<PAGE>   1

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

                                   FORM 10-K

<TABLE>
<S>              <S>
   (MARK ONE)
      [X]        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                 THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED,
                 EFFECTIVE OCTOBER 7, 1996).
                 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996.
                                              OR
      [  ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                 THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
                 FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>

                         COMMISSION FILE NUMBER 0-27276
                               MEDPARTNERS, INC.
             (Exact Name of Registrant as Specified in its Charter)

<TABLE>
<S>                                              <C>
                    DELAWARE                                        63-1151076
          (State or Other Jurisdiction                           (I.R.S. Employer
       of Incorporation or Organization)                       Identification No.)

        3000 GALLERIA TOWER, SUITE 1000
              BIRMINGHAM, ALABAMA                                     35244
    (Address of Principal Executive Offices)                        (Zip Code)
</TABLE>

              Registrant's Telephone Number, Including Area Code:
                                 (205) 733-8996

          Securities Registered Pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
                                                              NAME OF EACH EXCHANGE
              TITLE OF EACH CLASS                              ON WHICH REGISTERED
              -------------------                             ---------------------
<C>                                              <C>
    COMMON STOCK, PAR VALUE $.001 PER SHARE                THE NEW YORK STOCK EXCHANGE
</TABLE>

          Securities Registered Pursuant to Section 12(g) of the Act:

                                      NONE

     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.  ( )

     State the aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 20, 1997: Common Stock, par value $.001 per
share -- $3,524,905,388.

     Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.

<TABLE>
<CAPTION>
                     CLASS                                OUTSTANDING AT MARCH 20, 1997
                     -----                                -----------------------------
<C>                                              <C>
    COMMON STOCK, PAR VALUE $.001 PER SHARE                    171,449,860 SHARES*
</TABLE>

* Includes 9,317,000 shares held in trust to be utilized in employee benefit
  plans.

                       DOCUMENTS INCORPORATED BY REFERENCE

     No documents are incorporated by reference into this Annual Report on Form
10-K.
================================================================================
<PAGE>   2

     FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS

     FORWARD LOOKING STATEMENTS.  Statements in this document that are not
historical facts are hereby identified as "forward looking statements" for the
purpose of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934 (the "Exchange Act") and Section 27A of the Securities Act of 1933
(the "Securities Act"). MedPartners, Inc. ("MedPartners" or the "Company")
cautions readers that such "forward looking statements", including without
limitation, those relating to the Company's future business prospects, revenues,
working capital, liquidity, capital needs, interest costs and income, wherever
they occur in this document or in other statements attributable to the Company
are necessarily estimates reflecting the best judgment of the Company's senior
management and involve a number of risks and uncertainties that could cause
actual results to differ materially from those suggested by the "forward looking
statements". Such "forward looking statements" should, therefore, be considered
in light of various important factors, including those set forth below and
others set forth from time to time in the Company's reports and registration
statements filed with the Securities and Exchange Commission (the "SEC").

     These "forward looking statements" are found at various places throughout
this document. Additionally, the discussions herein under the captions
"Business -- Acquisition Program", "Business -- Industry", "Business --
Strategy", "Business -- Operations", "Business -- Government Regulation",
"Corporate Liability and Insurance", "Legal Proceedings" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" are
susceptible to the risks and uncertainties discussed below. Moreover, the
Company, through its senior management, may from time to time make "forward
looking statements" about the matters described herein or other matters
concerning the Company.

     The Company disclaims any intent or obligation to update "forward looking
statements".

     FACTORS THAT MAY AFFECT FUTURE RESULTS.  The healthcare industry in general
and the physician practice management business in particular are in a state of
significant flux. This, together with the circumstance that the Company has a
relatively short operating history and is the largest physician practice
management ("PPM") consolidator in the United States, makes the Company
particularly susceptible to various factors that may affect future results such
as the following:

          risks relating to the Company's growth strategy; risks relating
     to integration in connection with acquisitions; risks relating to
     capital requirements; identification of growth opportunities;
     dependence on HMO enrollee growth; risks related to the capitated
     nature of revenues; control of healthcare costs; risks relating to
     certain legal matters; risks relating to exposure to professional
     liability; risks relating to government regulation; risks relating to
     pharmacy licensing operations; risks relating to healthcare reform and
     proposed legislation; and possible volatility of stock price.

     For a more detailed discussion of these factors and their potential impact
on future results, see the applicable discussions herein.
<PAGE>   3

                                     PART I

ITEM 1.  BUSINESS.

GENERAL

     The Company is the largest PPM company in the United States based on annual
revenues of approximately $4.8 billion as of December 31, 1996. The Company
develops, consolidates and manages integrated healthcare delivery systems.
Through its network of affiliated group and independent practice association
("IPA") physicians, the Company provides primary and specialty healthcare
services to prepaid managed care enrollees and fee-for-service patients. The
Company also operates one of the largest independent prescription benefit
management ("PBM") programs in the United States, with annual revenues of
approximately $1.8 billion as of December 31, 1996 and provides disease
management services and therapies for patients with certain chronic conditions.
As of December 31, 1996, the Company operated its PBM program in all 50 states
and its PPM business in 26 states and was affiliated with approximately 8,850
physicians, including approximately 2,600 in group practices, 5,300 through IPA
relationships and 950 who were hospital-based, providing healthcare to
approximately 1.6 million prepaid enrollees.

     The Company affiliates with physicians who are seeking the resources
necessary to function effectively in healthcare markets that are evolving from
fee-for-service to managed care payor systems. The Company enhances clinic
operations by centralizing administrative functions and introducing management
tools, such as clinical guidelines, utilization review and outcomes measurement.
The Company provides affiliated physicians with access to capital and to
advanced management information systems. In addition, the Company contracts with
health maintenance organizations and other third-party payors that compensate
the Company and its affiliated physicians on a prepaid basis (collectively
"HMOs"), hospitals and outside providers on behalf of its affiliated physicians.
These relationships provide physicians with the opportunity to operate under a
variety of payor arrangements and to increase their patient flow.

     The Company's PPM revenue is derived from contracts with HMOs that
compensate the Company and its affiliated physicians on a prepaid basis and from
the provision of fee-for-service medical services. In the prepaid arrangements,
the Company, through its affiliated physicians, typically is paid by the HMO a
fixed amount per member ("enrollee") per month ("professional capitation") or a
percentage of the premium per member per month ("percent of premium") paid by
employer groups and other purchasers of healthcare coverage to the HMOs. In
return, the Company, through its affiliated physicians, is responsible for
substantially all of the medical services required by enrollees. In many
instances, the Company and its affiliated physicians accept financial
responsibility for hospital and ancillary healthcare services in return for
payment from HMOs on a capitated or percent of premium basis ("institutional
capitation"). In exchange for these payments (collectively, "global
capitation"), the Company, through its affiliated physicians, provides the
majority of covered healthcare services to enrollees and contracts with
hospitals and other healthcare providers for the balance of the covered
services. In March 1996, the California Department of Corporations (the "DOC")
issued a healthcare service plan license (the "Restricted License") to Pioneer
Provider Network, Inc. ("Pioneer Network") in accordance with the requirements
of the Knox-Keene Health Care Service Plan Act of 1975 (the "Knox-Keene Act")
which authorizes Pioneer Network to operate as a healthcare service plan in the
state of California. The Company intends to utilize the Restricted License for a
broad range of healthcare services. See "-- Government Regulation".

     The Company offers medical group practices and independent physicians a
range of affiliation models. These affiliations are carried out by the
acquisition of PPM entities or practice assets, either for cash or through an
equity exchange, or by affiliation on a contractual basis. In all instances, the
Company enters into long-term practice management agreements that provide for
the management of the affiliated physicians by the Company while assuring the
clinical independence of the physicians.

     The Company also manages outpatient prescription drug benefit programs for
more than 1,300 clients throughout the United States, including corporations,
insurance companies, unions, government employee groups and managed care
organizations. The Company dispenses 42,000 prescriptions daily through four
mail service pharmacies and manages patients' immediate prescription needs
through a network of approximately

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<PAGE>   4

59,000 retail pharmacies. The Company is in the process of integrating the PBM
program with the PPM business by providing pharmaceutical services to affiliated
physicians, clinics and HMOs. The Company's disease management services are
intended to meet the healthcare needs of individuals with chronic diseases or
conditions. These services include the design, development and management of
comprehensive programs comprising drug therapy, physician support and patient
education. The Company currently provides therapies and services for individuals
with such conditions as hemophilia, growth disorders, immune deficiencies,
genetic emphysema, cystic fibrosis and multiple sclerosis.

ACQUISITION PROGRAM

     The Company believes it is the leading consolidator in the PPM industry.
The Company's strategy is to develop locally prominent, integrated healthcare
delivery networks that provide high quality, cost-effective healthcare in
selected geographic markets. The Company implements this strategy through growth
in its existing markets, expansion into new markets through acquisitions and
affiliations and through the implementation of comprehensive healthcare
solutions for patients, physicians and payors. In connection with pursuing its
strategy, the Company creates strategic alliances with hospital partners and
HMOs. As an integral element of these alliances, the Company utilizes
sophisticated information systems to improve the operational efficiency of, and
reduce the costs associated with, operating the Company's network and the
practices of the affiliated physicians. The Company's principal methods of
expansion are acquisitions of PPM businesses and affiliations with physician and
medical groups.

     In September 1996, the Company acquired Caremark International Inc., a
publicly traded PPM and PBM company based in Northbrook, Illinois, in exchange
for approximately 90.5 million shares of MedPartners Common Stock having a total
value of $1.8 billion (the "Caremark Acquisition"), creating the largest PPM
company in the United States.

     In November 1995, the Company acquired Mullikin Medical Enterprises, L.P.
("MME"), a privately held PPM entity based in Long Beach, California, in
exchange for approximately 13.5 million shares of MedPartners Common Stock
having a total value of approximately $384.1 million (the "MME Acquisition"). In
February 1996, the Company acquired Pacific Physician Services, Inc. ("PPSI"), a
publicly traded PPM company based in Redlands, California, in exchange for
approximately 11.0 million shares of MedPartners Common Stock having a total
value of approximately $341.8 million. In June 1995, PPSI acquired Team Health,
Inc. ("Team Health"), based in Knoxville, Tennessee. Team Health primarily
manages physicians and other healthcare professionals engaged in the delivery of
emergency medicine and hospital based primary care.

     Through December 31, 1994, the Company had affiliated with 190
physicians(excluding pooling of interests treatment for certain acquisitions).
As of December 31, 1996, the Company had affiliated with approximately 8,850
physicians.

     The Company's success in continuing its aggressive growth strategy will be
dependent on many factors including, among others, its ability to identify
suitable growth opportunities and to integrate its acquired practices. The
Company's efforts in this regard could be adversely affected by competition from
other PPM businesses and companies as well as hospital management companies,
hospitals and insurers who are also expanding into the PPM market. The Company's
rapid consolidation makes integration a significant challenge. The dedication of
management resources to integration may detract attention from the day-to-day
operations of the Company. There can be no assurance that the Company will be
able to continue its growth or successfully integrate its acquisitions. Such
failures could have a material adverse effect on the operating results and
financial condition of the Company.

     The Company's major acquisitions since January 1995 have been structured as
poolings of interests. As a result, the Company's operating income has been
reduced by the related merger expenses resulting in a net loss for the year
ended December 31, 1996. Such merger expenses as well as integration costs may
result in future losses. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".

                                        2
<PAGE>   5

RECENT DEVELOPMENTS

     On January 20, 1997, the Company entered into an Agreement and Plan of
Merger by and among the Company, Seabird Acquisition Corporation (the
"Subsidiary") and InPhyNet Medical Management Inc. ("InPhyNet") relating to the
merger of InPhyNet with and into the Subsidiary (the "Merger"). The Merger is
expected to be accounted for as a pooling of interests under generally accepted
accounting practices and is expected to qualify for treatment as a tax-free
reorganization under Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). The Merger is subject to certain conditions typical for
transactions of this kind.

     On March 4, 1997, the Company entered into a Stock Purchase Agreement by
and between the Company and AHP Holdings, Inc., whereby the Company is to
acquire the business assets and assume the liabilities of most of the operations
of Aetna Professional Management Corporation ("APMC"), a PPM company and
affiliate of Aetna Inc. based in Glastonbury, Connecticut (the "APMC
Acquisition"). For accounting purposes, the APMC Acquisition will be treated as
if it were an asset purchase pursuant to Section 338(h)(10) of the Code. As a
part of the APMC Acquisition, the Company also will enter into a 10-year Master
Network Agreement with Aetna U.S. Healthcare, pursuant to which the members of
MedPartners' networks of affiliated physicians will be authorized providers for
many of the 14 million members of Aetna U.S. Healthcare's health plan. The APMC
Acquisition, as well as the Master Network Agreement, are subject to certain
conditions typical for transactions of this kind.

INDUSTRY

     The Health Care Financing Administration ("HCFA") estimates that national
healthcare spending in 1995 was in excess of $1 trillion, with physicians
controlling more than 80 percent of the overall expenditures. The American
Medical Association reports that approximately 565,000 physicians are actively
involved in patient care in the United States, with a growing number
participating in multi-specialty or single-specialty groups. Expenditures
directly attributable to physicians are estimated at $246 billion.

     Concerns over the cost of healthcare have resulted in the rapid growth of
managed care in the past several years. As markets evolve from traditional
fee-for-service medicine to managed care, HMOs and healthcare providers confront
market pressures to provide high quality healthcare in a cost-effective manner.
Employer groups have begun to bargain collectively in an effort to reduce
premiums and to bring about greater accountability of HMOs and providers with
respect to accessibility, choice of provider, quality of care and other matters
that are fundamental to consumer satisfaction. The increasing focus on
cost-containment has placed small to mid-sized physician groups and solo
practices at a disadvantage. They typically have higher operating costs and
little purchasing power with suppliers, they often lack the capital to purchase
new technologies that can improve quality and reduce costs and they do not have
the cost accounting and quality management systems necessary for entry into
sophisticated risk-sharing contracts with payors.

     Industry experts expect that the healthcare delivery system may evolve to
the point where the primary care physician manages and directs healthcare
expenditures. Consequently, primary care physicians have increasingly become the
conduit for the delivery of medical care by acting as "case managers" and
directing referrals to certain specialists, hospitals, alternate-site facilities
and diagnostic facilities. By contracting directly with payors, organizations
such as the Company that control primary care physicians are able to reduce the
administrative overhead expenses incurred by HMOs and insurers and thereby
reduce the cost of delivering medical services.

     As HMO enrollment and physician membership in group medical practices have
continued to increase, healthcare providers have sought to reorganize themselves
into healthcare delivery systems that are better suited to the managed care
environment. Physician groups and IPAs are joining with hospitals, pharmacies
and other institutional providers in various arrangements to create vertically
integrated delivery systems that provide medical and hospital services ranging
from community-based primary medical care to specialized inpatient services.
These healthcare delivery systems contract with HMOs to provide hospital and
medical services to enrollees pursuant to full risk contracts. Under these
contracts, providers assume the obligation to

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<PAGE>   6

provide both the professional and institutional components of covered healthcare
services to the HMO enrollees.

     In order to compete effectively in this evolving environment, the Company
believes many physicians are concluding that they must obtain control over the
delivery and financial impact of a broader range of healthcare services through
global capitation. To this end, groups of independent physicians and medium to
large medical groups are taking steps to assume the responsibility and the risk
associated with healthcare services that they do not provide, such as
hospitalization and pharmacy services. Physicians are increasingly abandoning
traditional private practice in favor of affiliations with larger organizations
such as the Company that offer skilled and innovative management, sophisticated
information systems and significant capital resources. Many payors and their
intermediaries, including governmental entities and HMOs, are also looking to
outside providers of physician and pharmacy services to develop and maintain
quality outcomes, management programs and patient care data. In addition, such
payors and their intermediaries look to share the risk of providing healthcare
services through capitation arrangements that fix payments for patient care at a
specified amount over a specified period of time. Medical groups and independent
physicians seem to be concluding that while the acceptance of greater
responsibility and risk affords the opportunity to retain and enhance market
share and to operate at a higher level of profitability, the acceptance of
global capitation carries with it significant requirements for enhanced
infrastructure, information systems, capital, network resources and financial
and medical management. As a result, physicians are turning to organizations
such as the Company to provide the resources necessary to function effectively
in a managed care environment.

STRATEGY

     The Company's strategy is to develop locally prominent, integrated
healthcare delivery networks that provide high quality, cost-effective
healthcare in selected geographic markets. The key elements of this strategy are
as follows:

          Expansion of Existing Markets.  The Company's principal strategy for
     expanding its existing markets is through the acquisition of, or
     affiliation with, physicians and medical groups within those markets. The
     Company seeks to acquire or otherwise affiliate with physician groups, IPAs
     and other providers that have significant market share in their local
     markets and have established reputations for providing quality medical
     care. The Company also develops multi-specialty physician networks that are
     designed to meet the specific medical needs of a targeted geographic
     market. The Company seeks to further enhance its existing market share by
     increasing enrollment and fee-for-service business in its existing
     affiliated practices and IPAs. The Company anticipates further internal
     growth by expanding more of its payor contracts to global capitation
     through Pioneer Network. Moreover, the Company believes that increasing
     marketing activities, enhancing patient service and improving the
     accessibility of care will also increase the Company's market share.

          Expansion into New Markets.  The Company expands into new markets
     through the acquisition of or affiliation with other PPM entities and
     medical groups. The Company believes it is the leading consolidator in the
     PPM industry and that the MME Acquisition was the first major consolidation
     in the industry. That acquisition was followed by the merger with PPSI, the
     Caremark Acquisition and the announcement in January 1997 of the proposed
     merger with InPhynet. As a result of the consolidation of physician
     practices and the entry of other PPM companies into the market, the
     Company's management has determined that it is important for the Company to
     continue its rate of expansion through acquisitions and mergers. The
     Company believes that by concentrating on larger acquisitions and by
     continuing to expand its core of physician groups and IPAs, as well as its
     affiliations with hospitals, it will create vertically integrated
     healthcare delivery systems that enhance its competitive position. The
     Company continually reviews potential acquisitions and physician
     affiliations and is currently in preliminary negotiations with various
     candidates.

          Integration of PPM and PBM Services.  The Company believes that there
     is significant opportunity for growth through the integration of the PBM
     program and the PPM business. The Company expects PBM activity to increase
     as payors seek to shift the responsibility for pharmacy services to PPM
     entities

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<PAGE>   7

     and physician groups, and those entities look to prescription benefit
     managers to control pharmaceutical costs. The Company expects its PBM
     program to grow as enrollees and fee-for-service patients use the Company's
     mail-order and retail pharmacy networks. In addition, the Company expects
     to expand its PBM contracts with managed care organizations to provide
     capitated pharmaceutical services for its prepaid enrollees.

          Strategic Alliances.  The Company believes that strategic alliances
     with hospitals and health plans improve the delivery of managed healthcare.
     The Company has entered into arrangements with various hospitals under
     which a portion of the capitation revenue received from HMOs for
     institutional care of enrollees assigned to designated Company clinics and
     IPA physicians is deposited into "subcapitated risk pools" managed by the
     Company. The Company believes that such arrangements can be enhanced
     through the implementation of the Restricted License held by Pioneer
     Network. Under these arrangements, the hospital is at risk in the event
     that the costs of institutional care exceed the available funds, and the
     Company shares in cost savings and revenue enhancements. The Company
     believes that through these and other similar alliances, providers will
     devote greater resources to ensuring the wellness of HMO enrollees, to
     enhancing high-quality and cost-effective care and to retaining and
     expanding their respective market shares. As a result, it is anticipated
     that the overall cost of delivering healthcare services will be contained,
     rendering both the Company and the participating providers more appealing
     to both HMOs and medical care consumers. The Company and its affiliated
     physicians have also established relationships with HMOs pursuant to which
     the Company and the HMOs share proportionately in the risks and rewards of
     market trends.

          Sophisticated Information Systems.  The Company believes that
     information technology is critical to the growth of integrated healthcare
     delivery systems and that the availability of detailed clinical data is
     fundamental to quality control and cost containment. The Company develops
     and maintains sophisticated management information systems that collect and
     analyze clinical and administrative data. These systems allow the Company
     to control overhead expenses, maximize reimbursement and provide
     utilization management more effectively. The Company evaluates the
     administrative and clinical functions of affiliated practices and
     re-engineers these functions as appropriate in conjunction with the
     implementation of the Company's management information systems to maximize
     the benefits of those systems.

          The Company also utilizes a sophisticated database to provide
     pharmaceutical-related information to participating physicians, payors,
     affiliated physician practices and other specialty service entities. The
     database is designed to provide an effective method for distributing and
     administering drugs and drug therapies.

          Increased Operational Efficiencies and Cost Reductions.  The Company
     is seeking to increase its operating efficiency through expansion of its
     market area and number of HMO enrollees, increased specialization,
     development of additional in-house services and increased emphasis on
     outpatient care. The Company is also refining its utilization management
     programs that deliver information used by participating physicians to
     monitor and improve their practice patterns. The Company's physician
     networks attempt to achieve economies of scale through centralizing
     billing, scheduling, information management and other functions.

OPERATIONS

     Prior to the MME Acquisition in November 1995, the Company concentrated its
PPM development efforts in the southeastern United States, affiliating primarily
with physician groups that practiced on a fee-for-service basis. The Company
acquired additional business models specifically designed to operate efficiently
in the capitated environment with the acquisition of the MME, PPSI and Caremark
organizations. These business models, which are replicable and flexible, allow
the Company to take advantage of the full range of market opportunities in the
PPM industry and enable the Company to build integrated physician networks
attractive to payors of all types. The Company currently has networks under
development in 26 states.

