services. In
addition, the federal "Stark" law generally prohibits referrals by physicians
for designated health services reimbursable under the Medicare and Medicaid
programs to entities with which such physicians or their immediate family
members have a financial interest.

There can be no assurance that review of the operations of the Old PCs prior to
the Merger, or the operations of the New PCs and PPI after the Merger,
by courts or regulatory authorities will not result in a determination or
further action that could have a material adverse effect on PPI. Moreover, there
can be no assurance that existing laws and regulations will not be amended,
interpreted or applied in the future in such a way as to have a material adverse
effect on PPI, or that additional laws will not be enacted.

Significant risk factors relating to the business of the Old PCs, the New PCs
and PPI are described in more detail below.

Fraud and Abuse Laws

Certain provisions of the Social Security Act, commonly referred to as the
"Anti-Kickback Statute," prohibit the offer, payment, solicitation, or receipt
of any form of remuneration in return for the referral of Medicare or state
health program patients or patient care opportunities, or in return for the
recommendation, arrangement, purchase, lease or order of items or services that
are covered by Medicare or state health programs. In recent years, there has
been increasing scrutiny by law enforcement authorities, the United States
Department of Health and Human Services, various state agencies, the federal and
state courts and Congress, of financial arrangements between health care
providers and potential sources of patient referrals to ensure that such
arrangements are not disguised mechanisms to pay for patient referrals. The
Anti-Kickback Statute is broad in scope and interpretations by various courts
have been ambiguous or conflicting in certain respects. To the extent PPI is
deemed to be either a referral source or a separate provider under the New PC
Management Agreements that is in a position to influence referrals to or from
physicians, the financial arrangements under these agreements could be subject
to scrutiny and prosecution under the Anti-Kickback Statute.

Furthermore, each of the Old PCs has had a history of receiving and making
referrals to providers in their respective communities. There can be no
assurance that the business practices of the Old PCs prior to the consummation
of the Merger would be construed to comply with the fraud and abuse laws in all
respects by applicable federal and state authorities. PPI or the New PCs, as
successors in interest to the Companies, would be subject to liability in
connection with any enforcement action taken against the Old PCs by a
regulatory enforcement agency with respect to such laws.

Physician Self-Referral Law
Significant prohibitions against physician self-referrals for services covered
by Medicare and Medicaid programs were enacted, subject to certain exceptions,
by Congress in the Omnibus Budget Reconciliation Act of 1993. These
prohibitions, commonly known as Stark II, amended prior physician self-referral
legislation known as Stark I (which applied only to clinical laboratory
referrals) by enlarging the list of services and investment interests to which
the self-referral prohibitions apply. Effective January 1, 1995, Stark II
prohibits a physician, or a member of his or her immediate family, from making
referrals for certain "Designated Health Services" to entities in which the
physician has an ownership or investment interest, or with which the physician
has a compensation arrangement. In addition to the conduct directly prohibited
by the law, the statute also prohibits schemes that are designed to obtain
referrals indirectly that cannot be made directly. The penalties for violating
the law include (i) a refund of any Medicare or Medicaid payments for services
that resulted from an unlawful referral, (ii) civil fines, and (iii) exclusion
from the Medicare and Medicaid programs. "Designated Health Services" include,
among other things, clinical laboratory services, radiology and other
diagnostic services, radiation therapy services, durable medical equipment,
prosthetics, outpatient prescription drugs, home health services and inpatient
and outpatient hospital services. Stark II prohibitions include referrals
within the physician's own group practice (unless the practice satisfies the
"in-office ancillary services" exception) and referrals in connection with
physicians' employment arrangements (unless the arrangement satisfies the
"in-office ancillary services" or "employment" exceptions). In addition, Stark
II applies to indirect financial arrangements. To the extent physicians managed
by the Company are determined to have an indirect financial relationship with
physicians in separate practices which are managed by the Company, absent a
Stark II exception, referrals for Designated Health Services between physicians
in different practices could be prohibited. Stark II also prohibits billing the
Medicare or Medicaid programs for services rendered in conjunction with
prohibited referrals. Noncompliance with, or violation of, Stark II can result
in exclusion from the Medicare and Medicaid programs and civil penalties. The
Company believes that its operations and those of the New PCs as presently
conducted do not pose a material risk of liability under Stark II, primarily
because PPI does not currently provide "Designated Health Services."
Nevertheless, there can be no assurance that Stark II will not be interpreted or
hereafter amended in a manner that has a material adverse effect on the
Company's operations as presently conducted.
        
In this regard, on January 9, 1998, the Health Care Financial Administration
published proposed regulations interpreting the scope and refining the
application of the Stark II law. These regulations provide, in the case of
Designated Health Services provided by a "group practice," that the overhead
expenses and income from such group practice must be distributed according to
methods that indicate that the practice is a unified business and not based on
each satellite office operating as if it were a separate enterprise. Only "group
practices" as defined by Stark II can utilize the general exception under the
law for "in-office ancillary services." There can be no assurance that the
distribution methodology of the New PCs will meet the unified business
requirement or that each of the New PCs otherwise will be deemed to be a "group
practice" if challenged. A determination that sharing of overhead expenses and
income by the New PCs does not comply with Stark II or failure to satisfy any
other criteria necessary to qualify for the "in-office ancillary services"
exception to the Stark II prohibition would preclude physician owners of a New
PC from referring Medicare/Medicaid patients to such New PC for Designated
Health Services, and could have a material adverse effect on the Company.

In addition, the proposed regulations contemplate that the issuance to
physicians of stock in a company prior to such company being publicly traded may
not satisfy the Stark exception for ownership interests in publicly traded
companies. Thus, to the extent PPI becomes a provider of Designated Health
Services, the New PC physicians who have received stock in PPI before it is
public may be precluded from them making Medicare/Medicaid referrals to the
Company and, under certain circumstances, to other affiliated medical groups,
for Designated Health Services, which could have a material adverse impact on
the Company.


<PAGE>   7

The Corporate Practice of Medicine

Certain laws prohibit the practice of medicine by corporations other than
professional corporations. It is possible that the operations of PPI could be
challenged on grounds that PPI, a business corporation, will participate in
operations or revenues of the New PCs and other PPI-managed medical practices to
a prohibited extent. Oregon law regarding the corporate practice of medicine
does not specifically approve or forbid practice management companies from
contracting with professional corporations and has been subjected to limited
judicial and regulatory interpretation. Therefore, no assurance can be given
that PPI's activities will be found to be in compliance with state law if
challenged. In the event of a prohibition against the PPI form of business, the
relationship between PPI and each of the New PCs may have to be modified,
possibly resulting in a reduction of revenues received by PPI for managing the
New PCs.

Fee-Splitting Laws

The laws of many states prohibit physicians from splitting fees with
non-physicians. Although Oregon currently does not have such a prohibition,
there is no assurance that Oregon will not enact new laws or interpret existing
laws in a manner that would require modifications to PPI's business in order to
comply with such a law. In addition, expansion of the operations of PPI to
jurisdictions that have laws that could be deemed to restrict or prohibit PPI's
form of arrangement with managed medical groups may require structural and
organizational modifications to PPI's form of management relationship, which
could have an adverse effect on PPI.

Medicare/Medicaid Reimbursement

State and federal civil and criminal statutes impose substantial penalties,
including civil and criminal fines and imprisonment, upon health care providers
who fraudulently or wrongfully bill governmental or other third-party payors for
health care services. The federal law prohibiting false billings allows a
private person to bring a civil action in the name of the United States
government for violations of its provisions. While management of each New PC
has attempted to comply with billing requirements, there is no assurance that
PPI's or the New PCs' activities will not be challenged or scrutinized by
governmental authorities. Moreover, Medicare and other reimbursement rules
impact the fee structure of medical billing. To the extent PPI's or the New PCs'
billing arrangements may need to be modified to comply with existing or modified
regulations, there could be a material adverse financial effect on PPI.

Oregon Insurance Law

The Oregon Department of Consumer and Business Affairs, Insurance Division (the
"Insurance Division"), regulates the transaction of insurance pursuant to the
Oregon Insurance Code. Pursuant to Insurance Division Bulletin 96-2 (the
"Bulletin") issued in April 1996 by the Oregon Insurance Commissioner, health
care providers that are compensated on a capitated basis by a health insurer or
health care service contractor ("HCSC") are not required to obtain a certificate
of authority to transact insurance if the capitation is internal to a policy of
insurance that is delivered by an authorized insurer or HCSC. The Bulletin also
states that discounted fee-for-service arrangements with reasonable limits on
discounts (i.e., not open-ended discounts) also do not require a certificate of
authority. PPI arrangements should fall into these categories and therefore be
exempt from regulation as an insurance company. There is no assurance, however,
that the position of the Insurance Division will not change in the future. In
such an event, PPI may be required to restructure its New PC Management
Agreements or apply for a certificate of authorization, which could have a
material adverse effect on PPI.

Antitrust Laws

Because the New PCs are separate legal entities they may be deemed competitors 
subject to a range of antitrust laws which prohibit anti-competitive conduct, 
including price fixing, concerted refusals to deal and division of market. 
There is no assurance that the review of the businesses of the New PCs and PPI 
by courts or regulatory authorities will not result in a determination that 
could have a material adverse effect on PPI.

Proposed Legislation

In addition to current federal regulations, the Clinton Administration and
several members of Congress have proposed legislation for significant  reforms
affecting the payment for and availability of health care services. Aspects of
certain such health care proposals, such as reductions in Medicare and Medicaid
payments and additional prohibitions on direct or indirect physician ownership
of facilities to which they refer patients, if adopted, could have a material
adverse effect on PPI. There can be no assurance as to the ultimate content,


<PAGE>   8

timing or effect of any health care reform legislation, nor is it possible at
this time to estimate the impact of potential legislation on PPI.


COMPETITION

In general, both the physician management industry and the health care provider
industry are highly competitive. Competition in the provision of medical
services in the markets where PPI operates come from an increasing variety of
providers who are in or have recently entered the physician provider business
(e.g., other group practices, hospital systems, IPAs, HMOs, and academic medical
centers). In the three markets presently served by the New PCs, hospital systems
employ primary care physicians who compete directly against the New PCs. While
PPI seeks to acquire groups with significant market presence, there can be no
assurance that PPI or the New PCs can successfully compete with other provider
competitors.

With respect to physician practice management companies, only three,
MedPartners, Inc. ("MedPartners"), American Oncology Resources ("AORI") and
PhyCor , Inc. ("PhyCor") have a presence in any of the markets currently served
by the New PCs. All of these publicly traded PPMs have holdings in the Portland,
Oregon market. MedPartners manages a multi-specialty group practice of
approximately 70 physicians in the Portland market. MedPartners has been an
aggressive suitor of physician groups in the Portland market. AORI has oncology
providers in the Portland market which are in direct competition with
HealthFirst's oncology practice and PhyCor has an indirect presence in the
Portland market at the Vancouver Clinic in Vancouver, Washington. In the larger
context of PPI's regional and national strategic growth plan in the pursuit of
quality primary care-based multi-specialty group practice acquisitions, PPI
directly competes with public as well as private physician practice management
companies. There can be no assurance that PPI can successfully compete against
other PPMs in such markets in the future.

EMPLOYEES

As of December 31, 1997, the Company employed approximately 1,600 people
including 17 in the corporate office. None of the Company's employees is in a
labor union and the Company considers its relations with its employees to be
excellent.

INSURANCE

The business of the Company entails an inherent risk of claims of provider
professional liability. To protect its overall operations from such potential
liabilities, the Company maintains professional liability insurance and general
liability insurance on a claims-made basis. Management does not believe
professional liability exposure is significant; however, there can be no
assurance that a future claim will not exceed the limits of available insurance
coverage or that such coverage will continue to be available. The Company
carries worker's compensation insurance and maintains multiperil liability,
fiduciary liability, employee dishonesty, professional liability, general
liability and directors and officers' insurance. The Company believes these
types of insurance to be customary and reasonable for a business of its kind.

ITEM 2: PROPERTIES

The Company's executive office is located at 111 SW Columbia Street, Portland,
Oregon. The Company believes these arrangements and the additional locations
discussed below are adequate for its current uses and anticipated growth.

In addition to the corporate office, the Company leases and occupies clinics,
offices or facilities in 24 locations throughout the Portland, Corvallis and
Medford, Oregon areas.


<PAGE>   9

In connection with the Medford Clinic, PC, two other properties, the Redwood
Dialysis Center and the Rogue Valley Dialysis Center facilities, are currently
owned by PPI. The mortgages of these properties were assumed by the Company as a
result of the Merger.

ITEM 3: LEGAL PROCEEDINGS

Physicians, hospitals and other participants in the health care industry are
subject to an increasing number of lawsuits alleging medical malpractice and
related claims. Many of these lawsuits involve large claims and substantial
defense costs. Although neither PPI nor its employees practice medicine, it is
subject to the risks associated with medical malpractice and related litigation.
PPI along with the New PCs are currently engaged in the defense of lawsuits
arising in the ordinary course and conduct of its business. PPI believes that
such actions will not have a material effect on its business.

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

The 1997 Annual Meeting of Stockholders of PPI was held on January 28, 1998.
Three Class 1 Directors, Tim E. Dupell, Michael F. Bonazzola, M.D. and Mark
Leavitt, M.D., were elected to the Board of Directors of PPI at such meeting.
The term of the new directors commences on January 28,1998 and expires at the
annual meeting of stockholders to be held in 2000. David M. Goldberg, M.H.A.,
Bruce E. Van Zee, M.D., David H. Cutsforth, Jr., M.D., Russell A. Dow, M.D.,
Frederick W. Eubank, II, Douglas M. Mancino, Esq. and Dan Gregorie, M.D. 
continued as directors after the 1997 Annual Meeting of Stockholders. The 
following chart tabulates the number of votes cast for and against each 
director nominated for election at such Annual Meeting; there were no 
abstentions.

                                                    For         Against

Tim E. Dupell                                    3,844,203      419,798
 
Michael F. Bonazzola, M.D.                       4,122,522      141,479

Mark Leavitt, M.D.                               4,149,349      114,652

                                     PART II

ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

There is no public trading market for the Company's common stock.