                                        5
<PAGE>   8

     To meet payor demand for price competitive, quality services, the Company
utilizes a market-based approach that incorporates primary care and specialty
physicians into a network of providers serving a targeted geographic area. The
Company engages in research and market analysis to determine the best network
configuration for a particular market. Primary care includes family practice,
internal medicine, pediatrics and obstetrics/gynecology. Key specialties include
orthopedics, cardiology, oncology, radiology, neurosciences, urology, surgery,
ophthalmology and ear, nose and throat. At certain locations, affiliated
physicians and support personnel operate centers for diagnostic imaging, urgent
care, cancer management, mental health treatment and health education. Network
physicians also treat fee-for-service patients on a per-occurrence basis.
After-hours care is available in several of the Company's clinics. Each network
is configured to contain, when complete, the physician services necessary to
capture at least a ten percent market share and to provide at least 90 percent
of the physician services required by payors. The Company markets its networks
to managed care and third-party payors, referring physicians and hospitals.

     Affiliated Physicians.  The relationship between the Company and its
affiliated physicians is set forth in asset purchase and practice management
agreements. Through the asset purchase agreements, the Company acquires the
assets utilized in the practices and may also assume certain leases and other
contracts of the physician practices. Under the practice management agreements,
the Company provides administrative, management and support functions to
physician practices as necessary in connection with their respective medical
practices. The Company also provides its physician practices with the equipment
and facilities necessary for the medical practices, manages practice operations
and employs substantially all of the practices' non-physician personnel, except
certain allied health professionals, such as nurses and physical therapists. See
also Note 1 to the consolidated financial statements.

     The practice management agreements between the Company and the physician
practices provide three general types of financial arrangements regarding
physician compensation: (i) fixed salary and a discretionary bonus; (ii)
fee-for-service; or (iii) base compensation plus a percentage of a practice's
net income. Under these agreements, the Company has a direct interest in the
earnings of the practices. Practice revenue is deposited in an account owned by
the Company, and the Company pays the physicians as described above. The Company
retains any residual from the operations of the practices (and funds any
deficit). For further details regarding the nature of physician compensation
arrangements, see Note 1 to the consolidated financial statements.

     The Company works closely with affiliated physicians in targeting and
recruiting additional physicians and in merging sole practices or single
specialty practices into the already-affiliated physician practices. The Company
seeks to recognize and develop opportunities to provide services throughout a
market by positioning its practices so that the entire market is covered
geographically. This approach provides patients with convenient medical
facilities and services and responds to coverage criteria that are essential to
payors. See Note 1 to the consolidated financial statements.

     IPAs.  The Company's networks include approximately 5,300 primary care and
specialist IPA physicians serving approximately 300,000 HMO enrollees. An IPA
allows individual practitioners to access patients in their respective areas
through contracts with HMOs without having to join a group practice or sign
exclusive contracts. An IPA also coordinates utilization review and quality
assurance programs for its affiliated physicians. Additionally, an IPA offers
other benefits to physicians seeking to remain independent, including economies
of scale in the marketplace, enhanced risk-sharing arrangements and access to
other strategic alliances. The Company identifies IPAs that need access to
capitated HMO contracts, and such IPA organizations typically agree to assign
their existing HMO contracts to the Company. The Company believes that the
expansion of its IPAs will enable it to increase its market share with
relatively low risk due to the low incremental investment required to recruit
additional physicians.

     HMOs.  The Company, through its affiliated physicians, began contracting
with HMOs to provide healthcare on a capitated reimbursement basis in 1975
(through predecessors). Under these contracts, which typically are automatically
renewed on an annual basis, the Company provides virtually all covered medical
services and receives a fixed monthly capitation payment from HMOs for each
member who chooses an affiliated physician as his or her primary care physician.
The capitation amount may be fixed, based upon a

                                        6
<PAGE>   9

percentage of premium, or adjustable based on the age and/or sex of the HMO
enrollee. Contracts for prepaid healthcare with HMOs accounted for approximately
29 percent of the Company's net revenue for the year ended December 31, 1996.

     To the extent that enrollees require more care than is anticipated or
require supplemental medical care that is not otherwise reimbursed by HMOs or
other payors, aggregate capitation payments may be insufficient to cover the
costs associated with the treatment of enrollees. Stop-loss coverage is
maintained, which mitigates the effect of occasional high utilization of
healthcare services. As of December 31, 1996, over 1.6 million prepaid HMO
enrollees were covered beneficiaries for services in the Company's networks.
These patients are covered under either commercial (typically
employer-sponsored) or senior (Medicare-funded) HMOs. Higher capitation rates
are typically received for senior patients because their medical needs are
generally greater. Consequently, the cost of their covered care is higher. As of
December 31, 1996, the Company's HMO enrollees comprised approximately 1.3
million commercial enrollees and approximately 0.1 million senior (over age 65)
enrollees and approximately 0.2 million Medicaid and other enrollees. As of
December 31, 1996, the Company was receiving institutional capitation payments
for approximately 0.6 million enrollees. The Company is largely dependent on
continued growth in the number of HMO enrollees. This growth may come from the
acquisition of other PPM entities, affiliation with additional physicians or
increased enrollment in HMO's currently contracting with the Company. There can
be no assurance that the Company will be successful in continuing the growth of
HMO enrollees.

     Hospitals.  The Company operates Pioneer Hospital ("Pioneer Hospital"), a
99-bed acute care hospital located in Artesia, California, U.S. Family Care
Medical Center ("USFMC"), a 102-bed acute care hospital in Montclair,
California, and Friendly Hills Hospital ("Friendly Hills"), a 274-bed acute care
hospital in La Habra, California. Many of the physicians on the professional
staff rosters of these hospitals are either employed by an affiliated
professional corporation or are under contract with the Company's IPAs. Other
physicians that are traditionally hospital-based, such as emergency room
physicians, anesthesiologists, pathologists, radiologists and cardiologists
provide services through contractual arrangements with the Company. Several of
the Company's medical clinics are located sufficiently close to hospitals where
these physicians are based to allow enrollees who use the clinics to also use
those hospitals. Under the HMO contracts, the Company, through its affiliated
medical practices or Knox-Keene licensee, is obligated to pay for inpatient
hospitalization and related services. Over 50 percent of Pioneer Hospital's,
approximately 85 percent of USFMC's and approximately 87 percent of Friendly
Hills' daily censuses are made up of the Company's affiliated medical group
enrollees. The Company, through its Knox-Keene licensee or affiliated medical
groups, has entered into agreements with other hospitals in California for the
delivery of hospital services to the remainder of its enrollees. In each
instance, the institutional capitation payments received from HMOs are placed at
risk for the benefit of the applicable hospital, the Company and its affiliated
physicians, to the extent such services have not reached a stop-loss threshold.
The Company and these providers split any savings realized if hospital
utilization declines due to the success of the Company's programs for early
intervention, wellness and outpatient treatment.

     Pharmaceutical Services.  The Company manages outpatient PBM programs
throughout the United States for corporations, insurance companies, unions,
government employee groups and managed care organizations. Prescription drug
benefit management involves the design and administration of programs for
reducing the costs and improving the safety, effectiveness and convenience of
prescription drugs. The Company has one of the largest independent PBM programs,
dispensing 42,000 prescriptions daily from four mail service pharmacies. The
Company also manages patients' immediate prescription needs through a network of
approximately 59,000 retail pharmacies. Under the Company's PBM quality
assurance program, the Company maintains rigorous quality assurance and
regulatory policies and procedures. A computerized order processing system
reviews each prescription order for a variety of potential concerns, including
reactions with other drugs known to be prescribed to that patient, reactions
with a patient's known allergies, duplication of therapies, appropriateness of
dosage and early refill requests that may indicate overutilization or fraud.
Each prescription is verified by a licensed pharmacist before shipment. The
Company has retained the services of an independent national advisory panel of
physician specialists that advises it on the clinical analyses of its
intervention strategies and on cost-effective clinical procedures. The Company
offers a full range of drug cost

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and clinical management services, including clinical case management, drug
utilization review, formulary management and customized prescription programs
for senior citizens. The pharmacy business is subject to heavy government
regulation. Any failure to satisfy pharmacy licensing requirements could have a
material adverse effect on the operating results and financial condition of the
Company.

     Disease Management.  The Company delivers comprehensive long-term support
for high-cost, chronic illnesses in an effort to improve outcomes for patients
and to lower costs. The Company believes that these programs efficiently provide
for a patient's entire healthcare needs. The programs utilize advanced protocols
and eliminate unnecessary procedural steps. The Company provides therapies and
services to individuals with such conditions as hemophilia, growth disorders,
immune deficiencies, genetic emphysema, cystic fibrosis and multiple sclerosis.
The Company estimates that there are over 200,000 patients in the United States
suffering from these diseases. The Company's disease management services utilize
the Company's integrated health data to develop therapies to manage the high
cost of treating these patients.

     Hospital-Based Physician Operations.  The Company's Hospital-Based
Physician ("HBP") operations organize and manage physicians and other healthcare
professionals engaged in the delivery of emergency, radiology and teleradiology
services, hospital-based primary care and temporary staffing and support
services to hospitals, clinics, managed care organizations and physician groups.
Team Health currently serves 127 hospital emergency departments and 21 hospital
radiology departments in 18 states. Under contracts with hospitals and other
clients, the Company's HBP operations identify and recruit physicians and other
healthcare professionals for admission to a client's medical staff, monitor the
quality of care and proper utilization of services and coordinate the ongoing
scheduling of staff physicians who provide clinical coverage in designated areas
of care. Hospitals have found it increasingly difficult to recruit, schedule,
retain and appropriately compensate hospital-based physician specialists
required to operate hospital emergency, radiology and other departments. As a
consequence, a large number of hospitals have turned to contract management
firms, such as Team Health, as a more cost-effective and reliable alternative to
the development of in-house physician staffing.

INFORMATION SYSTEMS

     The Company develops and maintains integrated information systems to
support its growth and acquisition plans. The Company's overall information
systems design is open, modular and flexible. The Company is implementing a
flexible individual patient electronic medical record ("EMR") that is
continually updated to complement primary practice management and billing
functions. The Company has configured its systems to give affiliated physicians
and their staff efficient and rapid access to complex clinical data. The
Company's use of the EMR enhances operational efficiencies through automation of
many routine clinical functions, as well as the capacity to link
"physician-specific" treatment protocols by diagnosis. This allows physicians to
have treatments checked against pre-defined protocols at the time of service.
The Company also utilizes a sophisticated database to provide
pharmaceutical-related information to participating physicians, payors,
affiliated physician practices and other specialty service entities. The
database is designed to provide a safe and effective method for distributing and
administering drugs and drug therapies.

     Effective and efficient access to key clinical patient and pharmaceutical
data is critical in obtaining quality outcomes and improving costs as the
Company enters into more capitation contracts. The Company utilizes its existing
information systems to measure patient care satisfaction and outcomes of care,
improve productivity, manage complex reimbursement procedures and integrate
information from multiple facilities throughout the care spectrum. These systems
allow the Company to analyze clinical and cost data to determine thresholds of
profitability under various capitation arrangements.

INTERNATIONAL

     The Company has minimal operations in several European countries, Canada
and Japan. The Company believes increasing healthcare costs, an expanding
population base over age 65, advances in medical technology and the ability to
provide improved quality of life while managing the cost of care will foster the
growth of managed healthcare services internationally as well as domestically.
Accordingly, the Company is

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<PAGE>   11

considering whether to expand its efforts in offering new approaches to
healthcare delivery and management around the world.

COMPETITION

     The PPM industry is highly competitive and is subject to continuing changes
in the provision of services and the selection and compensation of providers.
The Company competes for acquisition, affiliation and other expansion
opportunities with national, regional and local PPM companies and other PPM
entities. In addition, certain companies, including hospitals and insurers, are
expanding their presence in the PPM market. The Company also competes with
prescription drug benefit programs, prescription drug claims processors,
regional claims processors, providers of disease management services and
insurance companies.

GOVERNMENT REGULATION

     General.  As a participant in the healthcare industry, the Company's
operations and relationships are subject to extensive and increasing regulation
by a number of governmental entities at the federal, state and local levels. The
Company believes its operations are in material compliance with applicable laws.
Nevertheless, because the structure of the relationship with the physician
groups is unique, many aspects of the Company's business operations have not
been the subject of state or federal regulatory interpretation. Thus, there can
be no assurance that a review of the Company's or the affiliated physicians'
businesses by courts or regulatory authorities will not result in a
determination that could adversely affect the operations of the Company or of
its affiliated physicians. Nor can there be any assurance that the healthcare
regulatory environment will not change so as to restrict the Company's or the
affiliated physicians' existing operations or their expansion. Any significant
restriction could have a material adverse effect on the operating results and
financial condition of the Company.

     Federal Reimbursement, Fraud and Abuse and Referral Laws.  Approximately 24
percent of the revenues of the Company's affiliated physician practices is
derived from payments made by government-sponsored healthcare programs
(principally, medicare and state reimbursed programs). As a result, the Company
is subject to the laws and regulations that govern reimbursement under Medicare
and Medicaid. Any change in reimbursement regulations, policies, practices,
interpretations or statutes could adversely affect the operations of the
Company. There are also state and federal civil and criminal statutes imposing
substantial penalties (including civil penalties and criminal fines and
imprisonment) on healthcare providers that fraudulently or wrongfully bill
governmental or other third-party payors for healthcare services. The Company
believes it is in material compliance with such laws, but there can be no
assurance that the Company's activities will not be challenged or scrutinized by
governmental authorities or that any such challenge or scrutiny would not have a
material adverse effect on the operating results and financial condition of the
Company.

     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. Many states have adopted
similar prohibitions against payments intended to induce referrals of Medicaid
and other third-party payor patients. The Anti-Kickback Statute contains
provisions prescribing civil and criminal penalties to which individuals or
providers who violate such statute may be subjected. The criminal penalties
include fines up to $25,000 per violation and imprisonment for five years or
more. Additionally, the DHHS has the authority to exclude anyone, including
individuals or entities, who has committed any of the prohibited acts from
participation in the Medicare and Medicaid programs. If applied to the Company
or any of its subsidiaries or affiliated physicians, such exclusion could result
in a significant loss of reimbursement for the Company, up to a maximum of the
approximately 24 percent of revenues derived from such programs, which could
have a material adverse effect on the operating results and financial condition
of the Company. Although the Company believes that it is not in violation of the
Anti-Kickback Statute or similar state statutes, its operations do not fit
within any of the existing or proposed federal safe harbors.

                                        9
<PAGE>   12

     Federal law prohibits, with some exceptions, an entity from filing a claim
for reimbursement under the Medicare or Medicaid programs for certain designated
services if the entity has a financial relationship with the referring
physician. Federal law (the "Medicare Referral Payments Law") also prohibits the
solicitation or receipt of remuneration in exchange for, or the offer or payment
of remuneration to induce, the referral of Medicare or Medicaid beneficiaries.
Significant prohibitions against physician referrals were enacted by the United
States Congress in the Omnibus Budget Reconciliation Act of 1993. Subject to
certain exemptions, a physician is prohibited from referring Medicare or
Medicaid patients to an entity providing "designated health services" in which
the physician has an ownership or investment interest or with which the
physician has entered into a compensation arrangement. While the Company
believes it is in compliance with such legislation, future regulations could
require the Company to modify the form of its relationships with physician
groups. Some states have also enacted similar self-referral laws, and the
Company believes it is likely that more states will follow. The Company believes
that its practices fit within exemptions contained in such statutes.

     The Office of the Inspector General (the "OIG") of the United States
Department of Health and Human Services (the "DHHS") has promulgated regulatory
"safe harbors" under the Medicare Referral Payments Law that describe payment
practices between healthcare providers and referral sources that will not be
subject to criminal prosecution and that will not provide the basis for
exclusion from the Medicare and Medicaid programs. The Company retains
healthcare professionals to provide advice and non-medical services to the
Company in return for compensation pursuant to employment, consulting or service
contracts. The Company also enters into contracts with hospitals under which the
Company provides products and administrative services for a fee. Many of the
parties with whom the Company contracts refer or are in a position to refer
patients to the Company. The breadth of these federal laws, the paucity of court
decisions interpreting these laws, the limited nature of regulatory
interpretations and the absence of court decisions interpreting the safe harbor
regulations have resulted in ambiguous and varying interpretations of these
federal laws and regulations. The OIG or the United States Department of Justice
(the "DOJ") could seek a determination that the Company's past or current
policies and practices regarding contracts and relationships with healthcare
providers violate federal law. In such event, no assurance can be given that the
Company's interpretation of these laws will prevail, except with respect to
those matters that were the subject of the OIG investigation. See "-- Legal
Proceedings". The failure of the Company's interpretation of these laws to
prevail could materially adversely affect the operating results and financial
condition of the Company.

     Caremark agreed, in its settlement agreement with the OIG and DOJ prior to
the Caremark Acquisition, to continue to enforce certain compliance-related
oversight procedures. Should the oversight procedures reveal violations of
federal law, Caremark would be required to report such violations to the OIG and
DOJ. Caremark is therefore subject to increased regulatory scrutiny and, in the
event that Caremark commits legal or regulatory violations, it may be subject to
an increased risk of sanctions or penalties, including disqualification as a
provider of Medicare or Medicaid services which could have a material adverse
effect on the operating results and financial condition of the Company.

     State Referral Payment Laws.  The Company is also subject to state statutes
and regulations that prohibit payments for referral of patients and referrals by
physicians to healthcare providers with whom the physicians have a financial
relationship. State statutes and regulations generally apply to services
reimbursed by both governmental and private payors. Violations of these laws may
result in prohibition of payment for services rendered, loss of pharmacy or
health provider licenses as well as fines and criminal penalties. State statutes
and regulations that may affect the referral of patients to healthcare providers
range from statutes and regulations that are substantially the same as the
federal laws and the safe harbor regulations to a simple requirement that
physicians or other healthcare professionals disclose to patients any financial
relationship the physicians or healthcare professionals have with a healthcare
provider that is being recommended to the patients. These laws and regulations
vary significantly from state to state, are often vague, and, in many cases,
have not been interpreted by courts or regulatory agencies. The Company is not
materially dependent upon revenues derived from any single state. Adverse
judicial or administrative interpretations of such laws in several states, taken
together, could, however, have a material adverse effect on the operating
results and financial condition of the Company. In addition, expansion of the
Company's operations to new jurisdictions

                                       10
<PAGE>   13

could require structural and organizational modifications of the Company's
relationships with physician groups in order to comply with new or revised state
statutes. Such structural and organizational modifications could have a material
adverse effect on the operating results and financial condition of the Company.

     Corporate Practice of Medicine Laws.  The laws of many states prohibit
physicians from splitting fees with non-physicians and prohibit non-physician
entities from practicing medicine. These laws and their interpretations vary
from state to state and are enforced by the courts and by regulatory authorities
with broad discretion. As stated in Note 1 to the consolidated financial
statements, the Company believes that it has perpetual and unilateral control
over the assets and operations of the various affiliated professional
corporations. However, there can be no assurance that regulatory authorities
will not take the position that such control conflicts with state laws regarding
the practice of medicine or other federal restrictions. Although the Company
believes its operations as currently conducted are in material compliance with
existing applicable laws, there can be no assurance that the existing
organization of the Company and its contractual arrangements with affiliated
physicians will not be successfully challenged as constituting the unlicensed
practice of medicine or that the enforceability of the provisions of such
arrangements, including non-competition agreements, will not be limited. There
can be no assurance that review of the business of the Company and its
affiliates by courts or regulatory authorities will not result in a
determination that could adversely affect their operations or that the
healthcare regulatory environment will not change so as to restrict existing
operations or expansion thereof. In the event of action by any regulatory
authority limiting or prohibiting the Company or any affiliate from carrying on
its business or from expanding the operations of the Company and its affiliates
to certain jurisdictions, structural and organizational modifications of the
Company may be required, which could have a material adverse effect on the
operating results and financial condition of the Company.

     Antitrust Laws.  In connection with the corporate practice of medicine laws
referred to above, the physician practices with which the Company is affiliated
necessarily are organized as separate legal entities. As such, the physician
practice entities may be deemed to be persons separate both from the Company and
from each other under the antitrust laws and, accordingly, subject to a wide
range of laws that prohibit anticompetitive conduct among separate legal
entities. The Company believes it is in compliance with these laws and intends
to comply with any state and federal laws that may affect its development of
integrated healthcare delivery networks. There can be no assurance, however,
that a review of the Company's business by courts or regulatory authorities
would not adversely affect the operations of the Company and its affiliated
physician groups.

     Insurance Laws.  The assumption of risk on a prepaid basis by health
provider networks is occurring with increasing frequency, and the practice is
being reviewed by various state insurance commissioners as well as the National
Association of Insurance Commissioners to determine whether the practice
constitutes the business of insurance. The Company believes that it is currently
in material compliance with the insurance laws in the states where it is
operating, and it intends to comply with interpretative and legislative changes
as they may develop. There can be no assurance, however, that the Company's
activities will not be challenged or scrutinized by governmental authorities.

     Other State and Local Regulation.  On March 5, 1996, the DOC issued the
Restricted License to Pioneer Network in accordance with the requirements of the
Knox-Keene Act. The Restricted License authorizes Pioneer Network to operate as
a healthcare service plan in the State of California. The Company, through
Pioneer Network, utilizes the Restricted License to contract with HMOs for a
broad range of healthcare services, including both institutional and
professional medical services. The Knox-Keene Act and the regulations
promulgated thereunder subject entities that are licensed as healthcare service
plans in California to substantial regulation by the DOC. In addition, licensees
under the Knox-Keene Act must file periodic financial data and other information
(that generally become available to the public), maintain substantial tangible
net equity on their balance sheets and maintain adequate levels of medical,
financial and operational personnel dedicated to fulfilling the licensee's
statutory and regulatory requirements. The DOC is empowered to take enforcement
actions against licensees that fail to comply with such requirements.

                                       11
<PAGE>   14

     The operation of Pioneer Hospital, USFMC and Friendly Hills is highly
regulated, and each is accredited by the Joint Commission on Accreditation of
Healthcare Organizations. Accreditation from the Joint Commission on
Accreditation of Healthcare Organizations allows Pioneer Hospital to serve
Medicare patients and provides authorization from the California Department of
Health Services and the Los Angeles County Department of Health to operate as a
licensed hospital facility. Each of Pioneer Hospital, USFMC and Friendly Hills
is licensed and regulated as a general acute care hospital by the State of
California Department of Health Services. Additionally, each of Pioneer
Hospital, USFMC and Friendly Hills has a clinical laboratory license from the
State of California Department of Health Services, a clinical laboratory license
for its cardio-pulmonary laboratory and a pharmacy license for its inpatient
pharmacy.

     Pharmacy Licensing and Operation.  The Company is subject to federal and
state laws and regulations governing pharmacies. Federal controlled substance
laws require the Company to register its pharmacies with the United States Drug
Enforcement Administration and comply with security, record-keeping, inventory
control and labeling standards in order to dispense controlled substances. State
controlled substance laws require registration and compliance with the
licensing, registration or permit standards of the state pharmacy licensing
authority. State pharmacy licensing, registration and permit laws impose
standards on the qualifications of an applicant's personnel, the adequacy of its
prescription fulfillment and inventory control practices and the adequacy of its
facilities. In general, pharmacy licenses are renewed annually. Pharmacists
employed by each branch must also satisfy state licensing requirements.

     Several states have enacted legislation that requires mail service
pharmacies located outside such state to register with the state board of
pharmacy prior to mailing drugs into the state and to meet certain operating and
disclosure requirements. These statutes generally permit a mail service pharmacy
to operate in accordance with the laws of the state in which it is located. In
addition, various pharmacy associations and state boards of pharmacy have
promoted enactment of laws and regulations directed at restricting or
prohibiting the operation of out-of-state mail service pharmacies by, among
other things, requiring compliance with all laws of certain states into which
the mail service pharmacy dispenses medications whether or not those laws
conflict with the laws of the state in which the pharmacy is located. To the
extent that such laws or regulations are found to be applicable to the Company's
operations, the Company would be required to comply with them. Some states have
enacted laws and regulations which, if successfully enforced, would effectively
limit some of the financial incentives available to plan sponsors that offer
mail service prescription programs. The United States Department of Labor has
commented that such laws and regulations are pre-empted by the Employee
Retirement Income Security Act of 1974, as amended. The Attorney General in one
state has reached a similar conclusion and has raised additional constitutional
issues. Finally, the Bureau of Competition of the Federal Trade Commission
("FTC") has concluded that such laws and regulations may be anticompetitive and
not in the best interests of consumers. To date, there have been no formal
administrative or judicial efforts to enforce any of such laws against the
Company. To the extent that any of the foregoing laws or regulations prohibit or
restrict the operation of mail service pharmacies and are found to be applicable
to the Company, they could have an adverse effect on the Company's prescription
mail service operations. United States Postal Service regulations expressly
permit the transmission of prescription drugs through the postal system. The
United States Postal Service has authority to restrict such transmission.

     The PBM and disease management services of the Company are subject to state
and federal statutes and regulations governing the operation of pharmacies,
repackaging of drug products, dispensing of controlled substances, reimbursement
under federal and state medical assistance programs, financial relationships
between healthcare providers and potential referral sources, medical waste
disposal, risk sharing by non-insurance companies and workplace health and
safety. The Company's operations may also be affected by changes in ethical
guidelines and changes in operating standards of professional and trade
associations and private accreditation commissions such as the American Medical
Association, the National Committee for Quality Assurance and the Joint
Commission on Accreditation of Healthcare Organizations.

     Future Legislation and Regulation.  As a result of the continued escalation
of healthcare costs and the inability of many individuals to obtain health
insurance, numerous proposals have been or may be introduced in the United
States Congress and state legislatures relating to healthcare reform. There can
be no assurance

                                       12
<PAGE>   15

as to the ultimate content, timing or effect of any healthcare reform
legislation, nor is it possible at this time to estimate the impact of potential
legislation, which may be material, on the Company.

EMPLOYEES

     As of December 31, 1996, the Company, including its affiliated professional
entities, employed approximately 20,400 people on a full-time equivalent basis.

CORPORATE LIABILITY AND INSURANCE

     The Company's business entails an inherent risk of claims of physician
professional liability. In recent years participants in the healthcare industry
have become increasingly subject to large claims based on theories of medical
malpractice that entail substantial defense costs. Through the ownership and
operation of Pioneer Hospital, USFMC and Friendly Hills, all acute care
hospitals, the Company could also be subject to allegations of negligence and
wrongful acts. To protect its overall operations from such potential
liabilities, the Company has a multi-tiered corporate structure and preserves
the operational integrity of each of its operating subsidiaries. In addition,
the Company maintains professional liability insurance, general liability and
other customary insurance on a claims-made and modified occurrence basis, in
amounts deemed appropriate by management based upon historical claims and the
nature and risks of the business, for many of the affiliated physicians,
practices and operations. This insurance includes "tail" coverage for claims
against the Company's affiliated medical organizations, including those acquired
from Caremark, to cover incidents which were or are incurred but not reported
during the periods for which the related risk was covered by "claims made"
insurance. 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.

     Moreover, the Company requires each physician group with which it
affiliates to obtain and maintain professional liability insurance coverage.
Such insurance would provide coverage, subject to policy limits, in the event
the Company were held liable as a co-defendant in a lawsuit for professional
malpractice against a physician. In addition, generally, the Company is
indemnified under the practice management agreements by the affiliated physician
groups for liabilities resulting from the performance of medical services.
However, there can be no assurance that any future claim or claims will not
exceed the limits of these available insurance coverages or that indemnification
will be available for all such claims.

ITEM 2.  PROPERTIES.

     The Company's corporate headquarters is located at 3000 Galleria Tower in
Birmingham, Alabama. Additionally, the Company has corporate offices in Long
Beach, California, Knoxville, Tennessee and Northbrook, Illinois. The Company
currently owns or leases facilities providing medical services in 26 states,
Puerto Rico and six countries. The Company also leases, subleases or occupies,
pursuant to certain acquisition agreements, the clinic facilities of the
affiliated physician groups. The Company anticipates that as the affiliated
practices continue to grow and add new services, expanded corporate facilities
will be required.

ITEM 3.  LEGAL PROCEEDINGS.

     The Company is named as a defendant in various legal actions arising
primarily out of services rendered by physicians and others employed by its
affiliated physician entities and Pioneer Hospital, USFMC and Friendly Hills, as
well as personal injury and employment disputes. In addition, certain of its
affiliated medical groups are named as defendants in numerous actions alleging
medical negligence on the part of their physicians. In certain of these actions,
the Company's and the medical group's insurance carrier has either declined to
provide coverage or has provided a defense subject to a reservation of rights.
Management does not view any of these actions as likely to result in an
uninsured award which would have a material adverse effect on the operating
results and financial condition of the Company.

     In May 1996, two stockholders of Caremark, each purporting to represent a
class, filed complaints against Caremark and each of its directors in the Court
of Chancery of the State of Delaware alleging breaches of the directors'
fiduciary duty in connection with Caremark's then proposed merger with the
Company. The complaints seek unspecified damages, injunctive relief, and
attorneys' fees and expenses. The plaintiffs have not pursued these actions in
any manner since the consummation of the Caremark Acquisition, but if they do,

                                       13
<PAGE>   16

the Company intends to defend these cases vigorously. Although the ultimate
outcome of such litigation cannot be predicted, the Company does not believe
such litigation, if adversely determined, would have a material adverse effect
on the operating results and financial condition of the Company.

     In May 1996, three home infusion companies, purporting to represent a class
consisting of all of Caremark's competitors in the alternate site infusion
therapy industry, filed a complaint against Caremark, a subsidiary of Caremark,
and two other corporations in the United States District Court for the District
of Hawaii alleging violations of the federal conspiracy laws, the antitrust laws
and of California's unfair business practices statute. The complaint seeks
unspecified treble damages and attorneys' fees and expenses. The Company intends
to defend this case vigorously. Although management believes, based on
information currently available, that the ultimate resolution of this matter is
not likely to have a material adverse effect on the operating results and
financial condition of the Company, there can be no assurance that the ultimate
resolution of this matter, if adversely determined, would not have a material
adverse effect on the operating results and financial condition of the Company.

     In June 1995, Caremark agreed to settle an investigation with the DOJ, OIG,
the Veterans Administration, the Federal Employee Health Benefits Program
("FEHBA"), the Civilian Health and Medical Program of the Uniformed Services
("CHAMPUS") and related state investigative agencies in all 50 states and the
District of Columbia (the "OIG Settlement"). Under the terms of the OIG
Settlement, which covered allegations dating back to 1986, a subsidiary of
Caremark pled guilty to two counts of mail fraud -- one each in Minnesota and
Ohio. The basis of these guilty pleas was Caremark's failure to provide certain
information to CHAMPUS and FEHBP, federally funded healthcare benefit programs,
concerning financial relationships between Caremark and a physician in each of
Minnesota and Ohio. The OIG Settlement allows Caremark to continue participating
in Medicare, Medicaid and other government healthcare programs. Under the OIG
Settlement, Caremark agreed to make civil payments of $85.3 million to the
federal government in installments and $44.6 million to the states. The plea
agreement imposed $29.0 million in federal criminal fines. In addition, Caremark
contributed $2.0 million to a grant program set up under the Ryan White
Comprehensive AIDS Resources Emergency (CARE) Act. Caremark took an after-tax
charge of $154.8 million in 1995 for these settlement payments, costs to defend
ongoing derivative, security and other lawsuits, and other related costs. This
charge has been reflected in Caremark's discontinued operations and will not
materially affect the Company's ability to pursue its long-term business
strategy. There can be no assurance, however, that the ultimate costs related to
the OIG Settlement will not exceed these estimates or that additional costs,
claims and damages will not occur, or if they occur, will not have a material
adverse effect on the operating results and financial condition of the Company.

     In March 1996, Caremark agreed to settle all disputes with a number of
private payors. These disputes relate to businesses that were covered by the OIG
Settlement. The settlements resulted in an after-tax charge of approximately
$42.3 million. In addition, the Company paid $23.3 million after tax to cover
the private payors' pre-settlement and settlement-related expenses. An after-tax
charge for the above amounts was recorded in first quarter 1996 discontinued
operations.

     In its agreement with the OIG and DOJ, Caremark agreed to continue to
maintain certain compliance-related oversight procedures. Should these oversight
procedures reveal credible evidence of legal or regulatory violations, Caremark
is required to report such violations to the OIG and DOJ. Caremark is,
therefore, subject to increased regulatory scrutiny and, in the event it commits
legal or regulatory violations, Caremark may be subject to an increased risk of
sanctions or penalties, including disqualification as a provider of Medicare or
Medicaid services, which would have a material adverse effect on the operating
results and financial condition of the Company.

     In connection with the matters described above relating to the OIG
Settlement, Caremark is a party to various non-governmental claims and may in
the future become subject to additional OIG-related claims. Caremark is a party
to, or the subject of, and may be subjected to in the future, various private
suits and claims (including stockholder derivative actions and an alleged class
action suit) being asserted in connection with matters relating to the OIG
Settlement by Caremark's stockholders, patients who received healthcare services
from Caremark and such patients' insurers. The Company cannot determine at this
time what costs may be incurred in connection with future disposition of
non-governmental claims or litigation. Such

                                       14
<PAGE>   17

additional costs, if incurred, could have a material adverse effect on the
operating results and financial condition of the Company. See Note 13 to the
consolidated financial statements.

     In August and September 1994, stockholders of Caremark, each purporting to
represent a class, filed complaints against Caremark and certain officers and
employees of Caremark in the United States District Court for the Northern
District of Illinois, alleging violations of the Securities Act and the Exchange
Act, and fraud and negligence and various state law claims in connection with
public disclosures by Caremark regarding Caremark's business practices and the
status of the OIG investigation. The complaints seek unspecified damages,
declaratory and equitable relief, and attorneys fees and expenses. In June 1996,
the complaint filed by one group of stockholders alleging violations of the
Exchange Act only, was certified as a class. The parties to all of the
complaints continue to engage in discovery proceedings. The Company intends to
defend these cases vigorously. Although management believes, based on
information currently available, that the ultimate resolution of this matter is
not likely to have a material adverse effect on the operating results and
financial condition of the Company, there can be no assurance that the ultimate
resolution of this matter, if adversely determined, would not have a material
adverse effect on the operating results and financial condition of the Company.

     In late August 1994, certain patients of a physician who prescribed human
growth hormone distributed by Caremark and the sponsor of the health insurance
plan of one of those patients filed complaints against Caremark, employees of
Caremark and others in the United States District Court for the District of
Minnesota. Each complaint purported to be on behalf of a class and alleged
violations of the federal mail and wire fraud statutes, the federal conspiracy
statute and the state consumer fraud statute, as well as conspiracy to breach a
fiduciary duty, negligence and fraud. Each complaint sought unspecified treble
damages, and attorneys fees and expenses. In July 1996, these plaintiffs also
served a separate lawsuit in the Minnesota State Court in the County of Hennepin
against a subsidiary of Caremark purporting to be on behalf of a class and
alleging all of the claims contained in the complaint filed with the Minnesota
federal court other than the federal claims contained therein. The state
complaint seeks unspecified damages, attorneys' fees and expenses and an award
of punitive damages. In November 1996, in response to a motion by the
plaintiffs, the Court dismissed the United States District Court cases without
prejudice. In July 1995, another patient of this same physician filed a separate
complaint in the District Court of South Dakota against the physician, Caremark
and another corporation alleging violations of the federal laws prohibiting
payment of remuneration to induce referral of Medicare and Medicaid
beneficiaries, and the federal mail fraud and conspiracy statutes. The complaint
also alleges the intentional infliction of emotional distress and seeks trebling
of at least $15.9 million in general damages, attorneys fees and costs, and an
award of punitive damages. In August 1995, the parties to the case filed in
South Dakota agreed to a stay of all proceedings until final judgment has been
entered in a criminal case that is presently pending against this physician. The
Company intends to defend these cases vigorously. Although management believes,
based on information currently available, that the ultimate resolution of this
matter is not likely to have a material adverse effect on the operating results
and financial condition of the Company, there can be no assurance that the
ultimate resolution of this matter, if adversely determined, would not have a
material adverse effect on the operating results and financial condition of the
Company.

     In September 1995, Coram Healthcare Corporation ("Coram") filed a complaint
in the San Francisco Superior Court against Caremark and its subsidiary,
Caremark Inc. and 50 unnamed individual defendants. The complaint, which arises
from Caremark's sale to Coram of Caremark's home infusion therapy business in
April 1995 for approximately $209.0 million in cash and $100.0 million in
securities, alleges breach of the Asset Sale and Note Purchase Agreement, dated
January 29, 1995, as amended April 1, 1995, between Coram and Caremark, breach
of related contracts, fraud, negligent misrepresentation and a right to
contractual indemnity. Requested relief in Coram's amended complaint includes
specific performance, declaratory relief, injunctive relief, and damages of $5.2
billion. Caremark filed counterclaims against Coram in this lawsuit and also
filed a lawsuit in the U.S. District Court in Chicago claiming that Coram
committed securities fraud in its sale to Caremark of its securities in
connection with the sale of the Company's home infusion business to Coram. The
lawsuit filed in federal court in Chicago has been dismissed, and Caremark's
appeal of the dismissal was argued on May 10, 1996 and is now under submission.
The Coram lawsuit is in the final stages of discovery and a trial is scheduled
for the second quarter of 1997 in the event the IHS/Coram merger

                                       15
<PAGE>   18

described below is not consummated. In October 1996, Coram agreed to merge with
Integrated Health Services, Inc. ("IHS"). In connection with the merger
agreement, IHS and the Company have agreed to a settlement of the Coram
litigation, contingent upon consummation of the proposed merger, expected to be
completed in the second quarter of 1997. Under the settlement proposal, the
notes that are now payable by Coram to Caremark will be cancelled and replaced
with a new two-year note in the approximate principal amount of $57.5 million.
Caremark had previously established a reserve for a portion of the $100 million
in securities, and, therefore, the terms of the new note and commitments related
to the transition of this business are not expected to result in any additional
charge against earnings by the Company. The Company and IHS/Coram will enter
into long-term preferred provider agreements pursuant to which IHS/Coram will
provide services to the patients served by the Company's integrated delivery
systems on a national basis. The Company understands that the acquisition of
Coram by IHS is subject to the usual conditions found in transactions of this
type, including approval of the stockholders of both companies, and is expected
to be consummated in the second quarter of 1997. The Company has no control over
the conduct of the IHS/Coram transaction, and there can be no assurance that it
will be consummated.

     Beginning in September 1994, Caremark was named as a defendant in a series
of lawsuits added to a pending group of actions (including a class action)
brought in 1993 under the antitrust laws by local and chain retail pharmacies
against brand name pharmaceutical manufacturers, wholesalers and prescription
benefit managers other than Caremark. The lawsuits, filed in federal district
courts in at least 38 states (including the United States District Court for the
Northern District of Illinois), allege that at least 24 pharmaceutical
manufacturers provided unlawful price and service discounts to certain favored
buyers and conspired among themselves to deny similar discounts to the
complaining retail pharmacies (approximately 3,900 in number). The complaints
charge that certain defendant prescription benefit managers, including Caremark,
were favored buyers who knowingly induced or received discriminatory prices from
the manufacturers in violation of the Robinson-Patman Act. Each complaint seeks
unspecified treble damages, declaratory and equitable relief and attorneys fees
and expenses. All of these actions have been transferred by the Judicial Panel
for Multidistrict Litigation to the United States District Court for the
Northern District of Illinois for coordinated pretrial procedures. Caremark was
not named in the class action. In April 1995, the Court entered a stay of
pretrial proceedings as to certain Robinson-Patman Act claims in this
litigation, including the Robinson-Patman Act claims brought against Caremark,
pending the conclusion of a first trial of certain of such claims brought by a
limited number of plaintiffs against five defendants not including Caremark. On
July 1, 1996, the district court directed entry of a partial final order in the
class action approving an amended settlement with certain of pharmaceutical
manufacturers. The amended settlement provides for a cash payment by the
defendants in that action of approximately $351.0 million to class members in
settlement of conspiracy claims as well as a commitment from the settling
manufacturers to abide by certain injunctive provisions. All class action claims
against non-settling manufacturers as well as all opt out and other claims
generally, including all Robinson-Patman Act claims against Caremark, remain
unaffected by the settlement. The district court also certified to the court of
appeals for interlocutory review certain orders relating to non-settled
conspiracy claims against the pharmaceutical manufacturers and wholesalers.
These interlocutory orders do not relate to any of the claims brought against
Caremark. The Company intends to defend these cases vigorously. Although
management believes, based on information currently available, that the ultimate
resolution of this matter is not likely to have a material adverse effect on the
operating results and financial condition of the Company, there can be no
assurance that the ultimate resolution of this matter, if adversely determined,
would not have a material adverse effect on the operating results and financial
condition of the Company.

     In December 1994, Caremark was notified by the FTC that it was conducting a
civil investigation of the industry concerning whether acquisitions, alliances,
agreements or activities between prescription benefit managers and
pharmaceutical manufacturers, including Caremark's alliance agreements with
certain drug manufacturers, violate Sections 3 or 7 of the Clayton Act or
Section 5 of the Federal Trade Commission Act. The specific nature, scope,
timing and outcome of the investigation are not currently determinable. Under
the statutes, if violations are found, the FTC could seek remedies in the form
of injunctive relief to set aside or modify Caremark's alliance agreements and
an order to cease and desist from certain marketing practices and from entering
into or continuing with certain types of agreements. The Company intends to
defend these cases vigorously. Although management believes, based on
information currently available, that the ultimate

                                       16
<PAGE>   19

resolution of this matter is not likely to have a material adverse effect on the
operating results and financial condition of the Company, there can be no
assurance that the ultimate resolution of this matter, if adversely determined,
would not have a material adverse effect on the operating results and financial
condition of the Company.

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

     The stockholders of the Company approved the Amendment to the Second
Amended and Restated Certificate of Incorporation at a special meeting of the
stockholders on December 12, 1996, as follows:

<TABLE>
<CAPTION>
  NUMBER
  VOTING          FOR        AGAINST     ABSTENTIONS
-----------   -----------   ----------   -----------
<C>           <C>           <C>          <C>
132,625,497   119,394,453   12,247,656     983,388
</TABLE>

     Broker non-votes were not counted for the purpose of determining whether
the proposal had been approved by the stockholders.

                                    PART II

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

     Prior to February 21, 1995, the effective date of the Company's initial
public offering, there was no public market for the Company's Common Stock. The
Common Stock traded on the Nasdaq National Market under the symbol "MPTR" from
February 21, 1995 until February 21, 1996. On February 22, 1996, the Common
Stock was listed on the NYSE under the symbol "MDM".

     The following table sets forth for the quarterly periods indicated the high
and low reported bid prices for the Company's Common Stock through February 21,
1996, as reported on the Nasdaq National Market. After February 21, 1996, the
table sets forth the high and low last sale price as reported on the NYSE
Composite Tape.

<TABLE>
<CAPTION>
                                                               HIGH     LOW
                                                              ------   ------
<S>                                                           <C>      <C>
1995
First Quarter (from February 21)............................  $24.00   $14.75
Second Quarter..............................................   24.50    17.75
Third Quarter...............................................   30.00    18.00
Fourth Quarter..............................................   33.00    26.00
1996
First Quarter...............................................  $34.75   $28.50
Second Quarter..............................................   30.25    20.13
Third Quarter...............................................   23.13    16.63
Fourth Quarter..............................................   24.50    19.88
1997
First Quarter (through March 24)............................  $24.63   $18.63
</TABLE>

     There were approximately 43,644 holders of record of the Company's Common
Stock as of March 20, 1997.