<PAGE>   10



ITEM 6: SELECTED FINANCIAL DATA


<TABLE>
<CAPTION>
                                                            For the Period
                                                            from Inception
                                                            (June 20, 1996)     For the Year ended
                                                            to December 31,        December 31,
(Thousands of dollars, except earnings per share)                 1996                1997
                                                            ---------------     ------------------
<S>                                                            <C>                  <C>      
STATEMENT OF OPERATIONS DATA:
REVENUES:
 Reimbursement of Manager's Expenses                           $      --            $ 102,617
 Management Fees                                                      --                5,932
                                                               ---------            ---------
 Total Revenues                                                       --              108,549
 Total Operating Expenses                                             --              104,998
 Total Operating Income (Loss)                                        --                3,551
 Reorganization Costs                                              4,955                  718
 Other Non-Operating Income (Expenses)                                --               (2,699)
                                                               ---------            ---------
 Income (Loss) Before Taxes                                       (4,955)                 134
                                                               ---------            ---------
 Income Tax Expense (Benefit)                                         --                   --
                                                               ---------            ---------
                                                                                    
 Net Income (Loss)                                                (4,955)                 134
                                                               =========            =========
 Net Income (Loss) Applicable to Common Shareholders              (4,955)              (3,706)
 Earnings (Loss) Per Share                                     $ (107.37)           $   (0.63)
BALANCE SHEET DATA:
 Working Capital (Deficit)                                     $     (93)           $     889
 Total Assets                                                        100               73,831
 Long Term Debt, net                                                  --                8,177
 Capital and Direct Financing Lease Obligations, net                  --               17,841
 Preferred Redeemable Stock and Related Warrants                      --               17,910
 Shareholders' Equity                                                  3               (1,362)
</TABLE>


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

The following discussion includes some forward-looking statements that involve a
number of risks and uncertainties. Actual results may differ materially from
historical results or from the results discussed in such forward-looking
statements or outcomes otherwise currently expected or sought by PPI.

OVERVIEW

PPI is a physician practice management company ("PPM") that operates primary
care and multi-specialty clinics in the Pacific Northwest. PPI was formed in
June 1996 in connection with certain reorganization and merger transactions (the
"Transactions") contemplated by the Amended and Restated Agreement and Plan of
Reorganization and Merger (the "Reorganization and Merger Agreement") among
Medford Clinic, PC ("Old Medford"), HealthFirst Medical Group, PC ("Old
HealthFirst"), The Corvallis Clinic, PC ("Old Corvallis," and, together with Old
Medford and Old HealthFirst, referred to herein, collectively as "the Old PCs",
and PPI, which transactions were consummated on February 1, 1997. Pursuant to
the terms of the Reorganization and Merger Agreement, each Old PC affected (a) a
reorganization (the "New PC Reorganization") of its corporate structure by (i)
incorporating a wholly-owned professional corporation subsidiary ( a "New PC"),
(ii) transferring to the

<PAGE>   11

New PC certain assets and liabilities relating to the provider professional
services business, (iii) making a pro rata distribution to its shareholders of
all of the capital stock of the New PC, (iv) converting such Old PC from a
professional corporation to a business corporation and (v) entering into a 
40-year management agreement (the "Management Agreement") with PPI and (b) a
merger (the "Merger") with and into PPI, resulting in consolidation of the
operations (other than the provider professional services businesses) of the Old
PCs.

   
In exchange for providing management services under the Management Agreement,
and certain facilities and equipment to the managed clinics, PPI is reimbursed
for all managerial costs and expenses ("Manager's Expenses") incurred by PPI and
is paid a management fee. The management fee is 16% of (i) net revenues relating
to services provided by the New PCs less (ii) Manager's Expenses. PPI has a
Management Agreement with each of the three New PCs, i.e., HealthFirst Medical
Group, PC, Medford Clinic, PC and The Corvallis Clinic, PC.
    

The three New PCs have 25 clinical delivery sites and nearly 302 providers.
PPI's strategy is to pioneer innovative health care delivery into the 21st
century as a leading primary care-based multi-specialty group PPM. PPI endeavors
to deliver high quality health care by involving physicians at every level of
the organization. The majority of PPI's common stock is owned by physicians and
the Board of Directors maintains a physician majority.

To increase revenues, PPI is working with the New PCs to recruit additional
physicians, merge other physician groups in the area into the New PCs, and aid
in the negotiation of managed care contracts. PPI is working on initiatives
anticipated to reduce the New PCs' Manager's Expenses through regional
purchasing and insurance contracts and through the consolidation of various
services. PPI intends to expand its presence in the Pacific Northwest through
acquisitions of physician groups in new areas.

In 1997, PPI began modifying its computer system programming to process
transactions in the year 2000. Anticipated spending for this modification will
be expensed as incurred and is not expected to have a significant impact on the
Company's onging results of operations.

RESULTS OF OPERATIONS

   
Reorganization costs of $0.7 million in the year ended December 31, 1997 and
$4.3 million in the period ended December 31, 1996 were incurred to complete the
Transactions. These costs consisted of legal, accounting and printing expenses
and will not continue after 1997. Corporate costs of $2.8 million and $0.7
million in 1997 and 1996, respectively, consisted of the Salaries, Wages and 
Benefits of PPI management, outside professional expenses, and the operating
expenses of the corporate office. These costs will increase in 1998 as PPI
continues to build its management team.
    

PRO FORMA INFORMATION

As previously discussed, the Merger of the Old PCs with and into PPI became
effective February 1, 1997. As a result of the Merger, PPI succeeded to the
ownership of substantially all of the assets and liabilities of the Old PCs.
Also, an integral part of the Merger was the Management Agreement that calls for
PPI providing physician practice management services to each of the three New
PCs.

The actual results reflect only eleven months of post Merger operating
activities in the twelve months ended December 31, 1997 and no operating
activities for 1996. Summarized unaudited pro forma financial information


<PAGE>   12

is presented below. The pro forma balance sheet is presented as if the Merger
had occurred on December 31, 1996, and the pro forma income statements are
presented as if the Merger had taken place on January 1, 1996.

Summarized Unaudited Pro Forma Balance Sheet as of December 31, 1996 (all
amounts are in thousands):

<TABLE>
<CAPTION>
                                                               1996
                                                              -------
           <S>                                                <C>    
           ASSETS:
            Current Assets                                    $25,050
            Property, Plant and Equipment                      45,064
            Other Assets                                        1,032
                                                              -------
              Total Assets                                     71,146
                                                              =======

           LIABILITIES:
            Current Liabilities                                33,945
            Long-Term Debt and Capital Lease Obligations       28,602
            Other Long-Term Liabilities                         6,489
                                                              -------
              Total Liabilities                                69,036
                                                              -------

           SHAREHOLDERS' EQUITY                                 2,110
                                                              -------

           Total Liabilities and Shareholders' Equity         $71,146
                                                              =======
</TABLE>

Summarized Unaudited Pro Forma Income Statement as of December 31, 1996 and 1997
(all amounts are in thousands, except earnings per share):

<TABLE>
<CAPTION>
                                                               1996            1997
                                                             ---------       ---------
           <S>                                               <C>             <C>      
           REVENUES:
            Reimbursement of Manager's Expenses              $ 107,594       $ 111,566
            Management Fees                                      5,655           6,375
                                                             ---------       ---------
              Total Revenues                                   113,249         117,941
           OPERATING EXPENSES:
            Clinic Salaries, Wages and Benefits                 47,320          47,162
            Medical and Office Supplies                         16,814          17,517
            General and Administrative Expenses                 11,792          13,282
            Purchased Medical Services                          20,168          21,867
            Lease and Rent                                       3,038           3,770
            Depreciation and Amortization                        5,259           4,767
            Corporate Costs                                      2,900           2,899
                                                             ---------       ---------
              Total Operating Expenses                         107,291         111,264
              Total Operating Income                             5,958           6,677
           Other Income (Expenses)                              (3,203)         (2,973)
                                                             ---------       ---------
           Net Income Before Provision For Income Taxes          2,755           3,704
           Provision for Income Taxes                           (1,047)         (1,408)
                                                             ---------       ---------
           Net Income                                        $   1,708       $   2,296
                                                             =========       =========
           Earnings per Share - Basic                        $    0.29       $    0.39
                                                             =========       =========
           Earnings per Share - Diluted                      $    0.24       $    0.32
                                                             =========       =========
</TABLE>


<PAGE>   13

This pro forma financial information has been prepared by PPI based on the
historical financial statements of PPI and the Old PCs. The pro forma income
statements reflects the following adjustments to historical results:

a.  Elimination of net revenues of the Old PCs from providing medical services
    as these revenues will be retained by the New PCs for the year ended
    December 31, 1996 and the period ended January 31, 1997.

b.  Elimination of historical costs for provider compensation and benefits as
    such costs will be the responsibility of the New PCs for the year ended
    December 31, 1996 and the period ended January 31, 1997.

c.  Addition of the revenues to be earned by PPI under the terms of the
    Management Agreement for the year ended December 31, 1996 and the period
    ended January 31, 1997.

d.  PPI's corporate overhead costs in 1997 were adjusted to include the costs in
    January 1997. The 1996 results were adjusted to reflect corporate overhead
    costs similar to 1997.

e.  Elimination of nonrecurring costs related to the New PC Reorganization and
    Merger.

f.  Elimination of historical provision for income taxes and addition of
    provision for income taxes based on pro forma pretax net income.

g.  Elimination of $1.5 million of transition plan expenses and $1.0 million 
    provision against the receivables from the New PCs in 1997.

The pro forma income statements may not be indicative of actual results if the
Transactions had occurred on the dates indicated or which may be realized in the
future.

PRO FORMA RESULTS:

The increase in the reimbursement of Manager's Expenses of $4.0 million, or
3.7%, to $111.6 million for the twelve months ended December 31, 1997 from
$107.6 million for the twelve months of 1996 is mainly attributable to increases
in Purchased Medical Services and General and Administrative expenses. Purchased
Medical Services increased $1.7 million or 8.4% to $21.9 million in 1997
compared to $20.2 million in 1996 due to an increase in capitated lives in the
various managed care plans and higher utilization. Manager's Expenses will
continue to increase as the New PCs' revenues increase, however, they are
expected to remain relatively stable as a percentage of net revenues. The $1.5
million increase in General and Administrative expenses is due to various
consulting projects completed in 1997.

The $0.7 million increase in management fees for the year ended December 31,
1997 compared to 1996 is due to an increase in the New PCs' revenues of $8.1
million only partially offset by the increase in Manager's Expenses of $4.0
million. PPI anticipates that management fee revenue will continue to increase
as the New PCs' operating results improve and PPI acquires the assets of
additional clinics.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

   
Working capital increased from a $0.1 million deficit at December 31, 1996 to a
surplus of $0.9 million at December 31, 1997 which is due to the assumption of
the Old PCs' assets and liabilities on February 1, 1997. Based on the pro forma
December 31, 1996 balance sheet, working capital increased $9.8 million to a
$0.9 million surplus from an $8.9 million deficit at December 31, 1996. The
increase is due to a construction loan classified as short-term at December 31,
1996 being converted to long-term debt in the second quarter 1997 and the use of
the proceeds from the sale of preferred stock to reduce current liabilities.
Cash flows from operations used $4.3 million in the year ended December 31,
1996 and used $4.1 million in the year ended December 31, 1997. The use of funds
in the year ended December 31, 1997 is primarily due to the net increase in 
the Receivable from New PCs of $3.0 million and the $2.5 million decrease in
accrued compensation which were partially offset by an increase in drafts
payable. The decrease in accrued compensation is due to funding the 1996
employer's portion of HealthFirst's and Medford's defined contribution plans
with proceeds from the sale of preferred stock to First Union (see subsequent
section - "Redeemable Preferred Stock").
    

At December 31, 1997, PPI had cash and cash equivalents of approximately $1.8
million and $9.5 million available under its operating line of credit. PPI
believes that the cash and cash equivalents, combined with the line of credit
and cash flows from operations is sufficient to meet PPI's planned capital
expenditures and working capital needs for the next 12 months.


<PAGE>   14

Capital Expenditures

Capital expenditures in the year ended December 31, 1997 were $2.6  million.
Capital expenditures during 1997 consist mainly of purchases of medical and
office equipment. Capital expenditures in 1998 could increase if certain
investments are made in ancillary services.

Line of Credit

   
The Transactions resulted in PPI assuming all debt obligations of the Old PCs.
The Old PCs previously had separate lines of credit with an aggregate $5.5
million limit. In February 1997, the individual lines of credit were
consolidated into one operating line of credit with a $7.5 million limit made
available by U.S. Bank of Oregon. In August 1997, the line of credit was
increased to $15.0 million in anticipation of potential acquisitions. PPI, at
it's discretion, may make borrowings at prime rate or in $0.5 million increments
at LIBOR plus LIBOR margin. At December 31, 1997, $5.5 million was outstanding
under the line of credit with an effective interest rate of 8.5%. The line has
an annual commitment fee on the unused portion of .375%. The line of credit
contains certain covenants which among other things, require PPI to meet certain
financial obligations. PPI was not in compliance with those covenants at
December 31, 1997. However, subsequent to year-end the Bank agreed to waive the
covenant violations for the year ended December 31, 1997. At December 31, 1997,
PPI had approximately $9.5 million available under the operating line of credit.
    

Redeemable Preferred Stock

On July 10, 1997, PPI and First Union Capital Partners, Inc. ("First Union")
entered into the Preferred Stock and Warrant Purchase Agreement (the "Purchase
Agreement"). Pursuant to the Purchase Agreement, First Union purchased from PPI,
for a total purchase price of $15 million (i) 15,000 shares of Series B
Cumulative Redeemable Preferred Stock of PPI ("Preferred Shares") and (ii) a
Common Stock Purchase Warrant (the "Warrant") to purchase up to 1,799,893 shares
(the "Warrant Shares") of Class B Common Stock of PPI at an exercise price of
$.01 per share. The Preferred Shares rank senior to all other classes of capital
stock of PPI as to liquidation, dividends, redemptions and any other payment or
distribution with respect to capital stock. Any portion of the Preferred Shares
may be redeemed at any time at a price equal to $1,000 per share plus accrued
and unpaid dividends, which accrues at the annual rate of 9%, provided that all
Preferred Shares must be redeemed by June 30, 2005 or earlier upon the
occurrence of certain enumerated events (including change in control of PPI,
public offering by PPI, failure by PPI to meet certain financial covenants or a
material breach under the Purchase Agreement).