UNREGISTERED SALES OF SECURITIES

     The following table indicates all unregistered sales of the Company's
Common Stock during the last three years:

<TABLE>
<CAPTION>
                                                                                                 MARKET
TRANSACTION                                         PURPOSE                  DATE                 VALUE
-----------                                 -----------------------   -------------------   -----------------
<S>                                         <C>                       <C>                   <C>
Retina & Vitreous Associates of Alabama,    Asset Acquisition         December 29, 1995     $   28,382,244.00
  P.C.
The Atlanta Allergy Clinic, P.A.            Asset Acquisition         March 29, 1996            12,656,593.50
Eaton Medical Group                         Asset Acquisition         March 31, 1996             2,364,189.00
Cardiovascular Specialists Clark & Martin   Asset Acquisition         March 29, 1996             1,999,959.00
East Bay Fertility OB-GYN Medical Group,    Asset Acquisition         May 31, 1996               2,736,622.00
  Inc.
Emergency Physician Associates, P.A.        Acquisition               June 25, 1996             25,891,871.25
Global Care, Inc. (Bethany Medical)         Acquisition               June 28, 1996              1,599,713.88
Brevard OB/GYN Specialists, P.A.            Asset Acquisition         June 28, 1996              1,791,638.63
Southwest Healthcare Network, Inc.          Acquisition               July 13, 1996              3,624,478.00
</TABLE>

                                       17
<PAGE>   20

<TABLE>
<S>                                               <C>                       <C>                   <C>
Cleveland Ear, Nose, Throat and Facial Surgery    Asset Acquisition         July 30, 1996         $    3,347,263.75
  Group, Inc.
East Metro OB/GYN Specialists, Inc.               Asset Acquisition         July 1, 1996                 877,200.00
Orthopedic Management Associates, Inc.            Acquisition               June 1, 1996                 455,151.75
The Emergency Associates for Medicine, Inc.       Acquisition               July 31, 1996              3,076,593.75
Mount Vernon Orthopedic Associates, Ltd.          Management                July 31, 1996              4,687,500.00
                                                  Conversion
Bay Area Primary Care                             Earn-out/Asset            August 21, 1996            1,212,985.75
                                                  Acquisition
Georgia Urology Management Associates, Inc.       Acquisition               August 16, 1996            3,670,115.75
CHS Management, Inc.                              Acquisition               August 30, 1996           41,240,583.50
New Management                                    Asset Acquisition         August 30, 1996            7,217,036.75
Woman's Healthcare Associates, P.C.               Asset Acquisition         September 13, 1996         3,087,370.00
Mount Vernon Orthopedic Associates, Ltd.          Management                July 31, 1996                163,117.50
                                                  Conversion
Doctors Medical Associates, Pinole, Inc.          Asset Acquisition         September 18, 1996           236,606.50
Atlanta Plastic Surgery, P.A.                     Asset Acquisition         October 1, 1996            7,924,493.20
Quinn Wollowick Purita Schosheim Krebsbach &      Acquisition               September 27, 1996           874,818.75
  Stewart, Inc.
Emergency Professional Services, Inc.             Acquisition               September 20, 1996           48,226,907
OB-GYN Specialists of the Palm Beaches, Inc.      Acquisition of Minority   September 30, 1996         6,976,742.50
                                                  Interest
Gary L. Groves                                    Settlement                October 1, 1996              765,956.25
TBMSZ, Inc.                                       Acquisition               September 30, 1996         1,404,585.00
NeuroMedical Management, Inc.                     Acquisition               September 30, 1996         3,160,521.00
Southeastern Fertility Institute, et al           Management                October 1, 1996            1,608,719.50
                                                  Conversion
Michael Tucker, MD                                Employee Stock Agreement  October 1, 1996               97,499.50
Martinex, Sadowsky, Zuniga, Tuchman and Brown,    Management                September 30, 1996         1,287,604.50
  MDS, PA                                         Conversion
Roberts Medical Group                             Earn-out/Asset            September 1, 1996            454,030.75
                                                  Acquisition
Cardinal Healthcare, P.A.                         Acquisition               November 21, 1996         44,134,544.25
Drs. Sheer, Ahearn and Associates, P.A.           Acquisition               December 2, 1996          51,366,283.25
Northwest Diagnostic Clinic, P.A.                 Asset Acquisition         December 31, 1996          2,620,517.50
Aldine Women's Clinic, P.A.                       Asset Acquisition         December 31, 1996            450,257.25
L. Stayton Halberdier, Jr., M.D., P.A.            Asset Acquisition         December 31, 1996            450,254.25
Alan G. Moore, M.D., P.A.                         Asset Acquisition         December 31, 1996            540,309.25
Jeffrey C. Lambert, M.D., P.A.                    Asset Acquisition         December 31, 1996            225,110.75
Georgia Urology, P.A.                             Management                December 1, 1996           5,594,247.75
                                                  Conversion
SOUTHVIEW Medical Group, P.C.                     Acquisition               December 31, 1996          7,642,930.50
Hirsch, Strassberg, Kenward & Vizoso, M.D.s,      Acquisition of Minority   January 8, 1997              794,920.00
  Inc.                                            Interest
Summit Medical Group, P.A.                        Acquisition               January 31, 1997          41,843,483.75
North Carolina Medical Associates, P.A.           Management                December 31, 1996          1,725,756.75
                                                  Conversion
Chase Dennis Medical Group, Inc.                  Asset Acquisition         January 31, 1997          16,174,508.00
</TABLE>

     None of these sales was underwritten, and all of the shares issued were
taken for investment by the entity or individual to whom they were issued. The
Company believes all of the securities issued were exempt from registration
under Section 4(2) of the Securities Act.

                                       18
<PAGE>   21

ITEM 6.  SELECTED FINANCIAL DATA.

     The following tables set forth selected financial data for the Company
derived from the Company's consolidated financial statements. The selected
financial data should be read in conjunction with the consolidated financial
statements and the related notes thereto.

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                       --------------------------------------------------------------
                                          1992         1993         1994         1995         1996
                                       ----------   ----------   ----------   ----------   ----------
                                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                    <C>          <C>          <C>          <C>          <C>
STATEMENTS OF OPERATIONS DATA:
Net revenue..........................  $1,287,526   $1,756,762   $2,638,654   $3,583,377   $4,813,499
Net income (loss) from continuing
  operations.........................  $   20,417   $   47,881   $   54,144   $   20,901   $  (89,831)
Income from continuing operations
  excluding merger costs and losses
  on investments.....................  $   44,089   $   47,881   $   54,144   $   96,181   $  133,745
Income (loss) from discontinued
  operations.........................  $    5,858   $   30,808   $   25,902   $ (136,528)  $  (68,698)
Net income (loss)....................  $   26,275   $   78,689   $   80,046   $ (115,627)  $ (158,529)
Income per share from continuing
  operations excluding merger costs
  and losses on investments..........  $     0.45   $     0.40   $     0.41   $     0.69   $     0.86
Income (loss) per share from
  continuing operations(1)...........  $     0.21   $     0.40   $     0.41   $     0.15   $    (0.58)
Income (loss) per share from
  discontinued operations(1).........  $     0.06   $     0.26   $     0.20   $    (0.97)  $    (0.44)
Net income (loss) per share(1).......  $     0.27   $     0.66   $     0.61   $    (0.82)  $    (1.02)
Number of shares used in net (loss)
  per share..........................      98,798      119,380      131,783      140,364      155,364
</TABLE>

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                       --------------------------------------------------------------
                                          1992         1993         1994         1995         1996
                                       ----------   ----------   ----------   ----------   ----------
                                                               (IN THOUSANDS)
<S>                                    <C>          <C>          <C>          <C>          <C>
BALANCE SHEET DATA:
Cash and cash equivalents............  $   22,312   $   43,367   $   99,679   $   86,276   $  123,779
Working capital......................     139,642      240,023      150,977      234,630      170,313
Total assets.........................     777,632    1,049,258    1,585,643    1,840,914    2,265,969
Long-term debt, less current
  portion............................      80,378      164,040      385,258      531,774      715,657
Total stockholders' equity...........     381,481      481,177      612,781      592,074      739,497
</TABLE>

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

(1) Net income (loss) per share is computed by dividing net income (loss) by the
    number of common equivalent shares outstanding during the periods presented
    in accordance with the applicable rules of the Commission. All stock options
    issued have been considered as outstanding common equivalent shares for all
    periods presented, even if anti-dilutive, under the treasury stock method.
    Shares of MedPartners Common Stock issued in February 1995 upon conversion
    of the then outstanding convertible preferred stock are assumed to be common
    equivalent shares for all periods presented.

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

     The purpose of the following discussion is to facilitate the understanding
and assessment of significant changes and trends related to the results of
operations and financial condition of the Company, including changes arising
from recent acquisitions by the Company, the timing and nature of which have
significantly affected the Company's results of operations. This discussion
should be read in conjunction with the consolidated financial statements and the
notes thereto.

                                       19
<PAGE>   22

GENERAL

     In February and September of 1996, the Company combined with PPSI and
Caremark, respectively. These business combinations were accounted for as
poolings of interests. The financial information referred to in this discussion
reflects the combined operations of these entities and several additional
immaterial entities accounted for as poolings of interests.

     MedPartners is the largest PPM company in the United States. The Company
develops, consolidates and manages integrated healthcare delivery systems.
Through its network of affiliated group and IPA physicians, the Company provides
primary and specialty healthcare services to prepaid enrollees and
fee-for-service patients in the United States. The Company also operates
independent PBM programs and furnishes disease management services and therapies
for patients with certain chronic conditions.

     The Company affiliates with physicians who are seeking the resources
necessary to function effectively in healthcare markets that are evolving from
fee-for-service to prepaid payor systems. The Company enhances clinic operations
by centralizing administrative functions and introducing management tools such
as clinical guidelines, utilization review and outcomes measurement. The Company
provides affiliated physicians with access to capital and advanced management
information systems. MedPartners' PPM revenue is derived primarily from the
contracts with HMOs that compensate MedPartners and its affiliated physicians on
a prepaid basis. In the prepaid arrangements, MedPartners typically is paid by
the HMO a fixed amount per member ("enrollee") per month ("professional
capitation") or a percentage of the premium per member per month ("percent of
premium") paid by employer groups and other purchasers of healthcare coverage to
the HMOs. In return, MedPartners is responsible for substantially all of the
medical services required by enrollees. In many instances, MedPartners and its
affiliated physicians accept financial responsibility for hospital and ancillary
healthcare services in return for payment from HMOs on a capitated or percent of
premium basis ("institutional capitation"). In exchange for these payments
(collectively, "global capitation"), MedPartners, through its affiliated
physicians, provides the majority of covered healthcare services to enrollees
and contracts with hospitals and other healthcare providers for the balance of
the covered services. These relationships provide physicians with the
opportunity to operate under a variety of payor arrangements and increase their
patient flow.

     The Company offers medical group practices and independent physicians a
range of affiliation models which are described in Note 1 of the accompanying
consolidated financial statements. These affiliations are carried out by the
acquisition of PPM entities or practice assets, either for cash or through
equity exchange, or by affiliation on a contractual basis. In all instances, the
Company enters into long-term practice management agreements with the affiliated
physicians that provide for both the management of their practices by the
Company and the clinical independence of the physicians.

     The Company also organizes and manages physicians and other healthcare
professionals engaged in the delivery of emergency, radiology and teleradiology
services, hospital-based primary care and temporary staffing and support
services to hospitals, clinics, managed care organizations and physician groups.
Under contracts with hospitals and other clients, the Company identifies and
recruits physicians and other healthcare professionals for admission to a
client's medical staff, monitors the quality of care and proper utilization of
services and coordinates the ongoing scheduling of staff physicians who provide
clinical coverage in designated areas of care.

     The Company also manages outpatient prescription drug benefit programs for
clients throughout the United States, including corporations, insurance
companies, unions, government employee groups and managed care organizations.
The Company dispenses 42,000 prescriptions daily through four mail service
pharmacies and manages patients' immediate prescription needs through a network
of national retail pharmacies. The Company is integrating its PBM program with
the PPM business by providing PBM services to the affiliated physicians, clinics
and HMOs. The Company's disease management services are intended to meet the
healthcare needs of individuals with chronic diseases or conditions. These
services include the design, development and management of comprehensive
programs that comprise drug therapies, physician support and patient education.
The Company currently provides therapies and services for individuals with such
conditions as hemophilia, growth disorders, immune deficiencies, genetic
emphysema, cystic fibrosis and multiple sclerosis.

                                       20
<PAGE>   23

RESULTS OF OPERATIONS

     Through the Company's network of affiliated group and IPA physicians,
MedPartners provides primary and specialty healthcare services to prepaid
enrollees and fee-for-service patients. The Company also provides prescription
benefit services to more than 15 million individuals in all 50 states and
provides services and therapies to patients with certain chronic conditions,
primarily hemophilia and growth disorders. The following table sets forth the
earnings summary by service area for the periods indicated:

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                     ------------------------------------
                                                        1994         1995         1996
                                                     ----------   ----------   ----------
                                                                (IN THOUSANDS)
<S>                                                  <C>          <C>          <C>
Physician Services
  Net revenue......................................  $1,053,519   $1,663,728   $2,555,642
  Operating income.................................      27,121       73,586      125,015
  Margin...........................................         2.6%         4.4%         4.9%
Pharmaceutical Services
  Net revenue......................................  $1,097,315   $1,432,250   $1,784,319
  Operating income.................................      46,236       56,022       75,788
  Margin...........................................         4.2%         3.9%         4.2%
Specialty Services
  Net revenue......................................  $  487,820   $  487,399   $  473,538
  Operating income.................................      75,139       70,762       56,006
  Margin...........................................        15.4%        14.5%        11.8%
Corporate Services
  Operating loss...................................  $  (35,212)  $  (24,668)  $  (20,881)
  Percentage of total net revenue..................        (1.3)%       (0.7)%       (0.4)%
</TABLE>

  Physician Practice Management Services

     The Company's PPM revenues have increased substantially over the past three
years primarily due to growth in prepaid enrollment, existing practice growth
and new practice affiliations. Of the total 1996 PPM revenue, $1.7 billion can
be attributed to acquisitions (accounted for as either poolings of interests or
purchase transactions) made during the year. The Company's PPM operations in the
western region of the country function in a predominantly prepaid environment.
The Company's PPM operations in the other regions of the country are in
predominantly fee-for-service environments with limited but increasing managed
care penetration. The following table sets forth the breakdown of net revenue
for the PPM services area for the periods indicated:

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                     ------------------------------------
                                                        1994         1995         1996
                                                     ----------   ----------   ----------
                                                                (IN THOUSANDS)
<S>                                                  <C>          <C>          <C>
Prepaid............................................  $  620,701   $  982,128   $1,401,837
Fee-for-Service....................................     408,832      661,974    1,139,265
Other..............................................      23,986       19,626       14,540
                                                     ----------   ----------   ----------
          Total net revenue from PPM service
            area...................................  $1,053,519   $1,663,728   $2,555,642
                                                     ==========   ==========   ==========
</TABLE>

                                       21
<PAGE>   24

     The Company's prepaid revenue reflects the number of HMO enrollees for whom
it receives monthly capitation payments. The Company receives professional
capitation to provide physician services and institutional capitation to provide
hospital care and other non-professional services. The table below reflects the
growth in enrollment for professional and global capitation:

<TABLE>
<CAPTION>
                                                                 AT DECEMBER 31,
                                                         -------------------------------
                                                          1994       1995        1996
                                                         -------   ---------   ---------
<S>                                                      <C>       <C>         <C>
Professional enrollees.................................  548,821     603,391   1,025,763
Global enrollees (professional and institutional)......  255,188     477,208     603,892
                                                         -------   ---------   ---------
          Total enrollees..............................  804,009   1,080,599   1,629,655
                                                         =======   =========   =========
</TABLE>

     During 1996, the Company consolidated the majority of its acquisitions into
its management infrastructure, eliminating substantial overhead expenses and
improving integration of medical, administrative and operational management. The
integration of various acquisitions into existing networks has allowed the
conversion of thousands of prepaid enrollees from professional capitation to
global capitation. This integration has been a significant factor in increasing
operating margins in the PPM service area from 2.6% in 1994 to 4.9% in 1996.

     The Company has developed strong relationships with many of the national
and regional managed care organizations and has demonstrated its ability to
deliver high-quality, cost-effective care. The Company is strategically
positioned to capitalize on the industry's continued evolution toward a prepaid
environment, specifically by increasing the number of prepaid enrollees and
converting existing enrollees from professional to global capitation. These
changes are expected to result in significant internal growth.

     The Company has continued to acquire high-quality groups of emergency
physicians and radiologists who believe in the value of providing increasingly
cost-effective care. The reputation and strong local presence of new and
existing hospital-based groups provide a substantial advantage in the
competition for contracts with emergency room and radiology departments. The
excellent reputation and leadership of these groups continue to provide
opportunities for new contracts.

     In addition to the increased revenues and operational efficiencies realized
through acquisition and consolidation, the Company is profiting from synergies
produced by the exchange of ideas among physicians and managers across
geographical boundaries and varied areas of specialization. The PPM service
area, for example, has established medical management committees that meet
monthly to discuss implementation of the best medical management techniques to
assist the Company's affiliated physicians in delivering the highest quality of
care at lower costs in a consistent fashion. The Company is capitalizing on the
knowledge of its Western groups, which have significant experience operating in
a prepaid environment, to transfer the best practices to other groups in markets
with increasing managed care penetration. Through interaction between physicians
and managers from various medical groups during the fourth quarter of 1996,
significant cost savings have been identified at several of the Company's larger
affiliated groups.

     The PPM service area has also created a medical advisory committee, which
is developing procedures for the identification, packaging and dissemination of
the best clinical practices within the Company's medical groups. The committee
also provides the Company's affiliated physicians a forum to discuss innovative
ways to improve the delivery of healthcare.

     The Company has also initiated integration efforts between the PPM, PBM and
disease management areas. A project is in process to integrate patient care data
from several of the Company's affiliated clinics with the PBM's healthcare
information system. Through this database, which combines medical and claims
data with the prescription information tracked by the PBM area, the Company will
have access to the industry's most complete and detailed collection of
information on successful treatment patterns. Another synergy arising from
integration is the opportunity which the existing PBM infrastructure affords to
affiliated physician groups to further expand services by providing pharmacy
services ranging from fee-for-service retail claims processing to full drug
capitation programs. The Company is also beginning to integrate the disease

                                       22
<PAGE>   25

management area's expertise in an effort to formulate and implement disease
management programs for the Company.

  Pharmacy Benefit Management Services

     Pharmaceutical Services revenues continue to exhibit sustained growth. This
growth is entirely internal and has not been supplemented by acquisitions. Key
factors contributing to this growth include high customer retention, additional
penetration of retained customers, new customer contracts and drug cost
inflation. These growth factors were partially offset in 1995 and 1996 by
selective non-renewal of certain accounts not meeting threshold profitability
levels. The preponderance of Pharmaceutical Services revenue is earned on a
fee-for-service basis through contracts covering one to three-year periods.
Revenues for selected types of services are earned based on a percentage of
savings achieved or on a per-enrollee or per-member basis; however, these
revenues are not material to total revenues.

     Operating income experienced accelerated growth in 1995 and 1996 while
margins fell slightly in 1995 to but returned to a 4.2% level in 1996. Operating
income and margins in 1996 were enhanced by reduced information systems costs
achieved through renegotiation of a contract with an outsource service vendor,
continued improvements in the acquisition costs of drugs, increased penetration
of higher margin value-oriented services and an overall 13% reduction in selling
and administrative expenses. Partially offsetting these cost reductions were
continued declines in prices to customers.

     Margins in Pharmaceutical Services are also affected by the mix between
mail and retail service revenues. Margins on mail-related service revenues
currently are higher than those on retail service revenues. Revenues in both
mail and retail services continue to grow; although, the growth rate of retail
services in 1995 and 1996 was greater than the growth rate of mail services. In
1996, retail service revenues grew to represent nearly 49% of PBM revenues. The
Company has little or no influence over certain other factors, including
demographics of the population served and plan design, which, can affect the mix
between mail and retail services. Consequently, margin percentage trends alone
are not a sufficient indication of progress. The Company's pricing and
underwriting strategies are closely linked to its working capital and asset
management strategies and focus on return on investment and overall improvements
in return on capital deployed in the business.

     The Company has recently reorganized its sales and corporate accounts
management activities into eight geographic and two additional specialty areas.
This will enable the Company to improve its account retention, client service
and growth initiatives even further as a result of increased accountability and
focus. As mentioned under Physician Practice Management Services, the Company is
pursuing a number of PPM and PBM integration opportunities.

  Specialty Services

     Specialty Services concentrates on providing high quality products and
services in the home. Domestically, these services focus on low incidence
chronic diseases. Internationally, the company has established home care
businesses in Canada, Germany, France, the Netherlands, the United Kingdom,
Puerto Rico and Japan, where it is expanding into new services in response to
transforming health care delivery systems in these countries. Revenues for
specialty services have declined 3% as a result of managed care pricing
pressures, restructuring of benefit plans by payors and reduced reimbursement
from Medicaid and other state agency payors. For the hemophilia business,
federal government programs providing special pricing to qualified organizations
who may be competitors have impacted revenues negatively. To offset these
declines, the Company is attempting to launch new products and services
including the opening of a PBM in the Netherlands in the fourth quarter of 1996
and a multiple sclerosis ("MS") therapy service in the U.S.