The number of Warrant Shares that First Union may purchase under the Warrant may
be reduced to 687,919 shares if the Preferred Shares are redeemed in full by
June 30, 1998, to 942,784 if redeemed in full by June 30, 1999 and to 1,212,228
if redeemed in full by June 30, 2000. First Union has the right to sell to PPI
the Warrant and the Warrant Shares at a price equal to fair market value after
June 30, 2002 or, if earlier, upon the occurrence of certain enumerated 
events, which events are similar to those that piggyback and other 
registration rights.  First Union and any subsequent holders of Preferred 
Shares, the Warrant and Warrant Shares are prohibited from transferring such 
securities to any competitor of PPI.

   
The warrant was valued at $6.1 million at July 10, 1997.  The value was based on
probability factors assigned to the various share amounts which may be issued
and the fair market value per share.  The warrants and preferred stock are being
accreted up to their fair market value to the earliest potential redemption
date.  At December 31, 1997 the value of the warrants approximates the
redemption value at June 30, 1998.  The preferred stock was valued at $8.6
million at July 10, 1997.  The preferred stock is being accreted up to its
redemption value of $15.0 million by June 30, 1998.  Accordingly, $3.2 million
of accretion has been charged to Retained Earnings in 1997.

Of the available proceeds (net of $0.3 million of transaction costs) $13.3
million were used during the year ended December 31, 1997 to retire debt of $9.9
million and fund accrued pension contributions of $3.4 million assumed by PPI in
the Transactions. The retirement of debt will reduce future interest expense and
principal payments.

It is uncertain at this time what funds will be used to redeem the preferred
stock. Management will continue to evaluate the various sources of financing
available, including but not limited to, traditional commercial bank debt,
private debt, private equity, public equity and public debt.
    

Acquisitions

PPI is currently involved in acquisition discussions with various medical
clinics. PPI has entered into an initial agreement with one clinic and is
currently negotiating letters of intent with other clinics. Management
anticipates consummating a transaction in the second quarter of 1998. Management
believes the existing line of credit of $15.0 million, with availability of $9.5
million as of December 31, 1997, is adequate to fund these acquisitions.


<PAGE>   15

Management continues to evaluate various alternatives to finance potential
acquisitions which may exceed the existing available funding. Such alternatives
include but are not limited to, traditional commercial bank debt, private debt,
private equity, public equity and public debt. The availability and timing of
these alternatives depend on market and other conditions and the acceptability
of the terms of such financing alternatives to PPI.


ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and accompanying notes to financial statements,
together with the report of independent public accountants are located on the
following pages.
    
<PAGE>   16





                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Board of Directors of
Physician Partners, Inc.:

We have audited the accompanying balance sheets of Physician Partners, Inc. (a
Delaware corporation) as of December 31, 1996 and 1997, and the related
statements of operations, stockholders' equity and cash flows for the period
from inception (June 20, 1996) to December 31, 1996 and for the year ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Physician Partners, Inc. as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for the period from inception (June 20, 1996) to December 31, 1996 and for the
year ended December 31, 1997 in conformity with generally accepted accounting
principles.



                                       ARTHUR ANDERSEN LLP


Portland, Oregon,
  March 27, 1998



<PAGE>   17



                            PHYSICIAN PARTNERS, INC.


                   BALANCE SHEETS--DECEMBER 31, 1996 AND 1997

                 (All dollar amounts are expressed in thousands)


                                     ASSETS

<TABLE>
<CAPTION>
                                                                       1996         1997
                                                                      -------      -------
<S>                                                                   <C>          <C>    
CURRENT ASSETS:
  Cash and cash equivalents                                           $     4      $ 1,761
  Restricted Investments                                                   --          250
  Patient accounts receivable, net of allowances for contractual
    discounts and uncollectible accounts of $0 and $10,591 at
    December 31, 1996 and 1997, respectively                               --       17,094
  Healthcare and other receivables                                         --        5,702
  Inventories of drugs and supplies                                        --          408
  Prepaid expenses and deposits                                            --        1,405
                                                                      -------      -------
          Total current assets                                              4       26,620

PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation
  and amortization of $8 and $25,063 at December 31, 1996 and
  1997, respectively                                                       89       42,992

OTHER ASSETS:
  Receivables from New PCs, net of allowance of $1,000                     --        2,979
  Investments in affiliates                                                --        1,003
  Other                                                                     7          237
                                                                      -------      -------
          Total assets                                                $   100      $73,831
                                                                      =======      =======
</TABLE>




<PAGE>   18



                            PHYSICIAN PARTNERS, INC.


             BALANCE SHEETS--DECEMBER 31, 1996 AND 1997 (CONTINUED)

                 (All dollar amounts are expressed in thousands)


                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)


<TABLE>
<S>                                                                                   <C>            <C>     
CURRENT LIABILITIES:
  Line of credit                                                                      $     --       $  5,460
  Payable to clinics                                                                        97             --
  Current portion of long-term debt and capital and direct
    financing lease obligations                                                             --          1,112
  Drafts payable                                                                            --          3,026
  Accounts payable and accrued expenses                                                     --          4,001
  Accrued healthcare costs                                                                  --          6,565
  Accrued compensation and related expenses                                                 --          5,079
  Deferred revenue                                                                          --            488
                                                                                      --------       --------
          Total current liabilities                                                         97         25,731

DIVIDENDS PAYABLE                                                                           --            635

LONG-TERM DEBT, net of current portion                                                      --          8,177

CAPITAL AND DIRECT FINANCING LEASE OBLIGATIONS, net of current
  portion                                                                                   --         17,841

DEFERRED COMPENSATION AND OTHER                                                             --          4,899

REDEEMABLE PREFERRED STOCK AND RELATED WARRANT                                             --         17,910

STOCKHOLDERS' EQUITY (DEFICIT):
  Common stock-
    Class A - Voting; $0.01 par value; 20,000,000 shares authorized; 138,000 and
      6,435,696 shares issued and
      outstanding at December 31, 1996 and 1997, respectively                                1             64
    Class B - Voting; $0.01 par value; 30,000,000 shares
      authorized; no shares issued or outstanding                                           --             --
  Treasury stock, at cost                                                                   --           (748)
  Additional paid in capital                                                             5,008          9,626
  Accumulated deficit                                                                   (4,955)        (8,661)
  Notes receivable from stockholders                                                       (51)          (736)
  Unamortized value of restricted stock awards                                              --           (907)
                                                                                      --------       --------
          Total stockholders' equity (deficit)                                               3         (1,362)
                                                                                      --------       --------
          Total liabilities and stockholders' equity (deficit)                        $    100       $ 73,831
                                                                                      ========       ========
</TABLE>


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


<PAGE>   19



                            PHYSICIAN PARTNERS, INC.


                            STATEMENTS OF OPERATIONS

       FOR THE PERIOD FROM INCEPTION (JUNE 20, 1996) TO DECEMBER 31, 1996

                      AND THE YEAR ENDED DECEMBER 31, 1997

                 (All dollar amounts are expressed in thousands
                             except loss per share)


<TABLE>
<CAPTION>
                                                                     1996            1997
                                                                   ---------       ---------
<S>                                                                <C>             <C>      
REVENUES:
  Reimbursement of manager's expenses                              $      --       $ 102,617
  Management fees                                                         --           5,932
                                                                   ---------       ---------
          Net revenues                                                    --         108,549

OPERATING EXPENSES:
  Clinic salaries, wages and benefits                                     --          43,160
  Purchased medical services                                              --          20,291
  Medical and office supplies                                             --          16,054
  General and administrative expenses                                     --          12,338
  Lease and rent expense                                                  --           3,471
  Depreciation and amortization                                           --           4,376
  Corporate costs                                                        693           2,808
  Transition plan expenses                                                --           1,500
  Provision for Receivables from New PCS                                  --           1,000
                                                                   ---------       ---------
          Total operating expenses                                       693         104,998
                                                                   ---------       ---------
          Operating income (Loss)                                       (693)          3,551

OTHER INCOME (EXPENSE):
  Other income                                                            --              65
  Interest income                                                         --             684
  Interest expense                                                        --          (3,448)
  Reorganization costs                                                (4,262)           (718)
                                                                   ---------       ---------
          Net income (loss) before provision for income taxes         (4,955)            134
                                                                   ---------       ---------
PROVISION FOR INCOME TAXES                                                --              --
                                                                   ---------       ---------
NET INCOME (LOSS)                                                     (4,955)            134

ACCRETION ON PREFERRED STOCK                                              --           3,205  

PREFERRED STOCK DIVIDENDS                                                 --             635
                                                                   ---------       ---------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS                         $  (4,955)      $  (3,706)
                                                                   =========       =========

LOSS PER BASIC AND DILUTED SHARE                                   $ (107.37)      $    (.63)
                                                                   =========       =========
</TABLE>


        The accompanying notes are an integral part of these statements.


<PAGE>   20



                            PHYSICIAN PARTNERS, INC.


                  STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)

       FOR THE PERIOD FROM INCEPTION (JUNE 20, 1996) TO DECEMBER 31, 1996

                      AND THE YEAR ENDED DECEMBER 31, 1997

                 (All dollar amounts are expressed in thousands)


   
<TABLE>
<CAPTION>
                                Class A
                              Common Stock                               Unamortized        Note
                           ------------------    Treasury   Additional     Value of      Receivable
                              Number              Stock,      Paid in      Restricted        from       Accumulated
                            of Shares   Amount    at Cost     Capital     Stock Awards   Stockholders    Deficit       Total
                            ---------   ------   --------   ----------   ------------   ------------   -----------   -------
<S>                           <C>        <C>     <C>        <C>          <C>            <C>            <C>           <C>  
    Issuance of common
      stock                   138,000       1        --            746             --             --            --       747
    Stock subscription
      receivable                   --      --        --             --             --            (51)           --       (51)
    Reorganization costs
      incurred by
      Founding Clinics             --      --        --          4,262             --             --            --     4,262
    Net loss                       --      --        --             --             --             --        (4,955)   (4,955)
                            ---------    ----    --------   ----------   ------------   ------------   -----------   -------
BALANCE, December 31,
  1996                        138,000       1        --          5,008             --            (51)       (4,955)        3
    Contribution of old
      PC net assets         6,337,607      63        --          4,786         (1,192)          (974)           --     2,683 
    Retirement of common,
      stock                    (3,000)     --        --             --             --             --            --        --
    Forfeiture of common
      stock                   (36,911)     --        --           (168)           111             --            --       (57)
    Repurchase of common
      stock                        --      --      (748)            --             --             71            --      (677)
    Repayment of stock
      subscription                 --      --        --             --             --            218            --       218
</TABLE>
    





         The accompanying notes are an integral part of this statement.
<PAGE>   21



                            PHYSICIAN PARTNERS, INC.


            STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)

       FOR THE PERIOD FROM INCEPTION (JUNE 20, 1996) TO DECEMBER 31, 1996

                      AND THE YEAR ENDED DECEMBER 31, 1997

                 (All dollar amounts are expressed in thousands)


<TABLE>
<CAPTION>
                                   Class A
                                Common Stock                            Unamortized       Note
                             ----------------               Additional    Value of     Receivable
                               Number             Treasury   Paid in     Restricted       from      Accumulated
                             of Shares  Amount     Stock     Capital    Stock Awards   Stockholder    Deficit     Total
                             ---------  ------     -----     -------    ------------   -----------    -------     -----
<S>                          <C>         <C>        <C>       <C>           <C>             <C>       <C>         <C>   
    Amortization of stock
      awards                        --   $ --       $  --     $   --        $ 174         $  --       $    --     $  174
    Preferred stock
      dividends                     --     --          --         --           --            --          (635)      (635)
    Accretion on
      preferred stock               --     --          --         --           --            --        (3,205)    (3,205)
    Net income                      --     --          --         --           --            --           134        134
                             ---------   ----       -----     ------        -----         -----       -------     ------
BALANCE, December 31,
  1997                       6,435,696   $ 64       $(748)    $9,626        $(907)        $(736)      $(8,661)   $(1,362)
                             =========   ====       =====     ======        =====         =====       =======     ======
</TABLE>


         The accompanying notes are an integral part of this statement.


<PAGE>   22



                            PHYSICIAN PARTNERS, INC.


                             STATEMENT OF CASH FLOWS

       FOR THE PERIOD FROM INCEPTION (JUNE 20, 1996) TO DECEMBER 31, 1996

                      AND THE YEAR ENDED DECEMBER 31, 1997

                 (All dollar amounts are expressed in thousands)


   
<TABLE>
<CAPTION>
                                                                              1996        1997
                                                                            -------      -------
<S>                                                                         <C>          <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                                         $(4,955)     $   134
  Adjustments to reconcile net income (loss) to net cash provided
    by (used in) operating activities-
  Compensation expense for stock issued to officers and directors               693           --
      Depreciation and amortization                                              --        4,550
      Provisions for Receivables from New PCs                                    --        1,000
      Deferred tax benefit                                                       --       (1,491)
      Equity in income of affiliates                                             --         (726)
      Changes in operating assets and liabilities (excluding assets and
        liabilities assumed by Physician Partners, Inc.):
          Patient accounts receivable, net                                       --          160
          Healthcare and other receivables                                       --       (1,216)
          Receivables from New PCs                                               --       (3,979)
          Inventories of drugs and supplies                                      --          (83)
          Prepaid expenses and deposits                                          --         (621)
          Other assets                                                           --          229
          Drafts payable                                                         --        1,872
          Accounts payable and accrued expenses                                  --         (584)
          Accrued healthcare costs                                               --          219
          Deferred revenue                                                       --         (102)
          Accrued compensation and related expenses                              --       (2,463)
          Deferred compensation and other                                        --         (637)
          Other liabilities                                                      --         (322)
                                                                            -------      -------
          Net cash provided by (used in) operating activities                (4,262)       (4,060)

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                                            (98)      (2,554)
  Proceeds from investments                                                      (7)         440
                                                                            -------      -------
          Net cash used in investing activities                                (105)      (2,114)
</TABLE>
    


<PAGE>   23



                            PHYSICIAN PARTNERS, INC.