     In addition to pricing pressures, particularly in growth deficiency
therapy, operating expenses and cost of service expenses rose due to programs
targeted at launching the Company's new MS therapy service, an expanded payor
marketing initiative and an initiative targeted at attaining accreditation by
the Joint Committee on Accreditation of Healthcare Organizations for the
nationwide system of pharmacies.

                                       23
<PAGE>   26

  Discontinued Operations

     During 1995, Caremark divested its Caremark Orthopedic Services, Inc.
subsidiary as well as its clozaril patient management system, home infusion
business, and oncology management services business. The Company's consolidated
financial statements present the operating income and net assets of these
discontinued operations separately from continuing operations. Prior periods
have been restated to conform with this presentation. Discontinued operations
for 1995 reflect the net after-tax gain on the disposal of the clozaril patient
management system, the home infusion business and a $154.8 million after-tax
charge for the settlement discussed in Note 13 of the accompanying audited
consolidated financial statements related to the OIG investigation. Discontinued
operations for 1996 reflects a $65.6 million after-tax charge related to
settlements with private payors discussed in Note 13 of the accompanying audited
consolidated financial statements and an after-tax gain on disposition of the
nephrology services business, net of disposal costs, of $2.1 million.

  Results of Operations for the Years Ended December 31, 1996 and 1995

     For the year ended December 31, 1996, net revenue was $4,813.5 million,
compared to $3,583.4 million for 1995, an increase of 34.3%. The increase in net
revenue resulted primarily from affiliations with new physician practices and
the increase in PBM net revenue, which accounted for $339.9 million and $352.1
million of the increase in net revenue, respectively. The most significant
physician practice acquisition during this period was the CIGNA Medical Group
which was acquired in January 1996. This acquisition accounted for 92% of the
new practice revenue. The increase in PBM net revenue is attributable to
pharmaceutical price increases, the addition of new customers, further
penetration of existing customers and the sale of new products.

     Operating income for the PPM and PBM services areas increased 69.9% and
35.3%, respectively, for 1996 compared to 1995. This growth was the result of
higher net revenues in both areas and increases in operating margins resulting
from the spreading of fixed overhead expenses over a larger revenue base and
continued integration of operations in the PPM services area. Operating income
and margins declined in the corresponding periods for the specialty services
area as a result of lower volumes in the hemophilia business and continued
pricing pressures for growth hormone products.

     Included in the pre-tax loss for 1996 were merger expenses totaling $308.7
million related to the business combinations with Caremark, PPSI and several
other entities, the major components of which are listed in Note 11 of the
accompanying audited consolidated financial statements.

  Results of Operations for the Years Ended December 31, 1995 and 1994

     Net revenue for the year ended December 31, 1995 was $3,583.4 million, an
increase of $944.7 million, or 35.8%, over the year ended December 31, 1994. The
increase in net revenue resulted primarily from affiliation with new physician
practices, the increase in prepaid enrollees at existing affiliated physician
practices and the increase in PBM net revenue, which accounted for $240.1
million, $295.8 million, and $334.9 million of the increase in net revenue,
respectively. The most significant physician practice acquisition affecting this
period was the Friendly Hills Healthcare Network which was acquired in May 1995.
This acquisition accounted for 53% of the new practice revenue. The increase in
PBM net revenue resulted from increases in covered lives due to new customer
contracts and greater penetration of existing customers.

     Operating income grew 171.3% and 21.2% for 1995, compared to 1994, for the
PPM and PBM service areas, respectively. This growth is the result of higher net
revenues in both areas. The PPM service area also had a significant increase in
operating margin, 2.6% in 1994 to 4.4% in 1995, which resulted from the
leveraging of fixed overhead expenses over a substantially larger revenue base,
integration of operations and the impact of the varying margins of new physician
practice affiliations. Operating income and margins declined in the
corresponding periods for the specialty services areas as a result of pricing
pressures for growth hormone products.

                                       24
<PAGE>   27

FACTORS THAT MAY AFFECT FUTURE RESULTS

     The future operating results and financial condition of the Company are
dependent on the Company's ability to market its services profitably,
successfully increase market share and manage expense growth relative to revenue
growth. The future operating results and financial condition of the Company may
be affected by a number of additional factors, including: the Company's growth
strategy, which involves the ability to raise the capital required to support
growth, competition for expansion opportunities, integration risks and
dependence on HMO enrollee growth; efforts to control healthcare costs; exposure
to professional liability; and pharmacy licensing, healthcare reform and
government regulation. Changes in one or more of these factors could have a
material adverse effect on the future operating results and financial condition
of the Company.

     The Company completed the Caremark Acquisition in September 1996. There are
various Caremark legal matters which, if materially adversely determined, could
have a material adverse effect on the Company's operating results and financial
condition. See Note 13 to the accompanying consolidated financial statements of
the Company.

LIQUIDITY AND CAPITAL RESOURCES

     As of December 31, 1996, the Company had working capital of $170.3 million,
including cash and cash equivalents of $123.8 million. For the years ending
December 31, 1996, 1995 and 1994, cash flow from continuing operations was
$159.8 million, $152.8 million and $43.6 million, respectively.

     For the year ended December 31, 1996, the Company invested $157.4 million
in acquisitions of the assets of physician practices and $122.1 million in
property and equipment. These expenditures were funded by approximately $270.2
million derived from equity proceeds and $133.6 million in net incremental
borrowings. For the year ended December 31, 1995, the Company invested $205.1
million in acquisitions of the assets of physician practices and $124.5 million
in property and equipment. These expenditures were funded by approximately $83.4
million derived from equity proceeds and $71.2 million in net incremental
borrowings. For the year ended December 31, 1994, the Company's investing
activities totaled $248.3 million, which was composed primarily of $126.7
million related to practice acquisitions and $102.7 million related to the
purchase of property and equipment. These expenditures were funded by $128.1
million derived from equity proceeds and $232.4 million in net incremental
borrowings. Investments in acquisitions and property and equipment are
anticipated to continue to be substantial uses of funds in future periods.

     The Company entered into the $1 billion Credit Facility, which became
effective simultaneously with the closing of the Caremark acquisition, on
September 5, 1996, replacing its then existing credit facility. At the Company's
option, pricing on the Credit Facility is based on either a debt to cash flow
test or the Company's senior debt ratings. No principal is due on the facility
until its maturity date of September 2001. As of December 31, 1996, there was
$213.0 million outstanding under the facility. The Credit Facility contains
affirmative and negative covenants which include requirements that the Company
maintain certain financial ratios (including minimum net worth, minimum fixed
charge coverage ratio and maximum indebtedness to cash flow), and establishes
certain restrictions on investments, mergers and sales of assets. Additionally,
the Company is required to obtain bank consent for acquisitions with an
aggregate purchase price in excess of $75 million and for which more than half
of the consideration is to be paid in cash. The Credit Facility is unsecured but
provides a negative pledge on substantially all assets of the Company. As of
December 31, 1996, the Company was in compliance with the covenants in the
Credit Facility.

     Effective October 8, 1996, the Company completed a $450 million senior note
offering. These ten-year notes carry a coupon rate of 7 3/8%. The notes are not
redeemable by the Company prior to maturity and are not entitled to the benefit
of any mandatory sinking fund. The notes are general unsecured obligations of
the Company ranking senior in right of payment to all existing and future
subordinated indebtedness of the Company and pari passu in right of payment with
all existing and future unsubordinated and unsecured obligations of the Company.
The notes are effectively subordinated to all existing and future indebtedness
and other liabilities of the Company's subsidiaries. The notes are rated
BBB/Baa3 by Standard & Poors and Moody's Investor Services, respectively. The
Company is the only physician practice management company to earn an investment
grade debt rating. Net proceeds from the offering were used to reduce amounts
under the Credit Facility.

                                       25
<PAGE>   28

     On October 30, 1996, the Company completed its tender offer for Caremark's
$100 million 6 7/8% notes due August 15, 2003. Of the $100 million principal
amount of such notes outstanding, $99.9 million principal amount were tendered
and purchased. The total consideration for each $1,000 principal amount of
outstanding notes tendered was $1,017.72.

     The Company's growth strategy requires substantial capital for the
acquisition of PPM businesses and assets of physician practices, and for their
effective integration, operation and expansion. Affiliated physician practices
may also require capital for renovation, expansion and additional medical
equipment and technology. The Company believes that its existing cash resources,
the use of the Company's Common Stock for selected practice and other
acquisitions and available borrowings under the $1.0 billion Credit Facility or
any successor credit facility, will be sufficient to meet the Company's
anticipated acquisition, expansion and working capital needs for the next twelve
months. The Company expects from time to time to raise additional capital
through the issuance of long-term or short-term indebtedness or the issuance of
additional equity securities in private or public transactions, at such times as
management deems appropriate and the market allows in order to meet the capital
needs of the Company. There can be no assurance that acceptable financing for
future acquisitions or for the integration and expansion of existing networks
can be obtained. Any of such financings could result in increased interest and
amortization expense, decreased income to fund future expansion and dilution of
existing equity positions.

QUARTERLY RESULTS (UNAUDITED)

     The following tables set forth certain unaudited quarterly financial data
for 1995 and 1996. In the opinion of the Company's management, this unaudited
information has been prepared on the same basis as the audited information and
includes all adjustments (consisting of normal recurring items) necessary to
present fairly the information set forth therein. The operating results for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
                                                        QUARTER ENDED
                        ------------------------------------------------------------------------------
                        MARCH 31,   JUNE 30,    SEPTEMBER 30,   DECEMBER 31,   MARCH 31,     JUNE 30,
                          1995        1995          1995            1995          1996         1996
                        ---------   ---------   -------------   ------------   ----------   ----------
                                                        (IN THOUSANDS)
<S>                     <C>         <C>         <C>             <C>            <C>          <C>
Net revenue...........  $806,396    $ 887,121     $919,750       $ 970,110     $1,149,812   $1,196,226
Operating expenses....   770,599      846,889      871,279         918,908      1,099,519    1,143,107
                        --------    ---------     --------       ---------     ----------   ----------
Operating income......    35,797       40,232       48,471          51,202         50,293       53,119
Non-operating
  expenses:
  Net interest
    expense...........     6,254        2,213        5,350           3,804          6,741        4,021
  Merger expenses.....        --        1,051        3,473          62,040         34,448           --
  Losses on
    investments.......        --           --           --          86,600             --           --
  Other, net..........      (406)           5          (27)            236           (144)        (229)
                        --------    ---------     --------       ---------     ----------   ----------
Income (loss) from
  continuing
  operations before
  income taxes........    29,949       36,963       39,675        (101,478)         9,248       49,327
  Income tax expense
    (benefit).........    10,903       13,904       15,156         (55,755)         6,496       16,926
                        --------    ---------     --------       ---------     ----------   ----------
Income (loss) from
  continuing
  operations..........    19,046       23,059       24,519         (45,723)         2,752       32,401
Discontinued
  operations:
  Income (loss) from
    discontinued
    operations........    (2,605)    (144,011)      (5,791)        (15,935)       (71,221)          --
  Net gains on sales
    of discontinued
    operations........    10,895       (3,810)          --          24,729          2,523           --
                        --------    ---------     --------       ---------     ----------   ----------
Income (loss) from
  discontinued
  operations..........     8,290     (147,821)      (5,791)          8,794        (68,698)          --
                        --------    ---------     --------       ---------     ----------   ----------
      Net income
        (loss)........  $ 27,336    $(124,762)    $ 18,728       $ (36,929)    $  (65,946)  $   32,401
                        ========    =========     ========       =========     ==========   ==========

<CAPTION>
                               QUARTER ENDED
                        ----------------------------
                        SEPTEMBER 30,   DECEMBER 31,
                            1996            1996
                        -------------   ------------

<S>                     <C>             <C>
Net revenue...........   $1,199,679      $1,267,782
Operating expenses....    1,139,178       1,195,767
                         ----------      ----------
Operating income......       60,501          72,015
Non-operating
  expenses:
  Net interest
    expense...........        5,257           7,911
  Merger expenses.....      263,000          11,247
  Losses on
    investments.......           --              --
  Other, net..........          (37)         (1,159)
                         ----------      ----------
Income (loss) from
  continuing
  operations before
  income taxes........     (207,719)         54,016
  Income tax expense
    (benefit).........      (55,465)         26,746
                         ----------      ----------
Income (loss) from
  continuing
  operations..........     (152,254)         27,270
Discontinued
  operations:
  Income (loss) from
    discontinued
    operations........           --              --
  Net gains on sales
    of discontinued
    operations........           --              --
                         ----------      ----------
Income (loss) from
  discontinued
  operations..........           --              --
                         ----------      ----------
      Net income
        (loss)........   $ (152,254)     $   27,270
                         ==========      ==========
</TABLE>

                                       26
<PAGE>   29

     The Company's historical unaudited quarterly financial data have been
restated to include the results of all businesses acquired prior to December 31,
1996 that were accounted for as poolings of interests (collectively, the
"Mergers"). The Company's Quarterly Reports on Form 10-Q were filed prior to the
Mergers and thus, differ from the amounts for the quarters included herein. The
differences caused solely by the operation of the merged companies are
summarized as follows:

<TABLE>
<CAPTION>
                                                             QUARTER ENDED
                              ----------------------------------------------------------------------------
                                  MARCH 31, 1996             JUNE 30, 1996           SEPTEMBER 30, 1996
                              -----------------------   -----------------------   ------------------------
                              FORM 10-Q   AS RESTATED   FORM 10-Q   AS RESTATED   FORM 10-Q    AS RESTATED
                              ---------   -----------   ---------   -----------   ----------   -----------
                                                             (IN THOUSANDS)
<S>                           <C>         <C>           <C>         <C>           <C>          <C>
Net revenue.................  $332,549    $1,149,812    $360,398    $1,196,226    $1,182,015   $1,199,679
Income (loss) from
  continuing operations
  before income taxes.......   (21,435)        9,248      16,153        49,327      (207,168)    (207,719)
Income tax expense
  (benefit).................    (5,935)        6,496       6,129        16,926       (55,634)     (55,465)
Loss from discontinued
  operations................        --       (68,698)         --            --            --           --
Net income (loss)...........   (15,500)      (65,946)     10,024        32,401      (151,534)    (152,254)
</TABLE>

                                       27
<PAGE>   30

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     Consolidated financial statements of the Company meeting the requirements
of Regulation S-X are filed on the succeeding pages of this Item 8 of this
Annual Report on Form 10-K, as listed below:

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Ernst & Young LLP, Independent Auditors...........    29
Consolidated Balance Sheets as of December 31, 1995 and
  1996......................................................    30
Consolidated Statements of Operations for the Years Ended
  December 31, 1994, 1995 and 1996..........................    31
Consolidated Statements of Stockholders' Equity for the
  Years Ended December 31, 1994, 1995 and 1996..............    32
Consolidated Statements of Cash Flows for the Years Ended
  December 31, 1994, 1995 and 1996..........................    33
Notes to Consolidated Financial Statements..................    34
</TABLE>

     Other financial statements and schedules required under regulation S-X are
listed in Item 14(a)2 of this Annual Report on Form 10-K.

                                       28
<PAGE>   31

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Board of Directors
MedPartners, Inc.

     We have audited the accompanying consolidated balance sheets of
MedPartners, Inc. as of December 31, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

     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 opinions.

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

Birmingham, Alabama
February 3, 1997

                                       29
<PAGE>   32

                               MEDPARTNERS, INC.

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              -----------------------
                                                                 1995         1996
                                                              ----------   ----------
                                                                  (IN THOUSANDS)
<S>                                                           <C>          <C>
                           ASSETS
Current assets:
  Cash and cash equivalents.................................  $   86,276   $  123,779
  Marketable securities.....................................      35,567           --
  Accounts receivable, less allowances for bad debts of
     $80,077 in 1995 and $120,350 in 1996...................     506,226      563,519
  Inventories...............................................     122,337      150,156
  Deferred tax assets, net..................................      95,026       52,479
  Income tax receivable.....................................          --        2,496
  Prepaid expenses and other current assets.................      40,216       54,689
                                                              ----------   ----------
     Total current assets...................................     885,648      947,118
Property and equipment, net.................................     458,780      505,060
Intangible assets, net......................................     370,960      659,202
Deferred tax asset, net.....................................          --       18,333
Other assets................................................      89,226      136,256
Net assets of discontinued operations.......................      36,300           --
                                                              ----------   ----------
     Total assets...........................................  $1,840,914   $2,265,969
                                                              ==========   ==========
            LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $  280,958   $  280,060
  Other accrued expenses and liabilities....................     220,086      375,618
  Accrued medical claims payable............................      52,434       93,043
  Notes payable.............................................      81,900           --
  Current portion of long-term debt.........................      15,640       28,084
                                                              ----------   ----------
     Total current liabilities..............................     651,018      776,805
Long-term debt, net of current portion......................     531,774      715,657
Other long-term liabilities.................................      42,053       34,010
Deferred tax liabilities, net...............................      23,995           --
Contingencies (Note 13)
Stockholders' equity:
  Common stock, $.001 par value; 400,000 shares authorized,
     issued -- 146,390 in 1995 and 165,281 in 1996..........         146          165
  Additional paid-in capital................................     477,362      788,636
  Notes receivable from stockholders........................      (1,930)      (1,665)
  Unrealized loss on marketable securities, net of taxes....          (7)          --
  Unamortized deferred compensation.........................      (2,682)          --
  Shares held in trust, 9,317 in 1995 and 1996..............    (150,200)    (150,200)
  Retained earnings.........................................     269,385      102,561
                                                              ----------   ----------
     Total stockholders' equity.............................     592,074      739,497
                                                              ----------   ----------
     Total liabilities and stockholders' equity.............  $1,840,914   $2,265,969
                                                              ==========   ==========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       30
<PAGE>   33

                               MEDPARTNERS, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                          ---------------------------------------
                                                             1994          1995          1996
                                                          -----------   -----------   -----------
                                                              (IN THOUSANDS, EXCEPT PER SHARE
                                                                         AMOUNTS)
<S>                                                       <C>           <C>           <C>
Net revenue.............................................  $ 2,638,654   $ 3,583,377   $ 4,813,499
Operating expenses:
  Affiliated physician services.........................      433,758       657,826       980,429
  Outside medical expenses..............................      102,496       149,185       311,900
  Clinic expenses.......................................      433,091       705,369     1,040,629
  Non-clinic goods and services.........................    1,365,203     1,688,075     2,019,895
  General and administrative expenses...................      148,990       148,515       142,789
  Depreciation and amortization.........................       41,832        58,705        81,929
                                                          -----------   -----------   -----------
          Operating income..............................      113,284       175,702       235,928
Non-operating expenses:
  Net interest expense..................................       15,235        17,621        23,930
  Merger expenses.......................................           --        66,564       308,695
  Losses on investments.................................           --        86,600            --
  Other, net............................................         (143)         (192)       (1,569)
                                                          -----------   -----------   -----------
          Income (loss) from continuing operations
            before income taxes.........................       98,192         5,109       (95,128)
Income tax expense (benefit)............................       44,048       (15,792)       (5,297)
                                                          -----------   -----------   -----------
          Income (loss) from continuing operations......       54,144        20,901       (89,831)
Discontinued operations:
  Income (loss) from discontinued operations net of
     taxes of $18,000, $(72,100) and $(35,849) in 1994,
     1995 and 1996, respectively........................       25,902      (168,342)      (71,221)
  Net gains on sales of discontinued operations.........           --        31,814         2,523
                                                          -----------   -----------   -----------
          Income (loss) from discontinued operations....       25,902      (136,528)      (68,698)
                                                          -----------   -----------   -----------
Net income (loss).......................................  $    80,046   $  (115,627)  $  (158,529)
                                                          ===========   ===========   ===========
Earnings per common and common equivalent shares
  outstanding:
  Income (loss) from continuing operations..............  $      0.41   $      0.15   $     (0.58)
  Income (loss) from discontinued operations............         0.20         (0.97)        (0.44)
                                                          -----------   -----------   -----------
Net income (loss).......................................  $      0.61   $     (0.82)  $     (1.02)
                                                          ===========   ===========   ===========
Weighted average common and common equivalent shares
  outstanding...........................................      131,783       140,364       155,364
                                                          ===========   ===========   ===========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       31
<PAGE>   34