                       STATEMENT OF CASH FLOWS (CONTINUED)

       FOR THE PERIOD FROM INCEPTION (JUNE 20, 1996) TO DECEMBER 31, 1996

                      AND THE YEAR ENDED DECEMBER 31, 1997

                 (All dollar amounts are expressed in thousands)


   
<TABLE>
<CAPTION>
                                                                                      1996         1997
                                                                                    --------     --------
<S>                                                                                 <C>          <C>     
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from sale of common stock                                                $      3     $     --
  Borrowings from Founding Clinics                                                       106           --
  Net payments on borrowings under line of credit agreement                               --         (640)
  Principal payments on long-term debt and direct financing lease
    obligation                                                                            --       (7,827)
  Proceeds from repayments of notes receivable from stockholders                          --          218
  Cash assigned to Physician Partners, Inc. in merger                                     --        1,358
  Proceeds from issuance of preferred stock                                               --       14,705
  Purchase of treasury stock                                                              --         (601)
  Costs incurred related to PPI transaction                                            4,262          718
                                                                                    --------     --------
          Net cash provided by financing activities                                    4,371        7,931
                                                                                    --------     --------
NET INCREASE (DECREASE)IN CASH AND CASH EQUIVALENTS                                        4        1,757

CASH AND CASH EQUIVALENTS, beginning of period                                            --            4
                                                                                    --------     --------
CASH AND CASH EQUIVALENTS, end of period                                            $      4     $  1,761
                                                                                    ========     ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid for interest                                                            $     --     $  4,080
  Cash paid for income taxes                                                              --        1,264

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
  ACTIVITIES:
    Stock subscription receivable                                                   $     51     $     --
    
    In the purchase of treasury stock, PPI transferred approximately $76 of net
      equipment and forgave $71 of notes receivable from stockholders.

    On February 1, 1997, as a result of the Merger, PPI succeeded to the assets
      and liabilities of the Old PCs. The book value of the Old PCs' assets and
      liabilities, including $1,400 of cash, at January 31, 1997 are
      presented below:
        Current assets                                                                23,769
        Property, plant and equipment                                                 44,722
        Other long-term assets                                                         1,597
        Current liabilities                                                           28,777
        Long-term liabilities                                                         37,484
        Deferred tax liability                                                         1,491    
        Contributed equity                                                             2,336
</TABLE>
    


         The accompanying notes are an integral part of this statement.


<PAGE>   24



                            PHYSICIAN PARTNERS, INC.


                          NOTES TO FINANCIAL STATEMENTS

                        
                 (All dollar amounts are expressed in thousands, except
                                  loss per share)


1.  BUSINESS AND ORGANIZATION:

Physician Partners, Inc. (PPI), is a Delaware corporation formed on June 20,
1996 for the purpose of effecting a reorganization transaction between PPI and
HealthFirst Medical Group, PC ("HealthFirst"), The Corvallis Clinic, PC
("Corvallis") and The Medford Clinic, PC ("Medford"), (collectively, 
"The Founding Clinics").

This transaction, which was consummated on February 1, 1997, resulted in a
separation of operations of the three Founding Clinics between medical
professional services activities (i.e., providers of medical services) and the
physician practice management activities of the business. The professional
services activities were spun off into newly formed professional corporations
("New PCs"). The physician practice management business, along with
substantially all of the assets and liabilities of the three Founding Clinics,
i.e., cash, receivables, inventories, prepaids, property, plant and equipment,
payables, accruals, debt, and certain contractual commitments, were transferred
to PPI at historical cost. As consideration, the stockholders of the existing
Founding Clinics received stock of PPI.

An integral part of the reorganization is a 40-year management agreement that
calls for PPI to provide physician practice management services to the New PCs.
Services provided include management and administrative services, capital
resources, facilities, equipment and supplies. PPI is entitled to (a)
reimbursement of all managerial costs and expenses (Manager's Expenses) incurred
by PPI and (b) a management fee equal to 16% of (i) net revenues relating to
services provided by the New PCs less (ii) Manager's Expenses.

The New PCs are responsible for providing medical services and the related costs
for provider compensation and benefits.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Selected accounting policies are discussed below. Other significant accounting
policies regarding revenues, income taxes, professional liability and deferred
compensation are discussed in specific notes that follow.

Cash Equivalents

Cash equivalents consist of all highly liquid investments with original
maturities of three months or less.

Restricted Investments

Under Medford Clinic, P.C.'s agreement with Oregon Health Management System
("OHMS"), PPI is required to maintain $250 in a restricted or segregated
account. PPI can use these funds for purchased medical services only with
approval by OHMS.



<PAGE>   25
                                      -2-



Concentration of Credit Risk

PPI extends credit to patients covered by commercial insurance, Medicare and
Medicaid. PPI manages credit risk with the various public and private insurance
providers, as deemed appropriate by management. Allowances for contractual
discounts and uncollectable accounts have been made for potential losses, where
appropriate. Per the terms of the Management Agreement the New PCS bear the
risk of potential losses.

Healthcare Receivables

Certain of PPI's contracts with health plans include risk-sharing features
involving PPI, participating hospital and the health plan.  Amounts recorded 
at year-end represent management's estimates of the net settlement amounts 
expected. Differences between management's estimates and the ultimate 
settlement for each health plan are recorded in the year final settlement
occurs.

Receivables from New PCs

Receivables from New PCs include advances made during 1997 to the New PCs. The
receivables bear interest at 7.6% with interest only payments due in 1998 and
principal and interest payments due over a three year period beginning January
1999. A $ 1,000 allowance has been recorded against the receivable.

Inventories of Drugs and Supplies

Inventories are stated at the lower of cost or market, determined by the
first-in, first-out (FIFO) method. 

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Maintenance, repairs and minor
replacements are expensed as incurred. When properties are retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the
respective accounts and any gain or loss on disposition is recorded as other
income or expense.

Depreciation is computed using the straight-line method over the estimated
useful lives of the respective assets. Equipment under capital lease is
amortized using straight-line methods over the shorter of the period of the
lease term or the estimated useful life of the equipment.
Estimated lives are as follows:

Buildings and leasehold improvements                 7-40 years
Furniture and equipment                              3-15 years

Accrued Healthcare Costs

Accrued healthcare costs are calculated based on reported claims and an estimate
based on historical data of incurred but not reported claims.

Fair Value of Financial Instruments

The carrying amounts of cash equivalents, receivables, accounts
payable and accrued expenses are a reasonable estimate of their fair value based
on the short maturities of these instruments.

Interest rates that are currently available to PPI for issuance of debt with
similar terms and remaining maturities were used to estimate fair value for debt
issues. The current carrying value of debt approximates fair value.

PPI does not hold or issue financial instruments or derivative financial
instruments for trading purposes.



<PAGE>   26
                                      -3-



Notes Receivable from Stockholders

PPI maintains various agreements with stockholders for their purchase of common
stock. These agreements were originally made by The Founding Clinics and were
transferred to PPI in the Reorganization Transaction. The notes mature at
various stages through 2008.

Transition Plan Expenses

In 1997, PPI made one-time payments totalling $1,500 to the Founding Clinics.

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 at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

Reclassifications

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

3.  NET REVENUES:

   
<TABLE>
<CAPTION>
                                             Corvallis     HealthFirst     Medford    Combined
                                             ---------     -----------     -------    --------
<S>                                            <C>            <C>           <C>        <C>     
Net Clinic revenue                             $39,244        $58,187       $42,261    $139,692
Less:
  Manager's expenses                            28,788         43,387        30,442     102,617
                                               -------        -------       -------    --------
Adjusted revenue                                10,456         14,800        11,819      37,075
                                                   X16%           X16%          X16%        X16%
                                               -------        -------       -------    --------
Management fee                                   1,673          2,368         1,891       5,932
Reimbursement of manager's
  expenses                                                                              102,617
                                                                                       --------
Net revenues                                                                           $108,549
                                                                                       ========
</TABLE>
    

4.  PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment consists of the following:

<TABLE>
<CAPTION>
                                                       December 31,
                                                  ----------------------
                                                    1996          1997
                                                  --------      --------
         <S>                                      <C>           <C>     
         Land and land improvements               $     --      $  3,141
         Buildings and leasehold improvements            7        37,171
         Furniture and equipment                        90        27,648
         Construction in progress                       --            95
                                                  --------      --------
                                                        97        68,055
         Less- Accumulated depreciation                 (8)      (25,063)
                                                  --------      --------
                                                        89      $ 42,992
                                                  ========      ========
</TABLE>



<PAGE>   27
                                      -4-


5. FINANCING:

Long-term debt at December 31, 1997 is as follows:

<TABLE>
<S>                                                                                            <C>   
Note payable, due in monthly installments of principal and interest of $16 through July
   2000, with a final payment of $1,636, bearing interest at 9.875%.  The note is secured
   by building and land.                                                                       $1,693
Note payable, due in monthly principal payments of $188 through January 2017,
   bearing interest at 8.25%. The note is secured by building and land.                         3,578
Note payable, due in monthly installments of principal and interest of $1, maturing in
   October 2005, bearing interest at 8.50%                                                         23
Note payable, due in annual principal payments of $115 through August 2011, bearing
   interest at 7.90%. The note is secured by furniture and equipment.                           1,535
Note payable to a related party, due in annual principal payments of $1 through 1998,
   bearing interest at 6.00%.                                                                       3
Mortgage with bank, interest at 8.44%, payable in monthly installments of
   principal plus interest of $2, maturing December 31, 2014, secured by first
   deed on real property and equipment and fixtures.                                              219
Mortgage with bank, interest at 9.25%, payable in monthly installments of $5,
   maturing November 1, 2008, secured by first deed on real property and
   equipment and furniture and fixtures.                                                          431
Note payable with title company, interest at 7.90%, payable in monthly
   installments of $6, maturing July 1, 2013, secured by equipment and furniture
   and fixtures.                                                                                  668
Mortgage with bank, interest at 8.44%, payable in monthly installments of
   principal plus interest of $3, maturing December 15, 2001, secured by second
   deed on real property and equipment and fixtures.                                              201
Facilities loan with bank, interest at 9.00%, payable in monthly installments of $4,
   maturing September 30, 1999, secured by equipment, furniture and fixtures and accounts
   receivable.                                                                                     73
Equipment loan with bank, interest at 7.25%, payable in monthly installments of
   $22, maturing April 2000, secured by equipment, furniture and fixtures and
   accounts receivable                                                                            432
                                                                                               ------
          Total long-term debt                                                                  8,856

Less- Current portion                                                                             679
                                                                                               ------
          Total long-term debt, net of current portion                                         $8,177
                                                                                               ======
</TABLE>

Maturities of long-term debt for the next five years, including current
maturities, are as follows:

<TABLE>
                  <S>                      <C>   
                  1998                     $  679
                  1999                        628
                  2000                      2,040
                  2001                        497
                  2002                        373
                  Thereafter                4,639
                                           ------
                      Total                $8,856
                                           ======
</TABLE>

PPI maintains an unsecured revolving line-of-credit agreement providing up to
$15,000. PPI, at its discretion, may make borrowings at prime rate or in $500
increments at LIBOR plus LIBOR margin. At December 31, 1997, $5,460 was
outstanding under the line of credit with an effective interest rate of 8.5%.
The line has an annual commitment fee on the unused portion of .375% and expires
in July 1999.

Under terms of the revolving line of credit agreement, certain financial ratios
and other covenants are required to be met. PPI was not in compliance with 
certain of these debt covenants due to the recognition of a $1,500 transition
plan expense and $1,000 provision against the Receivables from New PCs as of
December 31, 1997. Subsequent to year-end, the Bank agreed to waive the 
covenant violations for the year ended December 31, 1997. As the violation
was due to one-time adjustments made in 1997, PPI anticipates being in 
compliance with all debt covenants at the next measurement date, 
March 31, 1998.



<PAGE>   28
                                      -5-



6.  LEASE COMMITMENTS:

Capital Leases

PPI leases certain medical equipment and facilities under agreements which are
classified as capital leases. The equipment leases have original terms of five
years and have either a bargain purchase option or a transfer of title at the
end of the lease. The building lease is with Gateway Properties LLC for a term
of 21 years. Leased capital assets included in property, plant and equipment at
December 31, 1997 are as follows:

<TABLE>
          <S>                                                         <C>   
          Buildings and leasehold improvements                        $3,574
          Furniture and equipment                                        524
                                                                      ------
                                                                       4,098
          Less- Accumulated amortization                              (1,022)
                                                                      ------
                                                                      $3,076
                                                                      ======
</TABLE>

Operating Leases

Leases that do not meet the criteria for capitalization are classified as
operating leases. Such lease commitments are primarily for facilities and
equipment, and the related rentals are charged to operations as incurred.

Future Minimum Lease Payments

Future minimum lease payments, by year and in the aggregate, under
noncancellable capital and operating leases with initial or remaining terms of
one year or more consist of the following at December 31, 1997.

<TABLE>
<CAPTION>
                                                    Capital    Operating
                                                    Leases      Leases
                                                    ------      ------
<S>                                                  <C>         <C>    
   1998                                              $  494      $ 3,539
   1999                                                 427        3,389
   2000                                                 423        2,751
   2001                                                 403        2,656
   2002                                                 403        2,442
Thereafter                                            5,071        9,586
                                                    -------      -------
Total minimum lease payments                          7,221      $24,363
                                                                 =======
Amounts representing interest                         3,763
                                                     ------
Present value of minimum lease payments               3,458
Current portion                                         183
                                                     ------
Long-term capitalized lease obligations              $3,275
                                                     ======
</TABLE>



<PAGE>   29
                                      -6-


Direct Financing Lease Obligations

   
In June of 1995, Corvallis contributed land, buildings, construction in process
and related notes payable to HealthCare Partners, LLC (Note 16). At the date of
transfer, Corvallis entered into 30-year lease agreements for the Asbury,
Aumann and other buildings and a 5-year lease agreement for the Albany
building. Monthly rental payments under these leases are $184. The assets were
sold under a sale/leaseback arrangement and, therefore, this was accounted
for as a financing transaction wherein the assets remain on Corvallis' books and
continue to be depreciated. Corvallis recorded a direct financing lease
obligation for cash received and obligations assumed by the LLC as part of the
transaction which was assumed by PPI at February 1, 1997. The liability for this
lease obligation was $13,922 at December 31, 1997.
    