                               MEDPARTNERS, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                1994       1995       1996
                                                              --------   --------   --------
                                                                      (IN THOUSANDS)
<S>                                                           <C>        <C>        <C>
COMMON STOCK:
  Balance, beginning of year................................  $    111   $    119   $    146
  Beginning balance of immaterial poolings of interests
     entities...............................................        --         --          6
  Common stock issued and capital contributions.............         8          9         10
  PPSI common stock issued during the two months ended
     December 31, 1995......................................        --         --          1
  Conversion of preferred stock.............................        --          7         --
  Stock issued in connection with acquisitions..............        --          2          2
  Contributions to employee benefit trust...................        --          9         --
                                                              --------   --------   --------
  Balance, end of year......................................       119        146        165
ADDITIONAL PAID-IN-CAPITAL:
  Balance, beginning of year................................   154,350    202,611    477,362
  Beginning balance of immaterial poolings of interests
     entities...............................................        --          2        620
  PPSI common stock issued during the two months ended
     December 31, 1995......................................        --         --        588
  Common stock issued and capital contributions.............    61,852     98,812    226,190
  Capital distributions.....................................   (18,743)   (30,970)        --
  Exercise of stock options.................................       802      1,124     43,996
  Deferred compensation on issuance of options..............     4,350         --         --
  Conversion of preferred stock.............................        --     19,994         --
  Stock issued in connection with acquisitions..............        --     35,598     39,880
  Contribution to employee benefit trust....................        --    150,191         --
                                                              --------   --------   --------
  Balance, end of year......................................   202,611    477,362    788,636
NOTES RECEIVABLE FROM STOCKHOLDERS:
  Balance, beginning of year................................    (2,396)    (2,349)    (1,930)
  Net change in notes receivable from stockholders..........        47        419        265
                                                              --------   --------   --------
  Balance, end of year......................................    (2,349)    (1,930)    (1,665)
UNREALIZED GAIN (LOSS) ON MARKETABLE SECURITIES:
  Balance, beginning of year................................      (166)        14         (7)
  Unrealized gain (loss) on marketable securities, net of
     taxes..................................................       180        (21)         7
                                                              --------   --------   --------
  Balance, end of year......................................        14         (7)        --
UNAMORTIZED DEFERRED COMPENSATION:
  Balance, beginning of year................................        --     (3,552)    (2,682)
  Amortization of deferred compensation.....................       798        870      2,682
  Deferred compensation on issuance of options..............    (4,350)        --         --
                                                              --------   --------   --------
  Balance, end of year......................................    (3,552)    (2,682)        --
SHARES HELD IN TRUST:
  Balance, beginning of year................................        --         --   (150,200)
  Contribution to employee benefit trust....................        --   (150,200)        --
                                                              --------   --------   --------
  Balance, end of year......................................        --   (150,200)  (150,200)
RETAINED EARNINGS:
  Balance, beginning of year................................   324,677    396,994    269,385
  Beginning balance of immaterial poolings of interests
     entities...............................................        --       (308)      (238)
  Net income (loss).........................................    80,046   (115,627)  (158,529)
  Dividends and distributions paid..........................   (10,008)   (11,674)        --
  Pro forma tax provision of pooled entities................     2,279         --         --
  Net loss for two months ended December 31, 1995 for
     PPSI...................................................        --         --     (8,057)
                                                              --------   --------   --------
  Balance, end of year......................................   396,994    269,385    102,561
                                                              --------   --------   --------
          Total stockholders' equity........................  $593,837   $592,074   $739,497
                                                              ========   ========   ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       32
<PAGE>   35

                               MEDPARTNERS, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                              ----------------------------------
                                                                 1994        1995        1996
                                                              ----------   ---------   ---------
                                                                        (IN THOUSANDS)
<S>                                                           <C>          <C>         <C>
CASH FLOWS FROM CONTINUING OPERATIONS:
Income (loss) from continuing operations....................  $   54,144   $  20,901   $ (89,831)
Adjustments for non-cash items:
  Depreciation and amortization.............................      41,832      58,705      81,929
  Provision (benefit) for deferred taxes....................      12,451     (69,273)    (37,350)
  Merger expenses...........................................          --      66,564     308,695
  Loss on sale of investments...............................          --      86,600          --
  Other.....................................................       6,755       1,683          94
Changes in operating assets and liabilities, net of effects
  of acquisitions...........................................     (71,622)    (12,384)   (103,704)
                                                              ----------   ---------   ---------
     Net cash and cash equivalents provided by continuing
       operations...........................................      43,560     152,796     159,833
Investing activities:
  Cash paid for merger expense..............................          --     (53,600)   (143,285)
  Net cash used to fund acquisitions........................    (126,697)   (205,051)   (157,396)
  Additions to intangibles..................................          --      (7,235)    (19,515)
  Purchase of property and equipment........................    (102,702)   (124,455)   (122,127)
  (Purchases) proceeds of marketable securities.............     (17,560)      1,636      27,558
  Other.....................................................      (1,305)        546          74
                                                              ----------   ---------   ---------
     Net cash and cash equivalents used in investing
       activities...........................................    (248,264)   (388,159)   (414,691)
Financing activities:
  Common stock issued and capital contributions.............     128,109      83,407     270,198
  Capital distributions.....................................     (21,045)    (37,771)         --
  Proceeds from debt........................................     267,563     156,728   1,781,498
  Repayment of debt.........................................     (35,188)    (85,546)  (1,647,866)
  Dividends and distributions paid..........................      (7,453)     (9,355)         --
  Other.....................................................          68          (3)        266
                                                              ----------   ---------   ---------
     Net cash and cash equivalents provided by financing
       activities...........................................     332,054     107,460     404,096
Cash flow from discontinued operations, net of divestiture
  proceeds..................................................    (180,000)    114,500    (115,835)
                                                              ----------   ---------   ---------
Net (decrease) increase in cash and cash equivalents........     (52,650)    (13,403)     33,403
Cash and cash equivalents at beginning of year..............     152,329      99,679      87,081
Beginning cash and cash equivalents of immaterial poolings
  of interests entities.....................................          --          --       3,295
                                                              ----------   ---------   ---------
Cash and cash equivalents at end of year....................  $   99,679   $  86,276   $ 123,779
                                                              ==========   =========   =========
Supplemental Disclosure of Cash Flow Information
  Cash paid during the period for:
     Interest...............................................  $   18,241   $  33,294   $  41,860
                                                              ==========   =========   =========
     Income taxes...........................................  $   28,436   $  14,820   $ (21,351)
                                                              ==========   =========   =========
</TABLE>

     Non-cash investing activities include notes and other obligations issued
for acquisitions of $1.2 and $30.8 million in 1994 and 1995, respectively, and
$123.6 million in notes and other securities received from divestitures in 1995.
Non-cash financing activities include the issuance of $45.8 and $39.9 million of
stock for acquisitions in 1995 and 1996, respectively.

          See accompanying notes to consolidated financial statements.

                                       33
<PAGE>   36

                               MEDPARTNERS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1996

1. ACCOUNTING POLICIES

  Description of Business

     MedPartners, Inc. (The "Original Predecessor") was incorporated in January
1993, and affiliated with its initial physician practice in November 1993.
Mullikin Medical Enterprises, L.P. ("MME") was formed by the merger of several
physician partnerships in 1994, and the original business was organized in 1957.
MedPartners/Mullikin, Inc. was formed as a result of the November 1995 business
combination between the Original Predecessor and MME. In February and September
of 1996, MedPartners/Mullikin, Inc. combined with Pacific Physician Services,
Inc. ("PPSI") and Caremark International Inc. ("Caremark"), respectively. These
business combinations were accounted for as poolings of interests. The combined
companies were renamed MedPartners, Inc. (herein referred to as the "Company" or
"MedPartners") in conjunction with the business combination with Caremark. The
financial information referred to in this discussion reflects the combined
operations of these entities and several additional immaterial entities
accounted for as poolings of interests.

     MedPartners is the largest physician practice management ("PPM") company in
the United States. The Company develops, consolidates and manages integrated
healthcare delivery systems. Through its network of affiliated group and
independent practice association ("IPA") physicians, the Company provides
primary and specialty healthcare services to prepaid enrollees and
fee-for-service patients. The Company also operates one of the largest
independent prescription benefit management ("PBM") programs in the United
States and provides disease management services and therapies for patients with
certain chronic conditions.

     The Company affiliates with physicians who are seeking the resources
necessary to function effectively in healthcare markets that are evolving from
fee-for-service to prepaid payor systems. The Company enhances clinic operations
by centralizing administrative functions and introducing management tools, such
as clinical guidelines, utilization review and outcome measurement. The Company
provides affiliated physicians with access to capital and advanced management
information systems. In addition, MedPartners contracts with health maintenance
organizations and other third-party payors that compensate the Company and its
affiliated physicians on a prepaid basis (collectively "HMOs"), hospitals and
outside providers on behalf of its affiliated physicians. These relationships
provide physicians with the opportunity to operate under a variety of payor
arrangements and increase their patient flow.

     The Company offers medical group practices and independent physicians a
range of affiliation models. These affiliations are carried out by the
acquisition of PPM entities or practice assets, either for cash or through
equity exchange, or by affiliation on a contractual basis. The Company enters
into long-term practice management agreements with the affiliated physicians
that provide for the management of their practices by the Company while at the
same time providing for the clinical independence of the physicians.

     The Company also manages outpatient prescription drug benefit programs for
clients throughout the United States, including corporations, insurance
companies, unions, government employee groups and managed care organizations.
The Company dispenses national prescriptions daily through four mail service
pharmacies and manages patients' immediate prescription needs through a national
network of retail pharmacies. The Company is in the process of integrating its
PBM program with the PPM business by providing pharmaceutical services to the
affiliated physicians, clinics and HMOs. The Company's disease management
services are intended to meet the healthcare needs of individuals with chronic
diseases or conditions. These services include the design, development and
management of comprehensive programs that comprise drug therapies, physician
support and patient education. The Company currently provides therapies and
services for individuals with such conditions as hemophilia, growth disorders,
immune deficiencies, genetic emphysema, cystic fibrosis and multiple sclerosis.

                                       34
<PAGE>   37

                               MEDPARTNERS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Basis of Presentation

     The consolidated financial statements have been prepared on the accrual
basis of accounting and include the accounts of the Company and its wholly owned
subsidiaries. Through the 20 to 40-year practice management agreements between
the Company's wholly owned subsidiaries and the various professional
corporations (PCs), the Company has assumed full responsibility for the
operating expenses in return for the assignment of the revenue of the PCs. The
Company believes it has, as opposed to affiliates of the Company, perpetual,
unilateral control over the assets and operations of the various PCs, and
notwithstanding the lack of technical majority ownership of the stock of such
entities, consolidation of the various PCs is necessary to present fairly the
financial position and results of operations of the Company because there exists
a parent-subsidiary relationship by means other than record ownership of a
majority of voting stock. Control by the Company is perpetual rather than
temporary because of (i) the length of the original terms of the agreements,
(ii) the continuing investment of capital by the Company, (iii) the employment
of the majority of the nonphysician personnel, and (iv) the nature of the
services provided to the PCs by the Company. The Company's financial
relationship with each practice offers the physicians access to capital,
management expertise, sophisticated information systems, and managed care
contracts. The Company's revenue is derived from medical services provided by
physicians under the practice management agreements, which revenue has been
assigned to the Company. During 1996, approximately 55% of physician services
revenue was derived through contracts for prepaid healthcare with HMOs. The
Company contracts directly with the HMOs to provide medical services to HMO
enrollees who have chosen the Company's affiliated physicians, or, in some
cases, physicians who are members of the Company's IPAs. The Company also
contracts with hospitals to provide medical staff for various hospital
departments. The Company's profitability depends on enhancing operating
efficiency, expanding healthcare services provided, increasing market share and
assisting affiliated physicians in managing the delivery of medical care.

  Nature of Physician Compensation Arrangements

     The Company compensates PCs with which it has contracted to provide
healthcare services to the Company's clinics primarily under four basic
arrangements. In all circumstances, the Company is responsible for the billing
and collection of the revenue related to services provided at the Company's
clinics as well as for paying all expenses of the clinic including physician
compensation. The Company records all such revenue for services performed by the
physicians at the clinics. In no instance is the Company paid a fixed fee to
cover clinic operating expenses. The Company remains at risk for the expenses of
the clinics operations. In the four types of arrangements described below, the
Company is not sharing revenue with the PCs or its physician owners.

     Approximately 55% of the Company's revenues from physician practice
management during 1996 was received under capitation arrangements. Under these
arrangements, the Company contracts with licensed HMOs for a broad range of
health care services and in turn subcontracts for the delivery of health care
with hospitals, ancillary providers, and professional medical organizations,
including PCs that are affiliated with the Company through management
agreements. Pursuant to these arrangements the PC is paid on a per member per
month basis by the Company. From this amount, the PC pays liability insurance
premiums and compensates its physician owners. The PCs do not have the authority
to participate in the negotiations of contracts with HMOs.

     Under the second type of arrangement, which represents approximately 20% of
the Company's revenues from physician practice management during 1996, the
Company pays the PC for the health care services provided at MedPartners'
clinics at a negotiated fixed dollar amount. At the Company's sole discretion,
the physicians are eligible to receive a bonus based on performance criteria and
goals. The amount of the discretionary bonus is determined solely by the
Company's management and is not directly correlated to clinic revenue and gross
profit. In these arrangements, the Company is responsible for the billing and
collection of all

                                       35
<PAGE>   38

                               MEDPARTNERS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

revenues for the services provided at its clinics as well as paying all
expenses, including physician compensation.

     Under the third type of arrangement, which represents approximately 16% of
the Company's revenues from physician practice management during 1996, the PC is
compensated on a negotiated fee-for-service basis for health care services
performed at the Company's clinics. In these arrangements the Company bills and
collects for all services rendered at its clinics and pays all expenses of the
clinics, including physician compensation, which is based on the fee for service
revenue generated at the clinics (which typically represents between 40 to 70
percent of the clinic's net revenues). Again, the Company is not reimbursed for
the clinic expenses, rather it is responsible and at risk for all such expenses.

     Under the fourth type of arrangement, representing approximately 9% of the
Company's revenues from physician practice management during 1996, the PC
receives a salary plus bonus and a profit sharing payment of a percentage of
clinic earnings net of certain expenses.

     The fee retained by the Company includes direct management expenses of
operating the clinics plus additional amounts which reflect a portion or all of
the residual equity interest in the clinics after payment of physician
compensation (including discretionary bonuses, if any), other medical costs and
management expenses. Under the four basic arrangements discussed above, these
additional amounts (representing clinic earnings) retained by MedPartners take
the following forms: (1) 100% of clinic earnings (as defined above); (2) 100% of
clinic earnings; (3) 100% of clinic earnings; and (4) a variable percentage of
the clinic's earnings (as defined above).

  Use of Estimates

     The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the accompanying consolidated
financial statements and notes. Actual results could differ from those
estimates.

  Cash Equivalents

     The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The carrying amounts
of all cash and cash equivalents approximate fair value.

  Marketable Securities

     Effective August 1, 1994, the Company adopted Financial Accounting
Standards Board Statement No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," which requires that investments in equity securities
that have readily determinable fair values and investments in debt securities be
classified in three categories: held-to-maturity, trading and
available-for-sale. Based on the nature of the assets held by the Company and
management's investment strategy, the Company's investments have been classified
as available-for-sale.

     Available-for-sale securities are carried at fair value, with the
unrealized gains and losses, net of tax, reported in a separate component of
stockholders' equity unless a decline in value is judged other than temporary.
When this is the case, unrealized losses are reflected in income. The amortized
cost of debt securities in this category is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in interest income. The cost of securities sold is based on the specific
identification method.

                                       36
<PAGE>   39

                               MEDPARTNERS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Inventories

     Inventories, which are primarily finished goods, consist of pharmaceutical
drugs, medical equipment and supplies and are stated at the lower of cost
(first-in, first-out method) or market.

  Property and Equipment

     Property and equipment are stated at cost, which for the used assets being
acquired is usually determined by an independent appraisal. Depreciation of
property and equipment is calculated using either the declining balance or the
straight-line method over the shorter of the estimated useful lives of the
assets or the term of the underlying leases. Estimated useful lives range from 3
to 10 years for equipment, 10 to 20 years for leasehold improvements and 10 to
40 years for buildings and improvements based on type and condition of assets.
Routine maintenance and repairs are charged to expense as incurred, while costs
of betterments and renewals are capitalized.

     Interest costs associated with the construction of certain capital assets
are capitalized as part of the cost of those assets. Interest costs
approximating $4.3 million were capitalized in 1996. The Company also
capitalizes purchased and internally developed software costs to the extent they
are expected to benefit future operations.

  Intangible Assets

     Excess of cost over fair value of assets acquired (goodwill) is being
amortized using the straight-line method over terms of the related practice
management agreements, generally 20 to 40 years. The carrying value of goodwill
is reviewed if the facts and circumstances suggest that it may be impaired. If
this review indicates that goodwill will not be recoverable, as determined based
on the undiscounted cash flows of the entity acquired over the remaining
amortization period, the carrying value of the goodwill is reduced by the
estimated shortfall of cash flows. Costs of obtaining practice management
agreements are capitalized as incurred and are amortized using the straight-line
method. These costs include all direct costs of obtaining such agreements, which
include such items as filing fees, legal fees and travel and related development
costs. The Company has elected to amortize these costs over a period not to
exceed the term of the related practice management agreements. Other intangible
assets include costs associated with obtaining long-term financing, which are
being amortized, and included in interest expense, systematically over the terms
of the related debt agreements.

  Restatement of Financial Statements

     The Company has merged with several entities during 1996 in transactions
that were accounted for as poolings of interests. Accordingly, the financial
statements for all periods prior to the effective dates of these mergers have
been restated to include these entities (see Note 11).

  Income Taxes

     The Company is a corporation subject to federal and state income taxes.
Deferred income taxes are provided for temporary differences between financial
and income tax reporting relating primarily to net operating losses which must
be carried forward to future periods for income tax reporting purposes.

     Prior to the poolings of interests noted previously, several entities were
S Corporations and MME and related real estate entities were partnerships and
were therefore not subject to federal and state income taxes. Pro forma income
tax provisions are reflected in income tax expense in the consolidated
statements of operations for 1994 to provide for additional federal and state
income taxes which would have been incurred had these entities been taxed as C
Corporations. The pro forma income tax expense included in 1994 operations was
$2.3 million.

                                       37
<PAGE>   40

                               MEDPARTNERS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Net Revenue

     Net revenue is reported at the estimated realizable amounts from patients,
third-party payors and others for services rendered. Revenue under certain
third-party payor agreements is subject to audit and retroactive adjustments.
Provisions for estimated third-party payor settlements and adjustments are
estimated in the period the related services are rendered and are adjusted in
future periods as final settlements are determined.

     During 1994, 1995 and 1996, approximately 6% of net revenue was received
from governmental programs. Governmental programs pay physician services based
on fee schedules which are determined by the related government agency.

     The Company has contracts with various managed care organizations to
provide physician services based on negotiated fee schedules. Under various
contracts with HMOs, capitation is received to cover all physicians and hospital
services needed by the HMO members. Capitation payments are recognized as
revenue on the accrual basis, and represents approximately 24%, 28% and 29% of
the Company's total net revenue in 1994, 1995 and 1996, respectively.
Liabilities for physician services provided and hospital services incurred are
accrued in the month services are rendered. The provision for accrued claims
payable, which represents the amount payable for services incurred by patients
not yet paid, is validated by actuarial review. Management believes that the
provision at December 31, 1996 is adequate to cover claims which will ultimately
be paid.

  Reclassifications

     Certain prior-year balances have been reclassified to conform with the
current year's presentation. Such reclassifications had no material effect on
the previously reported consolidated financial position, results of operations
or cash flows of the Company.

  Fiscal Year

     At January 1, 1996, PPSI changed its fiscal year-end from July 31 to
December 31. Amounts consolidated for PPSI prior to January 1, 1996 were based
on an October 31 year-end. As a result, the consolidated financial statements
for the years ended December 31, 1994 and 1995 include the 12 months of
operations of PPSI for the years ended October 31, 1994 and 1995.

  Stock Option Plans

     The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its stock-based compensation plans. The
Company applies APB 25 and related interpretations in accounting for its plans
because the alternative fair value accounting provided for under FASB Statement
No. 123, "Accounting for Stock-Based Compensation," requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.

  Impairment of Long-Lived Assets

     Effective December 31, 1995, the Company adopted FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." Statement 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. The Statement also addresses the
accounting for long-lived assets that are expected to be disposed of. Statement
121 is applicable for most long-lived assets, identifiable intangibles and
goodwill related to those assets; it does not apply to financial instruments and
deferred taxes. Management has determined that long-lived assets are fairly
stated in the accompanying balance sheets, and that no indicators

                                       38
<PAGE>   41

                               MEDPARTNERS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of impairment are present. In accordance with the new rules, the Company's prior
year financial statements have not been restated to reflect the change in
accounting principle.

2. DISCONTINUED OPERATIONS

     During 1995, Caremark divested several non-strategic businesses. In
accordance with APB 30, which addresses the reporting for disposition of
business segments, the Company's Consolidated Financial Statements present the
operating results and net assets of discontinued operations separately from
continuing operations. Prior periods have been restated to conform with this
presentation.

     Effective March 31, 1995, Caremark sold its Clozaril(R) Patient Management
System to Health Management, Inc. for $23.3 million in cash and notes. This
business involved managing the care of schizophrenia patients nationwide through
the distribution of the Clozaril drug and related testing services to monitor
patients for potentially serious side effects. Net revenue of this business was
$12.3 million for the three months ended March 31, 1995 and $84.0 million for
the year ended December 31, 1994. The after-tax gain on disposition of this
business was $11.1 million.

     Effective April 1, 1995, Caremark sold its home infusion business to Coram
Healthcare Corporation ("Coram") for $309 million in cash and securities,
subject to post-closing adjustments based on the net assets transferred. The
sale included Caremark's home intravenous infusion therapy, women's health
services and the Home Care Management System. Certain severance and legal
obligations remained with Caremark (see Note 13). Net revenue of this business
was $96.1 million for the period ended April 1, 1995 and $441.9 million for the
year ended December 31, 1994. The after-tax loss on disposition of this business
was $4.0 million. In 1995 net losses from this business reflected in
discontinued operations include $154.8 million related to the legal settlement
discussed in Note 13.

     Effective September 15, 1995, Caremark sold its Oncology management
services business to Preferred Oncology Networks of America, Inc., for
securities valued at $3.6 million. The business provides management services to
single-specialty oncology practices. Net revenue of this business for the 1995
period up to the date of sale was $8.9 million and $29.4 million for the year
ended December 1994. There was no after-tax gain or loss on the disposition.

     Effective December 1, 1995, Caremark sold its Caremark Orthopedic Services,
Inc. subsidiary to HealthSouth Corporation for $127.0 million in cash, subject
to post-closing adjustments. This business provides outpatient physical therapy
and rehabilitation services. Net revenue of this business for the 1995 period up
to the date of sale was $69.1 million and $55.8 million for the year ended
December 31, 1994. The after-tax gain on disposition of this business was $24.7
million.

     Effective February 29, 1996, Caremark sold its Nephrology Services business
to Total Renal Care, Inc. for $49.0 million in cash, subject to certain
post-closing adjustments. The after-tax gain on disposition of this business,
net of disposal costs, was $2.1 million, which was included in 1995 discontinued
operations.