Scheduled principal payments at December 31, 1997 are as follows.

               1998          $242
               1999           266
               2000           287
               2001           244
               2002           810
            Thereafter     12,073
                           ------
                           13,922
                           ======

   
In May 1996, HealthFirst sold three facilities to HealthFirst Properties LLC
(Note 16) under a sale/leaseback arrangement. The facilities were sold for
$12,550, of which $11,550 is due in the form of an 8% interest-bearing note
receivable due in monthly installments through April 2016. The remainder was
received in cash. The transaction was accounted for as a financing, wherein the
property and related debt remains on Healthfirst's books and will continue to be
depreciated. A financing obligation representing the proceeds of $1,000 has been
recorded and will be reduced based on payments under the lease. As sales
proceeds are received from the LLC, they will be credited to a financing
obligation, and amortized as a reduction of operating expenses over the
remaining life of the lease. The amount owed on the financing obligation at
December 31, 1997 was $894 of which $8 is due within one year. The lease has a
term of 20 years and requires minimum annual rental payments of $1,318 in 1998,
1999, 2000, 2001 and 2002 and $17,680 thereafter. PPI assumed the financing
lease obligation and the lease payments at February 1, 1997.
    

7.  INCOME TAXES:

Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS 109). SFAS 109 requires that PPI follow the
liability method of accounting for deferred income taxes. Differences between
accounting rules and tax laws cause differences between the bases of certain
assets and liabilities for financial reporting purposes and tax purposes. The
tax effect of these differences, to the extent they are temporary, are recorded
as deferred tax assets and liabilities and consisted of the following:

<TABLE>
<CAPTION>
                                                                            December 31,
                                                                       ----------------------
                                                                       1996              1997
                                                                       ----              ----
<S>                                                                   <C>              <C>    
Deferred tax assets:
  Cash to accrual adjustments                                         $   -            $ 10,731
  Allowance for uncollectible accounts                                    -                 695
  Allowance for related party receivable                                  -                 400 
  Deductible reorganization costs capitalized for tax and
   expensed for financial reporting purposes                            645                 538    
  Net operating loss carryforward                                         -                 577
  Accrued expenses                                                        -                 865  
  Other                                                                   -                  62
                                                                      -----            --------
    Net deferred tax assets                                             645              13,868
Deferred tax liabilities
  Cash to accrual adjustments                                             -              (9,997)
  Property, plant and equipment basis differences                         -                (880)
                                                                      -----            --------
    Net deferred liability                                                -             (10,877)              
    Less - valuation allowance                                         (645)             (2,991)
                                                                      -----            --------
    Net deferred taxes                                                $   -            $      -       
                                                                      =====            ========
</TABLE>

PPI maintains a valuation allowance in an amount equal to its net deferred tax
assets because of uncertainty with respect to the realization of the related
tax benefits in future years.

The provision for income taxes, which is substantially federal expense 
(benefit), is as follows:

<TABLE>
<CAPTION>
                    Year Ended December 31,
                    -----------------------
                     1996            1997
                     ----            ----
<S>                  <C>           <C> 
Current              $ -           $ 1,491
Deferred               -            (1,491)
                     ---           -------
                     $ -           $     -
                     ===           =======
</TABLE>     

The differences between the provision (benefit) for income taxes and the amount
computed by applying the statutory federal income tax rate to income before 
taxes were as follows:

<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                                                       -----------------------
                                                                       1996               1997
                                                                       ----               ----
<S>                                                                 <C>                  <C>

Income tax benefit at the federal statutory rate                    $1,734               $ 47
State tax, net of federal tax                                           70                  6
Nondeductible reorganization costs                                    (691)                 -
Costs allocated to the Founding Clinics for tax purposes              (432)                 -
Valuation allowance                                                   (645)               (53)  
Other                                                                  (36)                 -
                                                                    ------               ----
          Income tax provision per financial statements             $   --               $  -
                                                                    ======               ====
</TABLE>

<PAGE>   30

                                      -7-


8.  COMMON STOCK TRANSACTIONS:

The Founding Clinics were issued the initial 3,000 shares of PPI Class A common
stock for $3 in 1996.

Stock awards aggregating 108,000 shares of PPI were granted to four officers of
the Company in October 1996. The estimated fair value of these awards in the
aggregate amount of $595 was recognized as compensation expense in
1996.
   
A director of the Company purchased 27,000 shares of PPI Class A common stock
for $51. The price paid for the shares was based upon an independent 
appraisal. However, the estimated fair value of these shares for accounting 
purposes exceeded the purchase price by $99 and this amount was recognized 
as compensation expense in 1996.

In 1996, HealthFirst sold shares of common stock to selected providers at
prices below their estimated fair value for accounting purposes. The terms of
the related Restricted Stock Agreements require forfeiture of the stock unless
the grantee remains employed by HealthFirst until February 1, 2002. The
unamortized value of the stock was recorded as a contra-equity account which
was assumed by PPI in the Merger. The stock was exchanged for PPI common stock
at February 1, 1997.
    
At February 1, 1997, 6,337,607 shares were issued to the shareholders of The
Founding Clinics in connection with the Reorganization Transaction.

9.  STOCK OPTION PLANS:
   
The reorganization plan included various stock option plans for PPI employees 
and directors, as well as providers employed by the new PCs. These plans have 
reserved a total of 2,500,000 shares of PPI Class A common stock for issuance
under the plans. As of December 31, 1997 a total of 1,667,710 options had been 
granted, which had a weighted average fair value of $2.17. During 1997, 35,000
options with a weighted average exercise price of $7.20 were forfeited and no
options were exercised.

The Company applies APB No. 25 and related Interpretations in accounting for
the plans. For SFAS No. 123 purposes, the fair value of each option grant has
been estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions for grants in 1997: Dividend yield of 0%, expected
volatility of 0%, risk-free interest rate of 6%, expected life of six years. Had
compensation expense been determined consistent with SFAS No. 123, utilizing the
assumptions detailed above, the Company's net loss per share for the years ended
December 31, 1996 and 1997, would have increased as reflected in the following
pro forma amounts:
    
<TABLE>
<CAPTION>
                                                           Year ended
                                                           December 31
                                                       -------------------
                                                        1996        1997
                                                       ------      -------
     <S>                                               <C>         <C>    

     Net loss
       As reported                                     (4,955)      (3,706)
       Pro forma                                       (4,955)      (6,328)
     Net loss per basic and dilutive share:
       As reported                                     (107.37)      (0.63)
       Pro forma                                       (107.37)      (1.07)     
</TABLE>

The resulting pro forma compensation costs may not be representative of that
expected in future years.



<PAGE>   31
                                      -8-



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

<TABLE>
<CAPTION>
                   Options Outstanding                        Options Exercisable
                -------------------------                   -----------------------
                  Number         Weighted                      Number
                Outstanding       Average      Weighted     Exercisable     Weighted
  Range of          at           Remaining     Average           at          Average
  Exercise     December 31,        Cont.       Exercise     December 31,    Exercise
  Prices           1997            Life         Price           1997          Price
 ---------     ------------     ----------     --------     ------------    -------
    <S>           <C>               <C>          <C>            <C>           <C>
    $6.80           230,000         10           $6.80          --            $ --
    $7.20         1,339,710         10           $7.20          --            $ --
    $8.00            63,000         10           $8.00          --            $ --
</TABLE>

10.  EARNINGS PER SHARE:

Effective December 31, 1997, the Company adopted SFAS 128, Earnings Per Share.
SFAS 128 prescribes new calculations for Basic and Diluted Earnings Per Share
(EPS), which replaces the former calculations for Primary and Fully Diluted EPS.
Basic EPS is computed by dividing net income (loss) by the weighted average
shares outstanding; no dilution for any potentially dilutive securities is
included. Diluted EPS is calculated differently than the fully diluted EPS
calculation under the old rules. When applying the treasury stock method for
diluted EPS to compute dilution for options, SFAS 128 requires use of the
average share price for the period, rather than the greater of the average share
price or end-of-period share price. EPS is computed as follows:

<TABLE>
<CAPTION>
                                    Year Ended
                                   December 31,
                                1996             1997
                            -----------     ------------
<S>                             <C>               <C>    
EARNINGS:
  Net income (loss) for 
    basic and diluted EPS    $ (4,955)      $  (3,706)
                              =========     ==========

SHARES:
  Weighted average
    shares outstanding
    for basis EPS              46,144       5,907,890
  Stock option and
    warrant dilution (1)          -             -
                              ---------    ----------
  Weighted average
    shares for diluted                     
    EPS                        46,144       5,907,890
                              ==========    =========

Basic EPS                     (107.37)          (0.63)
                              ==========    ==========

Diluted EPS                   (107.37)          (0.63)
                              ==========    ==========
</TABLE>

(1) The effect of potential common stock equivalents is excluded from the
    dilutive calculation for the year ended December 31, 1996 and 1997 as 
    their effect would be antidilutive.



<PAGE>   32
                                      -9-



11.  RETIREMENT PLANS:

PPI maintains several retirement plans for its employees. The various plans were
originally set up by The Founding clinics. Descriptions of the various plans as
of December 31, 1997 are as follows:

    401(k) Profit Sharing Plan - Former Corvallis Employees

    PPI has a 401(k) Profit-Sharing Plan (the 401(k) Plan) in which all former
    Corvallis employees are eligible to participate subject to certain
    eligibility criteria. The 401(k) Plan permits employees to contribute up to
    10% of their annual compensation (not to exceed certain annual limits
    imposed by the Internal Revenue Code). PPI is required to make matching
    contributions equal to 50% of employee contributions up to 8% of the
    employee's compensation. PPI may also make discretionary contributions. All
    contributions are 100% vested.

    Money-Purchase Pension Plan - Former Corvallis Employees

    PPI has a Money-Purchase Pension Plan in which all former Corvallis
    employees are eligible to participate subject to certain eligibility
    criteria. PPI contributes 5.4% of the employee's eligible earnings up to $48
    and 10.8% of eligible earnings in excess of $48. These contributions are
    100% vested upon eligibility.

    PPI's contributions for these plans for the year ended December 31, 1997,
    were $620.

    Deferred Compensation

    The Corvallis Clinic, P.C. provides compensation to eligible shareholders
    who retire based upon average shareholder income, as defined in the
    Employment Agreement, for the first three years following retirement.
    Provider/shareholder retirees who have 20-1/2 years of service while in
    service with Corvallis are eligible to receive such deferred retirement
    compensation. PPI assumed the liability as of February 1, 1997 in the
    reorganization transaction.

    401(k) Profit-Sharing Plan - Former Medford Employees

    PPI has a 401(k) Profit-Sharing Plan (the 401(k) Plan) in which all former
    Medford employees are eligible to participate subject to certain eligibility
    criteria. The 401(k) Plan permits employees to contribute up to 15% of their
    annual compensation (not to exceed certain annual limits imposed by the
    Internal Revenue Service). PPI may also make discretionary contributions,
    which are immediately 100% vested.

    Money Purchase Pension Plans - Former Medford Employees

    PPI also has a Money Purchase Pension Plan in which all former Medford
    employees are eligible to participate subject to certain eligibility
    criteria. PPI contributes 5.7% of the employee's eligible earnings up to $63
    and 11.4% of eligible earnings in excess of limitations imposed by the
    Internal Revenue Service. These contributions are 100% vested upon
    eligibility.

    PPI's contributions for these plan for the year ended December 31, 1997 were
    $1,107.



<PAGE>   33

                                      -10-


    401(k) Plan - Former HealthFirst Employees

    PPI has a 401(k) plan covering all former HealthFirst employees who are
    eligible subject to certain requirements. Employees contribute between 2% to
    10% of their annual compensation. PPI matches employee contributions at a
    rate of 10% plus a discretionary percentage determined by the Board of
    Directors. The contributions to the Plan were $122 in 1997.

    Money Purchase Plans - Former HealthFirst Employees

    PPI has a defined contribution money purchase plan which is a plan in which
    all former HealthFirst employees are eligible to participate subject to
    certain requirements. PPI contributes 3% of the employee's compensation for
    the plan year.
    Contributions in 1997 were $362.

    Supplemental Pension Plan - Former HealthFirst Employees

    In 1987, HealthFirst entered into a supplemental pension plan with eight of
    its physicians providing for fixed monthly payments over five years
    commencing with the physicians' retirements or terminations. The physicians
    receive payments upon retirement or termination if certain vesting
    requirements have been met. HealthFirst had accrued $176 for the plan at
    February 1, 1997. The accrual was assumed by PPI in the reorganization
    transaction.

    Bonus Compensation Plan - Former HealthFirst Shareholders
   
    In February 1996, HealthFirst established a bonus compensation plan for
    eligible Shareholders. Employees are vested after five years of employment
    with credit for price service. A substantial portion of the employees were
    fully vested as of December 31, 1996. The total payout of approximately
    $5,250 will be over a period of eight years. PPI is accruing for the
    estimated present value of the bonus compensation over the estimated period
    of the employees' active employment from the date the contract was signed
    until the date they are fully vested. PPI assumed the liability at February
    1, 1997. The amount accrued at December 31, 1997 is $3,357, of which $589 is
    included in current liabilities and the remainder is included in deferred
    compensation.
    
12.  PROFESSIONAL LIABILITY:

PPI maintains a claims-made professional liability insurance policy for the
providers employed by the New PCs. The policy includes full prior act coverage
for claims incurred but not reported prior to February 1, 1997. The claims-made
policy has no deductible. Management feels the coverage limits are adequate to
cover any claims exposure. PPI accrues an estimate of the future liability for
claims incurred but not reported prior to the end of the accounting period.

13.  COMMITMENTS AND CONTINGENCIES:

Legal Proceedings

PPI is subject to various legal proceedings and claims which arise in the
ordinary course of business. In the opinion of management, although the ultimate
dispositions of these proceedings are not determinable, adverse determinations
in any or all of such proceedings would not have a material adverse effect upon
the financial position or results of operations of PPI.



<PAGE>   34

                                      -11-


Compliance with Rules and Regulations

The healthcare industry is subject to numerous laws and regulations of federal,
state and local governments. These laws and regulations include, but are not
necessarily limited to, matters such as licensure, accreditation, government
healthcare program participation requirements, reimbursement for patient
services, and Medicare and Medicaid fraud and abuse. Recently, government
activity has increased with respect to investigations and allegations concerning
possible violations of fraud and abuse statutes and regulations by healthcare
providers. Violations of these laws and regulations could result in expulsion
from government healthcare programs, together with the imposition of significant
fines and penalties, as well as significant repayments for patient services
previously billed. Management believes that PPI is in compliance with the fraud
and abuse regulations, as well as other applicable government laws and
regulations. Compliance with such laws and regulations can be subject to future
government review and interpretation, as well as regulatory actions unknown or
unasserted at this time.

Employment Agreements

Several officers of PPI have employment agreements which establish annual
compensation levels and also provide for an annual incentive bonuses. In the
event the officers are terminated by PPI without cause, they would be entitled
to termination benefits equivalent to one year of their base salary, and health
and disability insurance for one year.

14.  TREASURY STOCK:

Six shareholders of the Old PCs exercised their dissenters rights under the
Oregon Business Corporation Act. Accordingly, they were entitled to receive the
fair value of the shares they owned. PPI repurchased the dissenters' shares for
an aggregate amount of $748.

15.  PREFERRED REDEEMABLE STOCK:

PPI has authorized 50,000,000 shares of preferred stock, at $.01 par value. At
December 31, 1996 and 1997, there were 0 and 15,000 shares outstanding,
respectively.
   
On July 10, 1997, PPI and First Union Capital Partners, Inc. (First Union)
entered into the Preferred Stock and Warrant Purchase Agreement (the Purchase
agreement). Pursuant to the Purchase Agreement, First Union purchased from PPI,
for a total purchase price of $15,000 (i) 15,000 shares of Series B
Cumulative Redeemable Preferred Stock of PPI (Preferred Shares) and (ii) a
Common Stock Purchase Warrant (the Warrant) to purchase up to 1,799,893 shares
(the Warrant Shares) of Class B Common Stock of PPI at an exercise price of $.01
per share. The Preferred Shares rank senior to all other classes of capital
stock of PPI as to liquidation, dividends, redemptions and any other payment of
distribution with respect to capital stock. Any portion of the Preferred Shares
may be redeemed at any time at a price equal to $1,000 per share plus accrued
and unpaid dividends, which accrue at the annual rate of 9%, provided that all
Preferred Shares must be redeemed by June 30, 2005 or earlier upon the
occurrence of certain enumerated events (including change in control of PPI,
public offering by PPI, failure of PPI to meet certain financial covenants or a
material breach under the Purchase Agreement).
    
The number of Warrant Shares that First Union may purchase under the Warrant may
be reduced to 687,919 shares if the Preferred Shares are redeemed in full by
June 30, 1998, to 942,784 if redeemed in full by June 30, 1999, and to 1,212,228
if redeemed in full by June 30, 2000. First Union has the right to sell to PPI
the Warrant and the Warrant Shares at a price equal to fair market value after
June 30, 2002 or, if earlier, upon the occurrence of certain enumerated events,
which events are similar to those that require PPI to redeem Preferred Shares in
full. First Union has certain demand, piggyback and other registration rights.
First Union and any subsequent holders of Preferred Shares, the Warrant and
Warrant Shares are prohibited from transferring such securities to any
competitor of PPI.

The warrant was valued at $6,115 at July 10, 1997. The value was based on
probability factors assigned to the various share amounts which may be issued
and the fair market value per share. The warrants and preferred stock are being
accreted up to their fair market value to the earliest potential redemption
date. At December 31, 1997 the value of the warrants approximates the
redemption value at June 30, 1998. The preferred stock was valued at $8,590 at
July 10, 1997. The preferred stock is being accreted up to its redemption value
of $15,000 by June 30, 1998. Accordingly, $3,205 of accretion has been charged
to Retained Earnings in 1997.
<PAGE>   35
                                      -12-



16.  RELATED PARTY TRANSACTIONS:

HealthFirst Properties LLC

HealthFirst Properties LLC (HPLLC) was formed by certain shareholders of
HealthFirst in 1996 to acquire three clinic buildings from HealthFirst. HPLLC
purchased these properties from HealthFirst for an aggregate purchase price of
$12,550, to be paid under an installment sale contract with a 20-year term.
HPLLC made a $1,000 down payment to HealthFirst. Simultaneous with the execution
of the installment sale contract, HealthFirst agreed to lease back the three
buildings from HPLLC under a 20-year lease agreement. This transaction has been
recorded as a direct financing lease. Accordingly, the monies received from
HPLLC have been recorded as a direct financing lease obligation and the related
property is included in property, plant and equipment in the accompanying
financial statements.

Gateway Properties LLC

Gateway Properties LLC (Gateway) is owned by several former shareholders of The
Suburban Medical Clinic, P.C. ("Suburban"). Throughout 1995, Suburban recorded
notes receivable for various payments made on behalf of Gateway. The note
receivable at December 31, 1997 was $94. The terms of the note include monthly
installments of principal and interest of $5 through August 1999 with interest
accruing at 7%. PPI assumed a capital lease to occupy a new clinic building
for a term expiring in August 2015.

Investments in Affiliates

The Company's investments in affiliates consist of investments in various
entities which are accounted for on the equity method. The names of these
entities, carrying values and the percent of ownership held by PPI are
summarized below:

<TABLE>
<CAPTION>
                                      Percent    Carrying Value at
              Investee                 Owned     December 31, 1997
              --------                 -----     -----------------
     <S>                                 <C>           <C> 
     Corvallis MRI                       33%         $  254
     HealthCare Partners, LLC            50%            749
                                                     ------
                                                     $1,003
                                                     ======
</TABLE>

Additional information regarding these investments is discussed below.



<PAGE>   36
             
                                      -13-


Corvallis MRI:

Corvallis held a one-third interest in Corvallis MRI which was transferred to
PPI on February 1, 1997. Corvallis MRI is a partnership organized in 1988 which
owns and operates a magnetic resonance imaging (MRI) scanner. The MRI unit is
housed in facilities leased from Good Samaritan Hospital Corvallis, another
partner, and operated by Corvallis Radiology, P.C., the third partner. 

During 1997, payments to Corvallis MRI for services provided to Corvallis were
$156 and are included in purchased services.

HealthCare Partners, LLC

During the year ended November 30, 1995, Corvallis entered into a joint venture
agreement with Good Samaritan Hospital, Corvallis to form a limited liability
company to own and manage Corvallis' buildings and real properties and to serve
as a vehicle for financing future property expansion for Corvallis. Corvallis
contributed assets and liabilities in exchange for a 50% membership interest in
the limited liability company. On February 1, 1997, Corvallis transferred their
membership interest in HealthCare Partners, LLC to PPI.

The net book value of assets and liabilities contributed by Corvallis was
$13,805 for buildings, land and construction in progress and $8,363 for related
debt. In addition, Corvallis received $2,734 in cash reimbursements for the
market value of the above contributed net assets in excess of the Hospital's
contributed equity, as measured at the date of formation of the limited
liability company.
   
This transaction has been accounted for as a financing due to the continuing
involvement of Corvallis in the assets through its ownership interest in the
limited liability company. Accordingly, the contributed property remains as an
asset of Corvallis. The debt at the transaction date, together with the cash
received for the excess value of the contributed net assets, has been included
in the related financing obligations (Note 6).
    
Concurrent with the formation of the limited liability company, Corvallis
entered into a lease agreement relating to buildings and properties which were
contributed to the limited liability company which was assumed by PPI in the
merger.

PPI has guaranteed approximately $6,100 of long-term debt associated with the
above joint venture.




<PAGE>   37



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

None.


                                    PART III

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information about the persons who serve
as Directors and Officers of PPI:

<TABLE>
<CAPTION>
Name                          Age    Title                          Term
----                          ---    -----                          ----
<S>                           <C>   <C>                            <C>                  <C>
David M. Goldberg, M.H.A.      49   President and Chief            July 2, 1996         to  Present
                                      Executive Officer, Director
Tim E. Dupell, C.P.A           35   Senior Vice President and      January 28, 1998     to  Present
                                      Chief Financial Officer,
                                      Director
Michael F. Bonazzola, M.D      47   Senior Vice President and      January 28, 1998     to  Present
                                      Chief Medical Officer,
                                      Director
Bruce E. Van Zee, M.D.         52   Chairman of the Board,         July 2, 1996         to  Present
                                      Director
David H. Cutsforth, Jr.        50   Director                       July 2, 1996         to  Present
M.D.
Russell A. Dow, M.D.           49   Director                       July 2, 1996         to  Present
Douglas M. Mancino, Esq.       48   Director                       July 2, 1996         to  Present
Dan Gregorie, M.D.             48   Director                       September 17, 1997   to  Present
Mark Leavitt, M.D.             47   Director                       January 28, 1998     to  Present
Frederick W. Eubank, II        34   Director                       July 15, 1997        to  Present
Jon D. Ness.                   41   Senior Vice President          July 2, 1996         to  Present
Ralph Prows, M.D.              47   Senior Vice President          June 1, 1997         to  Present
Kerry Barnett                  40   Senior Vice President          February 9, 1998     to  Present
Jerald Erstgaard               49   Former Senior Vice President   July 2, 1996         to  August 20, 1997
</TABLE>


DAVID M. GOLDBERG joined PPI as its Chief Executive Officer in 1996. Mr.
Goldberg earned a B.A. degree in Sociology in 1970 from the University of
Colorado at Boulder and a Masters of Science degree in Health Care
Administration in 1977 from the University of Colorado Medical Center, Denver,
Colorado. From 1993 until joining PPI as its founding CEO, Mr. Goldberg was
employed as President of Simmonds Consulting, Inc., a national group practice
strategic planning and merger and acquisition consulting company that he helped
found. Mr. Goldberg was employed by Medical Management, Inc. as senior
consultant from 1986-1992. In this capacity he managed all group practice
management and strategic planning consulting and was instrumental in developing
standardized management, strategic and financial reporting systems for all of
the managed group practices, for the oldest (and then largest) contract group
practice management company in the U.S. The Old PCs engaged Mr. Goldberg as a
consultant through Simmonds Consulting, Inc. before he was employed by PPI. From
1983-1986, Mr. Goldberg served in a variety of senior management positions at
Lovelace Medical Center and Lovelace Health Plan, then a 250,000 member group
model HMO; Director of Planning for all of the Lovelace organizations and
Director of Primary Care and Associated Group Practices for Lovelace Medical
Center. Mr. Goldberg was the founding executive Director of New Mexico Health
Resources, Inc., a private company which was the predecessor to the New Mexico
State Office of Rural Health. After receiving his graduate education under the
guidance of Dr. Leland Kaiser, Mr. Goldberg was a recipient of a Robert Wood
Johnson Foundation grant to co-found a model rural primary care group practice.
During the past 15 years, Mr. Goldberg has been a frequent speaker and lecturer
for the Medical Group Management Association as well as for other national and
regional professional and trade organizations.

TIM E. DUPELL joined PPI as its Chief Financial Officer in 1996. Prior to
joining PPI, Mr. Dupell served as Chief Financial Officer for Corvallis Clinic
beginning in March 1994. From 1988 to 1994, Mr. Dupell held concurrent positions
in Finance, Operations and Risk Sharing Plans with Blue Cross/Blue Shield of
Oregon and


<PAGE>   38

with the Blue Cross/Blue Shield health maintenance organization, HMO Oregon.
From 1984-1988, Mr. Dupell was a senior auditor in the Portland, Oregon office
of Ernst & Young, LLP. Mr. Dupell holds a Bachelor's degree in Business from
Pacific University. In addition, Mr. Dupell is a Certified Public Accountant,
Certified Management Accountant, and a Certified Internal Auditor. He is a
member of the Oregon Society of Certified Public Accountants, The American
Institute of Certified Public Accountants, The Institute of Management
Accountants, The Institute of Internal Auditors and the National Association of
Accountants.

MICHAEL F. BONAZZOLA, M.D. joined PPI as Senior Vice President and Chief Medical
Officer in 1996. Dr. Bonazzola practiced general internal medicine at Medford
Clinic from 1982 to 1996. Dr. Bonazzola holds a Bachelor's degree in Natural
Sciences from Lewis and Clark College and a Doctor of Medicine degree from
University of Oregon Medical School and served as Chief Medical Resident at St.
Vincent Hospital and Medical Center (Portland, Oregon). He is Board Certified in
Internal Medicine. He was a member of the Board of Directors of Medford Clinic
from 1983-1991 and served as its President from 1989-1991. When Dr. Bonazzola
became Medford Clinic's Medical Director in 1991, Medford Clinic grew from 35
physicians, with no managed care contracts, to 64 physicians with approximately
35% of the overall business provided under managed care contracts. Between 1992
and 1995, Dr. Bonazzola served on the Board of Directors of HMO Oregon. He is a
Trustee of the Oregon Medical Professional Review Organization.

BRUCE E. VAN ZEE, M.D. joined PPI as a founding member of the Board of Directors
in 1996. Dr. Van Zee is a practicing physician of Medford Clinic committed to
physician involvement in the governance and management of innovative health care
organizations. He received his medical degree magna cum laude at the University
of Oregon in 1970. He is Board Certified in Internal Medicine and Nephrology,
having completed his post graduate education at the University of Rochester. Dr.
Van Zee has served in a variety of medical management roles which include Chair
of the Department of Medicine and President of the medical society in his
community. He has received advanced post graduate training in physician
management issues and in biomedical ethics.

DAVID H. CUTSFORTH, JR., M.D. joined PPI as a founding member of the Board of
Directors in 1996. He practiced as a Philomath Family Medicine physician before
that entity merged with Corvallis Clinic and currently practices at Corvallis
Clinic. Dr. Cutsforth has been active in local and statewide health forums. He
served as a Board Director for Western Oregon IPA from 1989-1993. He served as
an original committee member in the formulation of the Oregon Health Plan, a
national model for Medicaid reform. Dr. Cutsforth received his medical degree
from the University of Oregon in 1973. He is Board Certified in Family Medicine,
having completed his residency training at the University of Texas in Houston.
Dr. Cutsforth has served in a variety of management roles including chair of the
Department of Family Medicine and Peer Review Committee of Good Samaritan
Hospital, Corvallis. He received a superior service award from the U.S. Public
Health Service in 1977 and was recognized as America's Family Doctor of the Year
in 1994.