3. FINANCIAL INSTRUMENTS

     The Company's financial instruments include cash and cash equivalents,
investments in marketable and non-marketable securities and debt obligations.
The carrying value of marketable and non-marketable securities, which
approximated fair value, was $84.1 and $44.8 million at December 31, 1995 and
1996, respectively. The carrying value of debt obligations was $168.6 and $450.0
million at December 31, 1995 and 1996, respectively. The fair value of these
obligations approximated $156.4 and $451.9 million at December 31, 1995 and
1996, respectively. The fair value of marketable securities is determined using
market quotes and rates. The fair value of non-marketable securities are
estimated based on information provided by these companies. The fair value of
long-term debt has been estimated using market quotes.

                                       39
<PAGE>   42

                               MEDPARTNERS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     During 1995, the Company recorded a pre-tax charge to income of $86.6
million ($52.0 million after tax) to reflect unrealized losses on investments
that were judged other than temporary.

     Interest expense totaled $21.8, $31.0 and $34.5 million in 1994, 1995 and
1996, respectively. Interest income totaled $6.6, $13.4 and $10.6 million in
1994, 1995 and 1996, respectively.

4. INTANGIBLE ASSETS

     Goodwill, which totaled $327.0 and $610.9 million at December 31, 1995 and
1996, respectively, represents the excess of consideration paid for companies
acquired in purchase transactions over the fair value of net assets acquired.
Also included in intangible assets for the years ended December 31, 1995 and
1996 were organizational costs of $20.3 and $23.1 million, respectively. As of
December 31, 1995 and 1996, intangible assets, including goodwill, are stated
net of accumulated amortization of $26.8 and $55.3 million, respectively.

5. PROPERTY AND EQUIPMENT

     Property and equipment consisted of the following:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                1995       1996
                                                              --------   --------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Land........................................................  $ 38,498   $ 54,340
Buildings and leasehold improvements........................   191,937    184,817
Equipment...................................................   305,076    386,059
Construction in progress....................................    81,879     91,923
                                                              --------   --------
                                                               617,390    717,139
Less accumulated depreciation and amortization..............  (158,610)  (212,079)
                                                              --------   --------
                                                              $458,780   $505,060
                                                              ========   ========
</TABLE>

     The net book value of capitalized lease property approximated $9.8 and
$11.1 million at December 31, 1995 and 1996, respectively. Capitalized software
costs included in construction in progress approximated $56.5 million at
December 31, 1996, the majority of which was placed into service on January 1,
1997.

                                       40
<PAGE>   43

                               MEDPARTNERS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. LONG-TERM DEBT

     Long-term debt consisted of the following:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                1995       1996
                                                              --------   --------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Advances under Credit Facility, due 2001....................  $290,000   $213,000
6 7/8% Senior Notes due 2003, less unamortized discount of
  $0.4 million..............................................    99,600         --
Bonds Payable with interest at 7 3/8%, interest only paid
  semi-annually, due in 2006................................        --    450,000
Convertible subordinated debentures with interest at 5.50%,
  interest only paid semi-annually, due in 2003.............    69,000         --
Notes payable to physicians and stockholders in annual
  installments through 2001, interest rates ranging from 5%
  to 12%....................................................    15,329     14,118
Other long-term notes payable...............................    60,739     48,370
Capital lease obligations...................................    12,746     18,253
                                                              --------   --------
                                                               547,414    743,741
                                                              --------   --------
Less amounts due within one year............................   (15,640)   (28,084)
                                                              --------   --------
                                                              $531,774   $715,657
                                                              ========   ========
</TABLE>

     The Company entered into a $1 billion Revolving Credit and Reimbursement
Agreement (the "Credit Facility"), which became effective simultaneously with
the closing of the Caremark acquisition on September 5, 1996, replacing its then
existing credit facility. At the Company's option, pricing on the Credit
Facility is based on either a debt to cash flow test or the Company's senior
debt ratings. No principal is due on the facility until its maturity date of
September 2001. As of December 31, 1996, there was $213 million outstanding
under the facility. The rate approximated 6.5% at December 31, 1996. The Credit
Facility contains affirmative and negative covenants which, among other things,
require the Company to maintain certain financial ratios (including minimum net
worth, minimum fixed charge coverage ratio, maximum indebtedness to cash flow),
and set certain restrictions on investments, mergers and sales of assets.
Additionally, the Company is required to obtain bank consent for acquisitions
with an aggregate purchase price in excess of $75 million and which have more
than half of the consideration paid in cash. The Credit Facility is unsecured
but provides a negative pledge on substantially all assets of the Company. As of
December 31, 1996, the Company was in compliance with the covenants in the
Credit Facility.

     Effective October 8, 1996, the Company completed a $450 million Senior Note
offering. The ten year notes carry a coupon rate of 7 3/8%. Interest on the
notes is payable semi-annually on April 1 and October 1 of each year. The notes
are not redeemable by the Company prior to maturity and are not entitled to the
benefit of any mandatory sinking fund. The notes are general unsecured
obligations of the Company, ranking senior in right of payment to all existing
and future subordinated indebtedness of the Company and pari passu in right of
payment with all existing and future unsubordinated and unsecured obligations of
the Company. The notes are effectively subordinated to all existing and future
secured indebtedness of the Company and to all existing and future indebtedness
and other liabilities of the Company's subsidiaries. Net proceeds from the note
offering were used to reduce amounts under the Credit Facility.

     On October 30, 1996, the Company completed its tender offer for Caremark's
$100 million 6 7/8% notes due August 15, 2003. Of the $100 million principal
amount of such notes outstanding, approximately $99.9 million principal amount
were tendered and purchased. The total consideration for each $1,000 principal
amount of outstanding notes tendered was $1,017.72.

                                       41
<PAGE>   44

                               MEDPARTNERS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following is a schedule of principal maturities of long-term debt as of
December 31, 1996.

<TABLE>
<CAPTION>
                                                              (IN THOUSANDS)
                                                              --------------
<S>                                                           <C>
1997........................................................     $ 30,093
1998........................................................       17,745
1999........................................................        7,924
2000........................................................        6,449
2001........................................................      215,674
Thereafter..................................................      469,984
Amounts representing interest and discounts.................       (4,128)
                                                                 --------
          Total.............................................     $743,741
                                                                 ========
</TABLE>

     Operating Leases:  Operating leases generally consist of short-term lease
agreements for professional office space where the medical practices are located
and administrative office space. These leases generally have five-year terms
with renewal options. The following is a schedule of future minimum lease
payments under noncancelable operating leases as of December 31, 1996.

<TABLE>
<CAPTION>
                                                              (IN THOUSANDS)
                                                              --------------
<S>                                                           <C>
1997........................................................     $ 76,481
1998........................................................       77,351
1999........................................................       60,837
2000........................................................       51,660
2001........................................................       43,734
Thereafter..................................................      170,794
                                                                 --------
          Total.............................................     $480,857
                                                                 ========
</TABLE>

7. INCOME TAX EXPENSE

     At December 31, 1996, the Company had a cumulative net operating loss
("NOL") carryforward for federal income tax purposes of approximately $184
million available to reduce future amounts of taxable income. If not utilized to
offset future taxable income, the net operating loss carryforwards will expire
on various dates through 2011.

                                       42
<PAGE>   45

                               MEDPARTNERS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities were as follows:

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                               1995      1996
                                                              -------   -------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Deferred tax assets:
  Merger/acquisition costs..................................  $38,326   $51,696
  Bad debts.................................................   15,007    15,971
  Securities write-down.....................................   33,708        --
  Accrued and deferred compensation benefits................    6,780        --
  Accrued vacation..........................................       --     5,427
  NOL carryforward..........................................   23,970    72,484
  Alternative minimum tax credit carryforward...............       --    20,195
  Other.....................................................   17,273    29,190
                                                              -------   -------
Gross deferred tax assets...................................  135,064   194,963
Valuation allowance for deferred tax assets.................   (1,249)   (2,419)
Deferred tax liabilities
  State taxes...............................................    1,721     2,264
  Merger reserves...........................................       --     4,235
  Legal reserve.............................................   26,800     4,400
  Shared risk receivable....................................    7,182     7,135
  Securities write-down.....................................       --    13,449
  Excess tax depreciation...................................    2,974    30,363
  Goodwill..................................................    8,103     9,648
  Other amortization........................................       --    31,115
  Other.....................................................   16,004    19,123
                                                              -------   -------
Gross deferred tax liabilities..............................   62,784   121,732
                                                              -------   -------
Net deferred tax asset......................................  $71,031   $70,812
                                                              =======   =======
</TABLE>

     Income tax expense (benefit) on continuing operations is as follows:

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                          -----------------------------
                                                           1994       1995       1996
                                                          -------   --------   --------
                                                                 (IN THOUSANDS)
<S>                                                       <C>       <C>        <C>
Current:
  Federal...............................................  $24,580   $ 44,640   $ 28,205
  State.................................................    7,017      8,841      3,848
                                                          -------   --------   --------
                                                           31,597     53,481     32,053
Deferred:
  Federal...............................................   10,722    (59,602)   (31,125)
  State.................................................    1,729     (9,671)    (6,225)
                                                          -------   --------   --------
                                                           12,451    (69,273)   (37,350)
                                                          -------   --------   --------
                                                          $44,048   $(15,792)  $ (5,297)
                                                          =======   ========   ========
</TABLE>

                                       43
<PAGE>   46

                               MEDPARTNERS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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,
                                                          -----------------------------
                                                           1994       1995       1996
                                                          -------   --------   --------
                                                                 (IN THOUSANDS)
<S>                                                       <C>       <C>        <C>
Federal tax at statutory rate...........................  $34,367   $  1,788   $(33,295)
Add (deduct):
  State income tax, net of federal tax benefit..........    5,284     (2,037)    (1,369)
  Increase (decrease) in valuation allowance............       --    (14,240)     1,170
  Non deductible merger expense.........................       --         --     24,786
  Other.................................................    4,397     (1,303)     3,411
                                                          -------   --------   --------
                                                          $44,048   $(15,792)  $ (5,297)
                                                          =======   ========   ========
</TABLE>

8. CAPITALIZATION

     The Company's Third Restated Certificate of Incorporation provides that the
Company may issue 9.5 million shares of Preferred Stock, par value $0.001 per
share, .5 million shares of Series C Junior Participating Preferred Stock, par
value $0.001 per share, and 400 million shares of Common Stock, par value $0.001
per share. As of December 31, 1996 no shares of the preferred stock were
outstanding.

     On February 28, 1995, the Company completed an initial public offering of
5.1 million shares of its common stock. Gross and net proceeds of the offering
were $65.8 million and $60.4 million, respectively. Proceeds of the offering
were used to pay outstanding indebtedness under the bank credit facility. Net
proceeds were also used to fund acquisitions of certain assets of physician
practices, expansion of physician services, working capital and other general
corporate purposes.

     On March 13, 1996, the Company completed a secondary public offering of 6.6
million shares of its common stock. The net proceeds of the offering were $194.0
million. Proceeds of the offering were used to pay outstanding indebtedness
under the then existing credit facility. In April 1996, $69 million of the
proceeds were used to repay PPSI's convertible subordinated debentures. The
remainder of the net proceeds were used to fund acquisitions of certain assets
of physician practices, expansion of physician services, working capital and
other general corporate purposes.

9. STOCK BASED COMPENSATION PLANS

     The Company sponsors employee stock purchase plans that promote the sale of
its common stock to employees. The purchase price to employees is the lower of
85% of the closing market price on the date of subscription or 85% of the
closing market price on the date funds are actually used to purchase stock for
employees. Under the plans the Company sold 743,117, 582,132 and 267,232 shares
to employees in 1994, 1995 and 1996, respectively. The compensation cost for the
stock purchase plan is included in the pro forma information below. Compensation
cost is recognized for the fair value of the employee's purchase rights, which
was estimated using the same valuation model and assumptions below with the
exception of an expected purchase right expected life of 1 year. The
weighted-average fair value of those purchase rights granted in 1995 and 1996
was $6.47 and $8.66, respectively.

     The Company offers participation in stock option plans to certain employees
and individuals. All of the outstanding options under these plans were granted
at 100% of the market value of the stock on the dates of grant. Awarded options
typically vest and become exercisable in incremental installments over five
years and expire no later than ten years and one day from the date of grant. The
number of shares authorized under the various plans was 22.5 million as of
December 31, 1996.

                                       44
<PAGE>   47

                               MEDPARTNERS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table summarizes stock option activity for the indicated
years:

<TABLE>
<CAPTION>
                                                  1995                              1996
                                     -------------------------------   -------------------------------
                                                        WEIGHTED-                         WEIGHTED-
                                        OPTIONS          AVERAGE          OPTIONS          AVERAGE
                                     (IN THOUSANDS)   EXERCISE PRICE   (IN THOUSANDS)   EXERCISE PRICE
                                     --------------   --------------   --------------   --------------
<S>                                  <C>              <C>              <C>              <C>
Outstanding:
  Beginning of year................      13,895          $ 10.39           15,292          $ 13.73
  Granted..........................       5,681            19.19           11,641            19.26
  Exercised........................      (1,796)           (6.78)          (4,130)          (10.78)
  Canceled/expired.................      (2,488)          (12.55)          (5,841)          (24.04)
                                         ------                            ------
  End of year......................      15,292            13.73           16,962            14.69
Exercisable at end of year.........       4,926            13.66           11,611            13.75
Weighted-average fair value of
  options granted during the
  year.............................      $10.13                            $12.45
</TABLE>

     The following table summarizes information about stock options outstanding
at December 31, 1996:

<TABLE>
<CAPTION>
                                       OPTIONS OUTSTANDING                           OPTIONS EXERCISABLE
                       ----------------------------------------------------   ---------------------------------
                          OPTIONS       WEIGHTED-AVERAGE                         OPTIONS
   EXERCISE PRICE       OUTSTANDING        REMAINING       WEIGHTED-AVERAGE    EXERCISABLE     WEIGHTED-AVERAGE
        RANGE           AT 12/31/96     CONTRACTUAL LIFE    EXERCISE PRICE     AT 12/31/96      EXERCISE PRICE
---------------------  --------------   ----------------   ----------------   --------------   ----------------
                       (IN THOUSANDS)       (YEARS)                           (IN THOUSANDS)
<S>                    <C>              <C>                <C>                <C>              <C>
  under $12.00.......         547             7.28              $ 0.55               246            $ 0.57
  $12.00-$16.99......      13,933             7.93               14.31            10,758             13.71
  $17.00 and above...       2,482             9.57               19.89               607             19.74
</TABLE>

     Under various plans, the Company has made grants of restricted common stock
to provide incentive compensation to key employees. Restricted stock activity is
summarized below:

<TABLE>
<CAPTION>
                                                              1995        1996
                                                              ----        ----
                                                               (IN THOUSANDS)
<S>                                                           <C>         <C>
Restricted stock outstanding:
  Beginning of year.........................................   320        278
  Granted...................................................   339          1
  Canceled..................................................   (26)        (6)
  Vested (free of restrictions).............................  (355)       (97)
                                                              ----        ---
  End of year...............................................   278        176
                                                              ====        ===
</TABLE>

     Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its stock-based compensation plans under the fair value method as
described in Statement 123. The fair value for these options and employee
purchase rights was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions:

<TABLE>
<CAPTION>
                                                               1995      1996
                                                              ------    ------
<S>                                                           <C>       <C>
Risk-free interest rates....................................   6.16%     6.28%
Expected volatility.........................................    .431      .431
Expected option lives (years)...............................   5.6       5.6
Expected stock purchase lives (years).......................   1.0       1.0
</TABLE>

                                       45
<PAGE>   48

                               MEDPARTNERS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

     Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of Statement 123, the Company's net income and
earnings per share would have been reduced to pro forma net income (loss) from
continuing operations of $9.7 and $(134.6) million and pro forma net losses of
$(126.8) and $(203.3) million for the years ended December 31, 1995 and 1996,
respectively. Per share amounts would have been reduced to pro forma net income
(loss) from continuing operations of $0.07 and $(0.87) and pro forma net losses
per share of $(0.90) and $(1.31) for the years ended December 31, 1995 and 1996,
respectively.

10. ACQUISITIONS

     During the years ended December 31, 1994, 1995 and 1996, the Company,
through its wholly-owned subsidiaries, acquired certain operating assets of
various medical practices. Simultaneously with each medical practice
acquisition, the Company entered into a practice management agreement which
generally has a 20-40 year term. Pursuant to the practice management agreements,
the Company manages all aspects of the affiliated practice other than the
provision of medical services, which is controlled by the physician groups. For
providing services under the practice management agreement, the physicians
receive compensation which varies from practice to practice.

     In May 1995, Caremark entered into a long-term affiliation agreement with
Friendly Hills HealthCare Network ("Friendly Hills"), an integrated health care
delivery system headquartered in La Habra, California. Friendly Hills operates
18 medical offices and an acute care hospital. Caremark acquired substantially
all of the assets of Friendly Hills for approximately $140 million and agreed to
provide various management and administrative services. The transaction has been
accounted for by the purchase method of accounting. The Company invested
approximately $143.2 million in cash, stock and notes for other acquisitions in
1995.

     In January 1996, Caremark completed its agreement with CIGNA Healthcare of
California, a managed healthcare subsidiary of CIGNA Corporation, to acquire
substantially all of the assets of CIGNA Medical Group, CIGNA Healthcare's Los
Angeles area staff model delivery system ("CIGNA") for approximately $80.4
million in cash. The transaction has been accounted for by the purchase method
of accounting. During the year ended December 31, 1996, $157.4 million in cash
and 2 million shares of stock valued at $39.9 million were given in exchange for
the net assets of CIGNA and other entities. Results of operations would not have
been materially different in 1994, 1995 and 1996 had these transactions occurred
as of the beginning of the respective years.

     All of the aforementioned acquisitions have been accounted for by the
purchase method of accounting. As such, operating results of acquired businesses
are included in the Company's Consolidated Financial Statements as of their
respective dates of acquisition.

                                       46
<PAGE>   49

                               MEDPARTNERS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. MERGERS

     Effective February 22, 1996 and September 5, 1996, the Company merged with
PPSI and Caremark, respectively, in transactions that were accounted for as
poolings of interests. The Company exchanged 10,981,904 and 90,508,558 shares of
its common stock for all of the outstanding common stock of PPSI and Caremark,
respectively. During the year ended December 31, 1996, the Company also
exchanged 11,296,786 shares of its common stock in additional transactions
accounted for as poolings of interests. The Company's historical financial
statements for all periods have been restated to include the results of all
material transactions accounted for as poolings of interests.

<TABLE>
<CAPTION>
                                                                         OTHER
                                                                        POOLINGS       COMBINED
                                MEDPARTNERS     PPSI      CAREMARK    OF INTERESTS   (AS REPORTED)
                                -----------   --------   ----------   ------------   -------------
                                                          (IN THOUSANDS)
<S>                             <C>           <C>        <C>          <C>            <C>
Year ended December 31, 1994
  Net revenue.................  $  506,818    $308,226   $1,775,200     $ 48,410      $2,638,654
  Net (loss) income...........     (10,660)      7,598       80,400        2,708          80,046
Year ended December 31,1995
  Net revenue.................     742,388     411,132    2,374,300       55,557       3,583,377
  Net (loss) income...........      (9,717)     10,205     (116,300)         185        (115,627)
Year ended December 31, 1996
  Net revenue.................   1,071,819     410,102    3,203,512      128,066       4,813,499
  Net (loss) income...........    (141,680)    (10,464)      (3,359)      (3,026)       (158,529)
</TABLE>

     Prior to its merger with the Company, PPSI reported on a fiscal year ending
on July 31. The restated financial statements for all periods prior to and
including December 31, 1995 are based on a combination of the Company's results
for its December 31 fiscal year and an October 31 fiscal year for PPSI.
Beginning January 1, 1996, PPSI adopted a December 31 fiscal year end;
accordingly, all consolidated financial statements for periods after December
31, 1995 are based on a consolidation of all of the Company's subsidiaries on a
December 31 year end. PPSI's historical results of operations for the two months
ending December 31,1995 are not included in the Company's consolidated
statements of operations or cash flows. An adjustment has been made to
stockholders' equity as of January 1, 1996 to adjust for the effect of excluding
PPSI's results of operations for the two months ending December 31, 1995. The
following is a summary of operations and cash flow for the two months ending
December 31, 1995 (in thousands):

<TABLE>
<S>                                                           <C>
Statement of Operations Data:
  Net revenue...............................................  $ 69,850
Operating expenses:
  Affiliated physician services.............................    32,600
  Outside medical expenses..................................    14,861
  Clinic expenses...........................................    26,034
  General and administrative expenses.......................     5,235
  Depreciation and amortization.............................     2,371
  Net interest expense......................................       426
  Loss on disposal of assets................................        41
                                                              --------
     Net operating expenses.................................    81,568
                                                              --------
  Loss before taxes.........................................   (11,718)
  Income tax benefit........................................    (3,661)
                                                              --------
  Net loss..................................................  $ (8,057)
                                                              ========
</TABLE>

                                       47
<PAGE>   50

                               MEDPARTNERS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Statement of Cash Flow Data:
  Net cash used by operating activities.....................  $ (3,569)
  Net cash provided by investing activities.................     4,455
  Net cash used in financing activities.....................       (81)
                                                              --------
  Net increase in cash and cash equivalents.................  $    805
                                                              ========

     Included in pre-tax loss for the year ended December 31, 1996 are merger
costs totaling $308.7 million. Approximately $32.5 and $251.3 million relate to
the mergers with PPSI and Caremark, respectively. The components of this cost
are as follows (in thousands):

<TABLE>
<S>                                                           <C>
Investment banking fees.....................................  $ 31,774
Professional fees...........................................    16,674
Other transaction costs.....................................    11,645
Transition and debt restructuring...........................    39,011
Severance costs for identified employees....................    56,948
Impairment of assets........................................    41,616
Abandonment of facilities...................................    15,921
Noncompatible technology....................................     9,498
Conforming of accounting policies...........................    23,728
Operational restructuring...................................    30,324
Other charges...............................................    31,556
                                                              --------
Total.......................................................  $308,695
                                                              ========
</TABLE>

12. RETIREMENT SAVINGS PLAN

     Effective April 4, 1994, the Company adopted the MedPartners, Inc. and
Subsidiaries Employee Retirement Savings Plan (the "Plan"). The Plan is a Code
Section 401(k) Plan which requires the attainment of age 21 and one year of
service, with a minimum of 1,000 hours worked to become a participant in the
Plan. Service for a predecessor employer will be considered for participation
requirements in the Plan for all employees employed through acquisition
activities. The Company, at its sole discretion, may contribute an amount which
it designates as a qualified nonelective contribution. The Company made a
required contribution of approximately 3% percent of non-key employee salaries
for the Plan year ended December 31, 1996, however, no additional contributions
are anticipated at this time. Company contributions are gradually vested over a
six-year service period. The various entities that were acquired or merged into
the Company during 1996 also had various employee retirement plans, that will or
have been incorporated into the Company's Plan. Participants of Caremark's
401(k) Plan may contribute up to 12% of their annual compensation to the plan
and Caremark matches the participants' contributions up to 3% of compensation.
The expenses related to all plans during the years ended December 31, 1994, 1995
and 1996 were approximately $7.9 million, $6.0 million and $7.7 million,
respectively.