RUSSELL A. DOW, M.D. joined PPI as a founding member of the Board of Directors
in 1996. Dr. Dow is a HealthFirst physician practicing Obstetrics and Gynecology
and has been involved in medical leadership and governance for many years. He
received his medical degree from Tufts University School of Medicine in Boston,
Massachusetts in 1974. He is Board Certified in Obstetrics and Gynecology,
having completed his post-graduate training at the Oregon Health Sciences
University.

DOUGLAS M. MANCINO, ESQ. joined PPI as a founding outside member of the Board of
Directors in 1996. Mr. Mancino is an attorney and a partner in McDermott, Will &
Emery's Los Angeles office. He has had more than 20 years of experience
representing a broad variety of health care organizations. Mr. Mancino has been
recognized by THE NATIONAL LAW JOURNAL as one of the country's leading managed
care lawyers, and by the LOS ANGELES BUSINESS JOURNAL as one of Southern
California's top 100 health care executives. Mr. Mancino is the author of a new
book, TAXATION OF HOSPITALS AND HEALTH CARE ORGANIZATIONS (Warren, Gorham &
Lamont 1995) and a co-author of NAVIGATING YOUR WAY THROUGH THE FEDERAL
SELF-REFERRAL LAW: A GUIDEBOOK TO STARK II (Atlantic Information Systems, Inc.
1995). He has also co-authored a 1987 Aspen Systems book, JOINT VENTURES BETWEEN
HOSPITALS AND PHYSICIANS and has written more than 30 articles on a variety of
health care and taxation topics. Mr. Mancino received his law degree, summa cum
laude, from The Ohio State University of Law in 1974. He is an active member and
officer of several national legal organizations and publications and is a Fellow
of the


<PAGE>   39

American College of Tax Counsel. Mr. Mancino also has served as a Director of
Health Systems International, Inc., including acting on its Compensation
Committee.
   
FREDERICK W. EUBANK, II joined PPI as a Director in 1997. Mr. Eubank earned a
Bachelor of Science degree in Business Administration from the Wake Forest
University School of Business in Accountancy in 1986. In 1993, Mr. Eubank
graduated with honors from the executive program at Duke University's Fuqua
School of Business where he earned a Master of Business Administration degree.
Mr. Eubank joined First Union Corporation in 1986 and was an Assistant Vice
President in the Specialized Industries Group before joining First Union Capital
Partners in 1989.

DAN GREGORIE, M.D. joined PPI as a Director in 1997. Dr. Gregorie received his
undergraduate degree from Duke University and his medical degree from Tufts
University in Boston, Massachusetts. He completed his internship and residency
in Internal Medicine at Mount Auburn Hospital in Cambridge, Massachusetts.
Following his residency, Dr. Gregorie attended the Sloan School of Management at
MIT where he received his Master's degree in Management. Dr. Gregorie has served
as special assistant to the Medical Director of Georgetown University Community
Health Plan, Vice President and Associate Regional Medical Director of Capital
Area Permanente Medical Group and President, CEO and Regional Medical Director
of Northeast Permanente medical Group in Hartford, Connecticut. Since 1989, he
has been President, CEO and Chairman of the Board of ChoiceCare.
    
MARK LEAVITT, M.D., PH.D., joined PPI as a Director in 1997. Dr. Leavitt founded
MedicaLogic, Inc. in 1985 and has been its CEO since inception. From 1992 to
1994, Dr. Leavitt served as Medical Director of Information Systems for
Providence Health System. He practiced internal medicine full-time in Portland,
Oregon from 1982 to 1992. Dr. Leavitt holds a Bachelor's degree from the
University of Arizona, a Doctorate from Stanford University in Electronic
Engineering and a Doctorate from the University of Miami in Medicine. He is
Board Certified in Internal Medicine and Geriatrics. Dr. Leavitt served as
President of the Oregon Society of Internal Medicine from 1993 to 1994 and is a
member of the American Society of Internal Medicine, the American College of
Physicians and the Medical Informatics Association.

JON D. NESS joined PPI as a Senior Vice President in 1996 and concurrently
serves as Chief Executive Officer of Medford Clinic. Before employed by Medford
Clinic in 1995, he acted as Vice President of Deaconess-Billings Clinic Health
System. Mr. Ness is a member of MGMA and a member of the certified medical
practice executive program. Mr. Ness received his Master of Arts in Urban
Planning from North Dakota State University in 1984. He acted as a corporate
planner of St. Luke's Hospital, affiliated with Fargo Clinic, a 250 physician
multi-specialty clinic, from 1986 to 1989.
   
RALPH PROWS, M.D. joined PPI as a Senior Vice President and concurrently serves
as Chief Executive Officer of the Corvallis Clinic, PC. Dr. Prows received his
medical degree from Tulane University and completed specialty training at
Ochsner Foundation Hospital in New Orleans. He is Board Certified in Internal
Medicine. Dr. Prows had been the Corvallis Clinic's Medical Director since 1993
and was responsible for physician recruitment, clinical quality assurance and
utilization management. Prior to joining the Corvallis Clinic, he served for
seven years as Senior Vice President for Medical Affairs for Central
Massachusetts Health Care, a 100,000 member non-profit health maintenance
organization. Dr. Prows has also served on the Board of Directors of the Unified
Medical Group Association (now the American Medical group Association).
    
KERRY BARNETT joined PPI as Senior Vice President in February 1998 and
concurrently serves as Chief Executive Officer of HealthFirst Medical Group, PC.
Mr. Barnett received an undergraduate degree from the University of Rochester in
New York in 1978 and received his Juris Doctor from Yale School of Law in 1987.
From 1990 to 1993, he was the Oregon governor's legal counsel and senior policy
advisor. From 1993 until the end of 1997, Mr. Barnett served as Director of the
Department of Consumer and Business Services, Insurance Commissioner and
Superintendent of Banking. In this capacity he had primary responsibility for
all aspects of Oregon's largest business regulatory agency.

JERALD W. ERSTGAARD was a Senior Vice President of PPI. He obtained a Bachelor
of Arts degree from the University of South Dakota with a concentration in
business. In 1973, he received a Masters degree in Business Administration from
the University of Wyoming. Mr. Erstgaard worked as an assistant administrator at
Corvallis Clinic from 1979 to 1986. He joined Metropolitan as an administrator
in 1986. Since February 1, 1996, at the time of the business combination of
Metropolitan and Suburban, Mr. Erstgaard held the administrative


<PAGE>   40

position of Chief Executive Officer of HealthFirst. During Mr. Erstgaard's
tenure, HealthFirst grew from an organization of 15 physicians to an entity with
approximately 120 physicians. In addition to his role in management at
HealthFirst, Mr. Erstgaard acted as a member of the Board of Directors of the
American Medical Group Association and of the Northwest Group Practices
Association. He is a Member of Medical Group Management Association. He
previously served as President of Oregon Medical Group Management Association.
His employment with PPI ended in August 1997.

ITEM 11: EXECUTIVE COMPENSATION

   
The following table summarizes the annual and long-term compensation of the
Company's Chief Executive Officer and the five highest paid executive officers
for 1997, 1996 and 1995.
    


<TABLE>
<CAPTION>
                                                                          Long-Term Compensation
                                            Annual Compensation                   Awards
                                      -------------------------------    ------------------------
                                                              Other
                                                              Annual     Restricted    Securities    All Other
                                                              Compen-       Stock      Underlying    Compen-
Name and Principal Position   Year    Salary     Bonus(2)   sation($)(3)   Awards($)  Options(#)(4)  sation(5)
---------------------------   ----    ------     --------   ------------   ---------  -------------  ---------
<S>                           <C>     <C>         <C>          <C>         <C>            <C>         <C>   
David Goldberg                1997    231,000         --       12,000           --        150,000         --
Chief Executive Officer       1996         --         --           --      148,770             --         --
 and Director                 1995         --         --           --           --             --         --
Tim Dupell                    1997    175,000     25,000       12,000           --        100,000     15.245
Chief Financial Officer       1996         --         --           --      148,770             --         --
 and Director                 1995         --         --           --           --             --         --
Michael Bonazzola, M.D.       1997    185,000     25,000       12,000           --        102,210     14,667
Chief Medical Officer         1996         --         --           --           --             --         --
 and Director                 1995         --         --           --           --             --         --
Ralph Prows, M.D.             1997    158,000     10,000           --           --         40,977     13,166
Senior Vice President         1996         --         --           --           --             --         --
                              1995         --         --           --           --             --         --
Jon Ness                      1997    175,000     40,000           --           --         35,000         --
Senior Vice President         1996         --         --           --      148,770             --         --
                              1995         --         --           --           --             --         --
Jerald Erstgaard (1)          1997    132,000         --           --           --         35,000      2,550
Senior Vice President         1996         --         --           --           --             --         --
                              1995         --         --           --           --             --         --
</TABLE>

(1) Jerald Erstgaard`s employment with PPI was terminated in August 1997.
    Pursuant to the severance agreement, Mr. Erstgaard will continue to be paid
    at an annual rate of $132,000 for 14 months following the termination date. 

(2) Annual bonuses are earned and accrued during the fiscal years indicated and
    paid in the following year.

(3) Amounts consist of an automobile allowance paid by the Company.

(4) This column sets forth the dollar value, as of the grant date, of restricted
    stock awarded. The stock awards aggregating 108,000 were granted in October
    1996 to four officers of the Company. These awards were initially subject to
    a three-year vesting requirement. In the case of three of the officers, the
    requirement has subsequently been eliminated. The fourth officer is no
    longer employed, but will be entitled to retain the stock award as long as
    the terms of his separation agreement are adhered to. David Goldberg, Tim
    Dupell and Jon Ness were each rewarded 27,000 shares at an exercise price of
    $5.51 per share. The estimated fair value of these awards in the aggregate
    amount of $595,080 was recognized as compensation expense in 1996.


<PAGE>   41

   
(5) Amounts represent matching contributions from the New PC's defined
    contribution plans to Tim Dupell and Ralph Prows from the Corvallis Clinic,
    PC , to Michael Bonazzola from Medford Clinic, PC, and to Jerald Erstgaard
    from HealthFirst Medical Group, PC. See Note 11 in the accompanying audited
    Financial Statements of the Company.
    


The following table sets forth information concerning options granted to the
named executive officers in 1997.

<TABLE>
<CAPTION>
                                                                               Potential realizable value at
                                                                               assumed annual rates of stock
                       Individual Grants                                     price appreciation for option term
                       ----------------------------------------------------------------------------------------
                          Number of    Percent of
                         securities       total
                         underlying     options/      Exercise
                          Options/    SARS granted     or base
                            SARS      to employees      price      Expiration
Name                     granted(#)   in fiscal year  ($/share)      date       0%($)      5%($)       10%($)
----                     ----------   --------------  ---------    ----------  --------   --------   ----------
<S>                        <C>             <C>          <C>         <C>         <C>       <C>          <C>     
David Goldberg             50,000          3.1%         $7.20        2/01/07    $40,000   $226,400     $573,700
                          100,000          6.1%         $6.80       11/12/07   $120,000   $427,600   $1,083,700
Tim Dupell                 35,000          2.1%         $7.20        2/01/07    $28,000   $158,500     $401,600
                           65,000          4.0%         $6.80       11/12/07    $78,000   $278,000     $704,400
Michael Bonazzola, M.D.     2,210          0.1%         $7.20        2/01/07     $1,768    $10,000      $25,400
                           65,000          4.0%         $6.80       11/12/07    $78,000   $278,000     $704,400
                           35,000          2.1%         $7.20        2/01/07    $28,000   $158,500     $401,600
Ralph Prows, M.D.          35,000          2.1%         $7.20        2/01/07    $28,000   $158,500     $401,600
                            5,977          0.4%         $7.20        2/01/07     $4,782    $27,100      $68,600
Jon Ness                   35,000          2.1%         $7.20        2/01/07    $28,000   $158,500     $401,600
Jerald Erstgaard           35,000          2.1%         $7.20        2/01/07    $28,000   $158,500     $401,600
</TABLE>

(1) The potential realizable values shown are based on the actual market price
    of the options at grant date, $8.00 per share, and the indicated assumed
    annual rates of appreciation compounded annually.

(2) Options granted in 1997 did not include stock appreciation rights ("SARs").

The Securities and Exchange Commission regulations require information as to the
potential realizable value of each of these options, assuming that the market
price of Company Common Stock appreciates in value from the date of grant to the
end of the option term at annual rates of zero, five and ten percent. The shares
granted above were issued at a below-market price, therefore, the potential
realizable values of the options granted at the assumed annual rates were based
on the actual market value of the stock options at grant date, $8.00 per share.
If zero appreciation occurs over the term of the options, the value of the
options granted is listed above under the column detailing a 0% appreciation.
The value is determined as the difference between the market price of the
options and the base price of those options granted.

Actual gains, if any, on stock option exercises and Company Common Stock
holdings will depend on overall market conditions and the future performance of
the Company and its Common Stock. There can be no assurance that the amounts
reflected in this table will be realized.

FISCAL YEAR END OPTION VALUES

   
PPI's common stock is not publicly traded, therefore, the basis of the option
valuation is the price of the Common stock as of July 10, 1997, the last date of
valuation in the year ending December 31, 1997. No options were exercised in
1997 by any named executive officer. The following table details information
concerning the value of unexercised stock options held by each named executive
officer. The value of the unexercised options reflect the increase in the
granted value of the Company's Common Stock on the date of the grant through the
last date of stock valuation on July 10, 1997. As of July 10, 1997, PPI's Common
Stock was valued at $8.00 per share. The value actually
    


<PAGE>   42

realized upon the future exercise of options by the named executive officers
will depend on the value of the Company Common Stock at the time of exercise.


<TABLE>
<CAPTION>
                                                  DECEMBER 31, 1997 OPTION VALUE
                            ---------------------------------------------------------------------------
                             Number of Securities Underlying
                                 Unexercised Options at           Value of Unexercised In-the-Money
                                    December 31, 1997               Options at December 31, 1997
                            ---------------------------------------------------------------------------
Name                                  Unexercisable                         Unexercisable
----                                  -------------                         -------------
<S>                                      <C>                                  <C>     
David Goldberg                           150,000                              $160,000
Tim Dupell                               100,000                              $106,000
Michael Bonazzola, M.D.                  102,210                              $107,768
Ralph Prows, M.D.                         40,977                               $32,782
Jon Ness                                  35,000                               $28,000
Jerald Erstgaard (1)                          --                                    --
</TABLE>

(1) Jerald Erstgaard's employment with PPI was terminated on August 20, 1997.
    According to the terms of Mr. Erstgaard's Separation and Release Agreement,
    Mr. Erstgaard forfeited the right to purchase the 35,000 shares of PPI
    Common Stock granted to him at that time.

DIRECTOR COMPENSATION

PPI Directors are entitled to receive compensation for serving as Directors in
an amount equal to $1,000 per board meeting or $5,000 per fiscal quarter of PPI,
whichever is greater. In addition, Directors are entitled to receive $750 per
meeting attended for various committee purposes if the meeting is not held on a
date on which the Board holds a meeting. Furthermore, Directors may be
reimbursed for reasonable and actual out-of-pocket expenses incurred in
connection with their duties as Directors.

INDEMNIFICATION AGREEMENTS

Pursuant to Article VII of the PPI Bylaws, PPI is obligated to indemnify each of
its Directors and officers that could require PPI, among other things, to
indemnify them against certain liabilities that may arise by reason of their
status or service as Directors and officers and to advance expenses incurred by
them as a result of any proceeding against them as to which they could be
indemnified.

CHANGE-IN-CONTROL ARRANGEMENTS

PPI has established the Physician Partners, Inc. Change In Control Plan (the
"Plan") to enable PPI to provide severance benefits to eligible executive or
management employees whose employment is terminated following a Change in
Control (as such term is defined in the Plan) of the Company. Pursuant to
agreements entered into under the Plan, David Goldberg, Tim Dupell, Michael
Bonazzola, Ralph Prows and Jon Ness are entitled to separation pay and benefits
following a change of control of PPI and the employee's subsequent termination
of employment with PPI unless such termination is voluntary or results from
death, disability, retirement or cause. The eligible termination must occur
within 24 months of the Change in Control or the agreement is void. Each
agreement continues for three years from such date the agreement is executed and
automatically renews every three years from such date unless the employee
receives written notice of termination at least ninety days prior to the renewal
date. The separation pay under each agreement (including those for each of the
named executive officers) equals three years' annualized base salary and maximum
target bonus. In addition, upon the occurrence of an eligible termination, all
outstanding options to purchase PPI Common Stock will immediately vest and
become exercisable. In the event that any payments to be made to an employee in
connection with a change in control of PPI under the Plan or any other plan or
arrangement would not be deductible by PPI for federal income tax purposes, then
the


<PAGE>   43

payments under the Plan and the employee's agreement will be
reduced as necessary to eliminate the disallowance of the deduction.

EMPLOYMENT AGREEMENTS

DAVID GOLDBERG entered into an agreement with the Company on September 19, 1996
to be employed as President and Chief Executive Officer of PPI for a term of
three years. From July 1, 1996 until February 1, 1997, i.e., the effective date
of the Merger ("Effective Time"), Mr. Goldberg was paid a base salary at an
annual rate of $300,000; from and after the Effective Time, he will be paid a
base salary at an annual rate of $225,000 and options to purchase 150,000 shares
of PPI Common Stock. Pursuant to his employment agreement, on October 30, 1996,
Mr. Goldberg received a restricted stock award of 27,000 shares of PPI Common
Stock. In the event Mr. Goldberg's employment is terminated without cause, he
shall receive his base salary and medical, health and accident and disability
insurance for a term of 12 months after the date of such termination. The
obligations of PPI under the employment agreement with Mr. Goldberg are
guaranteed by the New PCs.

TIM DUPELL entered into an agreement with the Company on September 19, 1996 to
be employed as Senior Vice President and Chief Financial Officer of PPI for a
term of three years. From July 29, 1996 until the Effective Time, Mr. Dupell was
paid a base salary at an annual rate of $175,000; from and after the Effective
Time, Mr. Dupell has received options to purchase 100,000 shares of PPI
Common Stock. Pursuant to his employment agreement, on October 30, 1996 Mr.
Dupell received a restricted stock award for 27,000 shares of PPI Common Stock.
In the event Mr. Dupell's employment is terminated without cause, he shall
receive his base salary and medical, health and accident and disability
insurance for a term of 12 months after the date of such termination. The
obligations of PPI under the employment agreement of Mr. Dupell are guaranteed
by the New PCs.

MICHAEL BONAZZOLA, M.D. entered into an agreement with the Company on September
19, 1996 to be employed as Senior Vice President and Chief Medical Officer of
PPI for a term of three years. On the Effective Date, Dr. Bonazzola received a
bonus award of $25,000. Commencing at the Effective Time, Dr. Bonazzola has been
paid a base salary at an annual rate of $190,000, and received options to
purchase 100,000 shares of PPI Common Stock. In the event Dr. Bonazzola's
employment is terminated without cause, he shall receive his base salary and
medical, health and accident and disability insurance for a term of 12 months
after the date of such termination. The obligations of PPI under the employment
agreement of Dr. Bonazzola are guaranteed by the New PCs.

JON NESS entered into an agreement with the Company on September 19, 1996 to be
employed as Senior Vice President of PPI for a term of three years. Commencing
at the Effective Time, Mr. Ness has been paid a base salary at an annual rate of
$175,000 and received an option to purchase 35,000 shares of PPI Common Stock.
Pursuant to his employment agreement, Mr. Ness received on October 30, 1996 a
restricted stock award for 27,000 shares of PPI Common Stock. In the event Mr.
Ness' employment is terminated without cause, he shall receive his base salary
and medical, health and accident and disability insurance for a term of 12
months after the date of such termination.

JERALD ERSTGAARD entered into an agreement with the Company on September 19,
1996 to be employed as Senior Vice President of PPI. Mr. Erstgaard's position
was voluntarily terminated as of August 20, 1997. Mr. Erstgaard's employment
agreement was for a term of three years. Commencing at the Effective Time, Mr.
Erstgaard was paid a base salary at an annual rate of $132,000 and at the time
of termination of Mr. Erstgaard employment with PPI, PPI agreed to provide the
following compensation and benefits to Mr. Erstgaard: For a period of 14 months
from the termination date, in addition to the salary which had been paid to him
for the month of August 1997, PPI will pay Mr. Erstgaard an the annual rate of
$132,000 as though Mr. Erstgaard's employment with PPI had continued, payable in
regular installments and subject to applicable withholding and deductions. In
addition, PPI agreed to provide Mr. Erstgaard with (a) medical, health and
accident and disability insurance and other benefits at the same coverage level
maintained for Erstgaard's benefit immediately prior to the termination, and (b)
participation in any 1997 and 1998 contribution that PPI makes on behalf of its
employees to any retirement or pension plan, with respect to severance payments
through October 19, 1998.


<PAGE>   44

KERRY BARNETT entered into an employment agreement on February 9, 1998 to be
employed as Senior Vice President of PPI for a term of three years. Kerry
Barnett assumed the responsibilities of Jerald Erstgaard. Mr. Barnett will be
paid a base salary at an annual rate of $158,000 with a potential annual bonus
of $32,000 and receive an option to purchase 10,000 shares of PPI Common Stock.
In the event that Mr. Barnett's employment is terminated without cause, he shall
receive his base salary and medical, health and accident and disability
insurance for a term of 6 months after the date of such termination.

RALPH PROWS, M.D. entered into an agreement with the Company on June 1, 1997 to
be employed as Senior Vice President of PPI for a term of three years. Mr. Prows
will be paid a base salary at an annual rate of $162,650 and receive an option
to purchase 35,000 shares of PPI Common Stock. In the event Mr. Prows'
employment is terminated without cause, he shall receive his base salary and
medical, health and accident and disability insurance for a term of 12 months
after the date of such termination.


ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Set forth below is information concerning beneficial ownership of the Company
Common Stock as of March 30, 1998 by (i) each of the nominees and current
Directors, (ii) each of the named executive officers, (iii) all current
Directors and executive officers of the Company as a group, and (iv) all persons
known by the Company to be the beneficial owners of five percent or more of
Company Common Stock.


<TABLE>
<CAPTION>
                                           Shares of Company
                                              Common Stock
PPI                                        Beneficially Owned          Percent Outstanding
---                                        ------------------          -------------------
<S>                                              <C>                           <C> 
David M. Goldberg, M.H.A.(1)                     37,000                        0.6%
Tim E. Dupell, C.P.A(1)                          34,000                        0.5%
Michael F. Bonazzola, M.D(1)                     34,269                        0.5%
Bruce E. Van Zee, M.D.(1)                        27,269                        0.4%
David H. Cutsforth, Jr. M.D.(1)                  19,889                        0.3%
Russell A. Dow, M.D.                             30,631                        0.5%
Douglas M. Mancino, Esq.(1)                      28,500                        0.4%
Dan Gregorie, M.D.                                   --                          --
Mark Leavitt, M.D.                                   --                          --
Jon D. Ness.(1)                                  34,000                        0.5%
Ralph Prows, M.D.(1)                             26,649                        0.4%
Kerry Barnett                                        --                          --
All directors and executive officers
of the Company as a group (1)                    272,207                       4.2%
</TABLE>

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

(1) Includes shares which may be acquired on February 1, 1997 upon exercise of
    stock options (10,000 shares for David Goldberg, 7,000 shares for Tim Dupell
    and Jon Ness, 7,442 shares for Michael Bonazzola, M.D., 442 shares for Bruce
    Van Zee, M.D., 1,135 shares for David Cutsworth, Jr., M.D., 1,500 shares for
    Douglas Mancino, Esq. and 8,195 shares for Ralph Prows, M.D.). Holders
    exercise neither voting nor investment power over unexercised option shares.


ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.



<PAGE>   45



                                     PART IV

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


(a)  Financial Statements, Financial Statement Schedules and Exhibits

    (1) Financial Statements

        The following financial statements of Physician Partners, Inc. are
        included in Part II, Item 8 of this report:

<TABLE>
<CAPTION>
                                                                                    
                                                                                     
       <S>                                                                             <C>
        Report of Independent Public Accountants                                      
        Balance Sheets - December 31, 1996 and 1997                                    
        Statements of Operations - Years ended December 31, 1995, 1996 and 1997       
        Statements of Shareholders' Equity - Years ended December 31, 1995, 1996
          and 1997                                                                    
        Statements of Cash Flows - Years ended December 31, 1995, 1996 and 1997        
</TABLE>

    (2) Financial Statement Schedules

        None required.

    (3) Exhibits

<TABLE>
         <S>    <C>
         2.1*   Amended and Restated Agreement and Plan of Reorganization and
                Merger, dated as of September 19, 1996, as amended on November
                4, 1996, November 29, 1996 and December 31, 1996, among
                Physician Partners, Inc., The Corvallis Clinic, PC, HealthFirst
                Medical Group, PC and Medford Clinic, PC

         3.1*   Amended and Restated Certificate of Incorporation of PPI

         3.2*   By-Laws of PPI

         3.2**  Certificate of Designation

         4.1**  Credit Agreement between PPI and United States National Bank of
                Oregon dated February 1, 1997, as amended on March 7, 1997 and
                August 25, 1997

        10.1*   Amended and Restated Employment Agreement, dated as of September
                19, 1996 between PPI and David M. Goldberg

        10.2*   Amended and Restated Employment Agreement, dated as of September
                19, 1996 between PPI and Tim E. Dupell

        10.3*   Amended and Restated Employment Agreement, dated as of September
                19, 1996 between PPI and Michael F. Bonazzola, M.D.

        10.4*   Employment Agreement, dated as of September 19, 1996 between PPI
                and Jon Ness

        10.5**  Employment Agreement, dated as of February 9, 1998 between PPI
                and Kerry Barnett

        10.6**  Employment Agreement, dated as of June 1, 1997 between PPI and
                Ralph Prows

        10.7**  Amended and Restated 1997 Stock Option Plan for Non-Employee
                Directors of PPI dated November 12, 1997

        10.10** Amended and Restated 1997 Stock Option Plan for Employees of PPI
                dated November 12, 1997

        10.11** Amended and Restated 1997 Stock Option Plan for Non- Employee
                Providers Affiliated with PPI dated November 12, 1997

        10.12*  PPI Change in Control Plan, dated as of December 31, 1996

        10.13** Preferred Stock and Warrant Purchase Agreement with First Union
                Capital together with Common Stock Purchase Warrant and
                Registration Rights Agreement

        27**    Financial Data Schedule
</TABLE>

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

*   Previously filed in connection with Registration Statement No. 333-15595 and
    hereby incorporated by reference

**  Previously filed and hereby incorporated by reference
<PAGE>   46
                                   SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) 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.

                                            Physician Partners, Inc.
                                            (Registrant)

                                         By /s/ David M. Goldberg
                                            ------------------------------------
                                            David M. Goldberg
                                            President, Chief Executive Officer
                                            and Director

                                            3/30/98


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

By  /s/ David M. Goldberg                By /s/ Tim E. Dupell, C.P.A.
    -----------------------------------     ------------------------------------
    David M. Goldberg                       Tim E. Dupell, C.P.A.
    President, Chief Executive Officer      Senior Vice President, Chief
    and Director                            Financial Officer and Director

    3/30/98                                 3/30/98

By  /s/ Michael F. Bonazzola, M.D.       By /s/ Bruce E. Van Zee, M.D.
    -----------------------------------     ------------------------------------
    Michael F. Bonazzola, M.D.              Bruce E. Van Zee, M.D.
    Senior Vice President, Chief Medical    Chairman of the Board and
    Officer and Director                    Director

    3/30/98                                 3/30/98

By  /s/ David H. Cutsforth Jr., M.D.     By /s/ Russel A. Dow, M.D.
    -----------------------------------     ------------------------------------
    David H. Cutsforth Jr., M.D.            Russel A. Dow, M.D.
    Director                                Director

    3/30/98                                 3/30/98

   
By  /s/ Douglas M. Mancino, Esq.                                               
    -----------------------------------      
    Douglas M. Mancino, Esq.                                                   
    Director                                                                   
                                                                               
    3/30/98