     Caremark sponsored retirement plans for all qualifying domestic employees
and certain employees in other countries. Benefits are typically based on years
of service and the employee's compensation during five of the last 10 years of
employment as defined by the plans. Caremark's funding policy is to make
contributions that meet or exceed the minimum requirements of the Employee
Retirement Income Security Act of 1974, based on the projected unit credit
actuarial cost method, and to limit such contributions to amounts currently
deductible for federal income tax reporting purposes.

                                       48
<PAGE>   51

                               MEDPARTNERS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table summarizes the components of net pension expense and
related actuarial assumptions used at the January 1 valuation date for the
respective years related to the Caremark sponsored defined benefit plan:

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                               1994     1995     1996
                                                              ------   ------   ------
<S>                                                           <C>      <C>      <C>
Assumptions:
  Discount rate.............................................    8.75%    7.25%    8.75%
  Increase in compensation levels...........................     5.0%     5.0%     5.0%
  Expected long-term return on assets.......................    10.5%     9.5%     9.5%
Components (in thousands):
  Service cost-benefits earned..............................  $4,600   $2,100   $3,024
  Interest cost on projected obligation.....................   2,300    2,200    2,635
  Actual return on assets...................................  (1,300)  (1,700)  (3,121)
  Net amortizations.........................................     700      100      698
  Deferred asset gain.......................................      --       --    1,233
Merger expenses:
  Special termination benefits..............................      --       --    4,675
  Curtailment loss..........................................      --       --      502
                                                              ------   ------   ------
  Net pension expense.......................................  $6,300   $2,700   $9,646
                                                              ======   ======   ======
</TABLE>

     The following table presents the funded status of the Caremark plans, the
net pension liability recognized in the consolidated balance sheets and related
actuarial assumptions as of December 31:

<TABLE>
<CAPTION>
                                                               1995       1996
                                                              -------    -------
<S>                                                           <C>        <C>
Assumptions:
  Discount rate.............................................     7.25%      8.75%
  Increase in compensation levels...........................      5.0%       5.0%
Funded status and net pension liability (in thousands):
  Actuarial present value of benefit obligations:
     Vested benefits........................................  $22,200    $37,453
     Accumulated benefits...................................   25,000     41,141
     Effect of future salary increases......................    7,200         --
                                                              -------    -------
     Projected benefits.....................................   32,200     41,141
Less: plan assets at fair value(1)..........................   20,900     24,977
                                                              -------    -------
Projected benefit obligations in excess of plan assets......   11,300     16,164
Less: unrecognized net loss.................................   (4,800)        --
                                                              -------    -------
Net pension liability.......................................  $ 6,500    $16,164
                                                              =======    =======
</TABLE>

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

(1) Primarily equity and fixed income securities.

13. CONTINGENCIES

     On September 11, 1995, Coram Healthcare Corporation ("Coram") filed a
complaint in the San Francisco Superior Court against Caremark International
Inc. and its subsidiary, Caremark Inc., and 50 unnamed individual defendants.
The complaint, which arises from Caremark's sale to Coram of Caremark's home
infusion therapy business in April 1995 for approximately $209.0 million in cash
and $100.0 million in securities, alleges breach of the Asset Sale and Note
Purchase Agreement, dated January 29, 1995, as amended on April 1, 1995, between
Coram and Caremark, breach of related contracts, fraud, negligent

                                       49
<PAGE>   52

                               MEDPARTNERS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

misrepresentation and a right to contractual indemnity. Requested relief in
Coram's amended complaint includes specific performance, declaratory relief,
injunctive relief and damages of $5.2 billion. Caremark filed counterclaims
against Coram in this lawsuit and also filed a lawsuit in the United States
District Court in Chicago claiming that Coram committed securities fraud in its
sale to Caremark of its securities in connection with the sale of Caremark's
home infusion business to Coram. The lawsuit filed in federal court in Chicago
has been dismissed, and Caremark's appeal of the dismissal was argued on May 10,
1996 and is now under submission. Coram's lawsuit is currently in the discovery
phase, with a scheduled trial date during the second quarter of 1997. In October
1996, Coram agreed to merge with Integrated Health Services, Inc. ("IHS"). In
connection with the merger agreement, IHS and the Company have agreed to a
settlement of the Coram litigation, contingent upon consummation of the proposed
merger, expected to be completed sometime during the second quarter of 1997.
Under the settlement proposal, the notes that are now payable by Coram to
Caremark will be canceled and replaced with a new two-year note in the
approximate principal amount of $57.5 million. Caremark had previously
established a reserve for a portion of the $100 million in securities and,
therefore, the terms of the new note will not require any additional charge
against earnings by the Company.

     In March 1996, Caremark agreed to settle all disputes with a number of
private payors. The settlements resulted in an after-tax charge of $42.3
million. These disputes related to businesses that were covered by Caremark's
settlement with federal and state agencies in June 1995 discussed below. In
addition, Caremark agreed to pay $23.3 million after-tax to cover the private
payors' pre-settlement and settlement-related expenses. An after-tax charge for
the above amounts has been recorded in first quarter 1996 discontinued
operations. During the year ended December 31, 1996, Caremark paid $105.1
million, with an additional $3.3 million plus interest to be paid over the next
six months, related to the settlements.

     In June 1995, Caremark agreed to settle an investigation of Caremark with
the U.S. Department of Justice, the Office of the Inspector General of the U.S.
Department of Health and Human Services, the Veterans Administration, the
Federal Employees Health Benefits Program, the Civilian Health and Medical
Program of the Uniformed Services and related state investigative agencies in
all 50 states and the District of Columbia (the "OIG investigation"). Under the
terms of the OIG Settlement, which covered allegations dating back to 1986, a
subsidiary of Caremark pled guilty to two counts of mail fraud, one each in
Minnesota and Ohio, resulting in the payment of civil penalties and criminal
fines. The basis of these guilty pleas was Caremark's failure to provide certain
information to CHAMPUS, FEHBP and federal funded healthcare benefit programs,
concerning financial relationships between Caremark and a physician in each of
Minnesota and Ohio. Caremark took an after-tax charge to discontinued operations
of $154.8 million in 1995 for these settlement payments, costs to defend ongoing
derivative, security and related lawsuits and other associated costs.

     The Company cannot determine at this time what costs may be incurred in
connection with future disposition of nongovernmental claims or litigation. The
Company does not believe that the above-referenced settlements will materially
affect its ability to pursue its long-term business strategy. There can be no
assurances, however, that additional costs, claims and damages will not occur or
that the ultimate costs related to the settlements will not exceed estimates in
the preceding paragraphs.

     In May 1996, three home infusion companies, purporting to represent a class
consisting of all of Caremark's competitors in the alternate site infusion
therapy industry, filed a complaint against Caremark International Inc.,
Caremark, Inc. and two other corporations in the United States District Court
for the District of Hawaii alleging violations of the federal conspiracy laws,
the antitrust laws and of California's unfair business practice statute. The
complaint seeks unspecified treble damages, attorneys' fees and expenses. The
Company intends to defend this case vigorously. Management is unable at this
time to estimate the impact, if any, of the ultimate resolution of this matter.

     In August and September 1994, stockholders, each purporting to represent a
class, filed complaints against Caremark and certain officers and employees of
Caremark in the United States District Court for the

                                       50
<PAGE>   53

                               MEDPARTNERS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Northern District of Illinois, alleging violations of the Securities Act of 1933
and the Securities Exchange Act of 1934, and fraud and negligence in connection
with public disclosures by Caremark regarding Caremark's business practices and
the status of the OIG investigation discussed above. The complaints seek
unspecified damages, declaratory and equitable relief, and attorneys' fees and
expenses. In June 1996, the complaint filed by one group of stockholders
alleging violations of the Securities Exchange Act of 1934 only, was certified
as a class. The parties to all of the complaints continue to engage in discovery
proceedings. The Company intends to defend these cases vigorously. Management is
unable at this time to estimate the impact, if any, of the ultimate resolution
of these matters.

     In late August 1994, certain patients of a physician who prescribed human
growth hormone distributed by Caremark and the sponsor of a health insurance
plan of one of those patients filed complaints against Caremark, employees of
Caremark and others in the United States District Court for the District of
Minnesota. Each complaint purported to be on behalf of a class and alleged
violations of the federal mail and wire fraud statutes, the federal conspiracy
statute and the state consumer fraud statute, as well as conspiracy to breach a
fiduciary duty, negligence and fraud. Each complaint sought unspecified treble
damages, and attorneys' fees and expenses. In July 1996, these plaintiffs also
filed a separate lawsuit in the Minnesota State Court in the County of Hennepin
against a subsidiary of Caremark purporting to be on behalf of a class and
alleging all of the claims contained in the complaint filed with the Minnesota
federal court other than the federal claims contained therein. The state
complaint seeks unspecified damages, attorneys' fees and expenses and an award
of punitive damages. In November 1996, in response to a motion by the
plaintiffs, the Court dismissed the United States District Court cases without
prejudice. In July 1995, another patient of the same physician filed a separate
complaint in the District of South Dakota against the physician, Caremark and
another corporation alleging violations of the federal laws prohibiting payment
of remuneration to induce referral of Medicare and Medicaid beneficiaries, and
the federal mail fraud and conspiracy statutes. The complaint also alleges the
intentional infliction of emotional distress and seeks trebling of at least
$15.9 million in general damages, attorneys' fees and costs, and an award of
punitive damages. In August 1995, the parties to the case filed in South Dakota
agreed to a stay of all proceedings until final judgment has been entered in a
criminal case that is presently pending against this physician. The Company
intends to defend these cases vigorously. Management is unable at this time to
estimate the impact, if any, of the ultimate resolution of these matters.

     Beginning in September 1994, Caremark was named as a defendant in a series
of new lawsuits added to a pending group of actions (including a class action)
brought in 1993 under the antitrust laws by local and chain retail pharmacies
against brand name pharmaceutical manufacturers, wholesalers and prescription
benefit managers other than Caremark. The new lawsuits, filed in federal
district courts in at least 38 states (including the United States District
Court for the Northern District of Illinois), allege that at least 24
pharmaceutical manufacturers provided unlawful price and service discounts to
certain favored buyers and conspired among themselves to deny similar discounts
to the complaining retail pharmacies (approximately 3,900 in number). The
complaints charge that certain defendant prescription benefit managers,
including Caremark, were favored buyers who knowingly induced or received
discriminatory prices from the manufacturers, in violation of the
Robinson-Patman Act. Each complaint seeks unspecified treble damages,
declaratory and equitable relief, and attorneys' fees and expenses. All of these
actions have been transferred by the Judicial Panel for Multidistrict Litigation
to the United States District Court for the Northern District of Illinois for
coordinated pretrial procedures. Caremark was not named in the class action. In
April 1995, the Court entered a stay of pretrial proceedings as to certain
Robinson-Patman Act claims in this litigation, including the Robinson-Patman Act
claims brought against Caremark, pending the conclusion of a first trial of
certain of such claims brought by a limited number of plaintiffs against five
defendants not including Caremark. On July 1, 1996, the district court directed
entry of a partial final order in the class action approving an amended
settlement with certain of pharmaceutical manufacturers. The amended settlement
provides for a cash payment by the defendants in the class action (which does
not include Caremark) of approximately $351.0 million to class

                                       51
<PAGE>   54

                               MEDPARTNERS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

members in settlement of conspiracy claims as well as a commitment from the
settling manufacturers to abide by certain injunctive provisions. All class
action claims against non-settling manufacturers as well as all opt out and
other claims generally, including all Robinson-Patman Act claims against
Caremark, remain unaffected by the settlement. The district court also certified
to the court of appeals for interlocutory review certain orders relating to
non-settled conspiracy claims against the pharmaceuticals manufacturers and
wholesalers. These interlocutory orders do not relate to any of the claims
brought against Caremark. The Company intends to defend these cases vigorously.
Although management believes, based on information currently available, that the
ultimate resolution of this matter is not likely to have a material adverse
effect on the operating results and financial condition of the Company, there
can be no assurance that the ultimate resolution of this matter, if adversely
determined, would not have a material adverse effect on the operating results
and financial condition of the Company.

     In December 1994, Caremark was notified by the Federal Trade Commission
(the "FTC") that it was conducting a civil investigation of the industry
concerning whether acquisitions, alliances, agreements or activities between
pharmacy benefit managers and pharmaceutical manufacturers, including Caremark's
alliance agreements with certain drug manufacturers, violate Sections 3 or 7 of
the Clayton Act or Section 5 of the Federal Trade Commission Act. The specific
nature, scope, timing and outcome of this investigation are not currently
determinable. Under the statutes, if violations are found, the FTC could seek
remedies in the form of injunctive relief to set aside or modify Caremark's
alliance agreements and an order to cease and desist from certain marketing
practices and from entering into or continuing with certain types of agreements.
Management is unable at this time to estimate the impact, if any, of the
ultimate resolution of this matter.

     In May 1996, two stockholders, each purporting to represent a class, filed
complaints against Caremark and each of its directors in the Court of Chancery
of the State of Delaware alleging breaches of the directors' fiduciary duty in
connection with Caremark's then proposed merger with the Company. The complaints
seek unspecified damages, injunctive relief, and attorneys' fees and expenses.
The plaintiffs in these actions have made no effort to pursue these claims and
the Company does not believe that these complaints will have a material adverse
effect on the operating results and financial condition of the Company.

     Although the Company cannot predict with certainty the outcome of
proceedings described above, based on information currently available,
management believes that the ultimate resolution of such proceedings,
individually and in the aggregate, is not likely to have a material adverse
effect on the Company.

     The Company is party to various other commitments, claims and routine
litigation arising in the ordinary course of business. Management does not
believe that the result of such commitments, claims and litigation, individually
or in the aggregate, will have a material adverse effect on the Company's
business or its results of operations, cash flows or financial condition.

14. SUBSEQUENT EVENTS

     On January 20, 1997, the Company agreed to merge with InPhyNet Medical
Management Inc. ("InPhyNet"), a provider of hospital based physician services
headquartered in the Ft. Lauderdale area. In 1996, InPhyNet provided physician
practice management services at 188 service sites in 26 states with
hospital-based services and capitated networks. The consideration for this
transaction is based on a fixed exchange ratio of 1.311 shares of MedPartners
common stock for each share of InPhyNet common stock. Based on this ratio,
approximately 22 million shares of the Company's common stock will be issued in
exchange for all outstanding shares of InPhyNet common stock, valuing the
transaction at approximately $493 million. The transaction is expected to be
accounted for as a pooling of interests and is expected to close during the
first six months of 1997.

                                       52
<PAGE>   55

                               MEDPARTNERS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The pro forma effect on the consolidated statement of operations of the
Company had the transaction occurred on January 1, 1994 is as follows:

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                     ------------------------------------
                                                        1994         1995         1996
                                                     ----------   ----------   ----------
                                                       (IN THOUSANDS, EXCEPT PER SHARE
                                                                    DATA)
<S>                                                  <C>          <C>          <C>
Net revenue........................................  $2,909,024   $3,908,717   $5,222,019
Pro forma net income (loss)........................      89,412     (104,339)    (141,837)
Pro forma net income (loss) per share..............        0.60        (0.65)       (0.80)
Number of shares used in pro forma net income
  (loss) per share calculations....................     148,437      160,079      176,368
</TABLE>

                                       53
<PAGE>   56

ITEM 9.  CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS OR ACCOUNTING AND FINANCIAL
         DISCLOSURE

     The Company has not changed independent accountants within the twenty-four
months prior to December 31, 1996.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The following table sets forth certain information about the executive
officers and directors of the Company:

<TABLE>
<CAPTION>
                    NAME                      AGE               POSITION WITH THE COMPANY
                    ----                      ---               -------------------------
<S>                                           <C>   <C>
Larry R. House..............................  53    Chairman of Board, President and Chief Executive
                                                      Officer and Director
Mark L. Wagar...............................  45    President -- Western Operations
John J. Gannon..............................  58    President -- Eastern Operations
James G. Connelly, III......................  51    President -- Caremark
H. Lynn Massingale, M.D.....................  44    President -- Team Health
Harold O. Knight, Jr........................  38    Executive Vice President and Chief Financial
                                                      Officer
Tracy P. Thrasher...........................  34    Executive Vice President and Corporate Secretary
William R. Dexheimer........................  40    Executive Vice President and Chief Operating
                                                      Officer -- East
J. Rodney Seay..............................  49    Executive Vice President of Mergers and
                                                      Acquisitions
J. Brooke Johnston, Jr......................  57    Senior Vice President and General Counsel
Peter J. Clemens, IV........................  32    Vice President of Finance and Treasurer
Richard M. Scrushy..........................  44    Director
Larry D. Striplin, Jr.......................  67    Director
Charles W. Newhall III(1)...................  52    Director
Ted H. McCourtney(2)........................  58    Director
Walter T. Mullikin, M.D.....................  79    Director
John S. McDonald, J.D.(1)...................  64    Director
Rosalio J. Lopez, M.D.(2)...................  44    Director
Richard J. Kramer...........................  54    Director
C.A. Lance Piccolo..........................  56    Director
Roger L. Headrick(1)........................  60    Director
Thomas W. Hodson(2).........................  50    Director
Harry M. Jansen Kraemer, Jr.................  42    Director
</TABLE>

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

(1) Member of the Compensation Committee
(2) Member of the Audit Committee

     Larry R. House has been President and Chief Executive Officer of the
Company since August 1993, and has been Chairman of the Board since January
1993. From 1985 to 1992, he was Chief Operating Officer of HEALTHSOUTH
Rehabilitation Corporation, now HEALTHSOUTH Corporation ("HEALTHSOUTH"). From
1992 to 1993, Mr. House was President of HEALTHSOUTH International, Inc. Mr.
House is a member of the Board of Directors of each of HEALTHSOUTH, Capstone
Capital Corporation, a publicly traded real estate investment trust
("Capstone"), the American Sports Medicine Institute, UAB Research Foundation
and Monitor MedX.

     Mark L. Wagar has been President -- Western Operations of the Company since
January 1996. From January 1995 through December 1995, Mr. Wagar was Chief
Operating Officer of MME. From March 1994

                                       54
<PAGE>   57

to December 1994, he was the President of CIGNA HealthCare of California, a
healthcare plan serving enrollees in California, Oregon and Washington, from
January 1993 through February 1994, was a Vice President of CIGNA HealthCare of
California, an HMO. From November 1989 to December 1992, he was the President of
Managed Care Partners, Inc., a private consulting management company
specializing in managed care services. He has been involved in healthcare
management for over 20 years, including 10 years in managed care companies.

     John J. Gannon has been President -- Eastern Operations of the Company
since July 1996. For 23 years, Mr. Gannon was a Partner with KPMG Peat Marwick.
His most recent position with KPMG was that of National Partner-in-Charge of
Strategy and Marketing, Healthcare and Life Sciences. He served as one of the
firm's designated industry review specialists for healthcare financial
feasibility studies.

     James G. Connelly, III has been President and Chief Operating Officer of
Caremark since August 1992. Mr. Connelly was the President of a subsidiary of
Caremark from April 1992 to November 1992. From May 1990 to November 1992, Mr.
Connelly was a Group Vice President of Baxter International Inc., a publicly
traded company that is a leading manufacturer and marketer of healthcare
products and services ("Baxter"). Prior to 1990, he was a Corporate Vice
President of Baxter, responsible for its hospital supply business group. Mr.
Connelly also serves as a director of Boise Cascade Office Products Corporation,
a publicly traded company.

     H. Lynn Massingale, M.D. has been President of Team Health since its
formation in March 1994. Dr. Massingale has served as President of Southeastern
Emergency Physicians, Inc., a subsidiary of Team Health, since 1981. A graduate
of the University of Tennessee Center for Health Sciences in Memphis, Dr.
Massingale is certified by the National Board of Medical Examiners, Tennessee
Board of Medical Examiners and American Board of Emergency Medicine. Dr.
Massingale's professional memberships include the Knoxville Academy of Medicine,
Tennessee Medical Association, American Medical Association and American College
of Emergency Physicians.

     Harold O. Knight, Jr. has been Executive Vice President and Chief Financial
Officer of the Company since November 1994. Mr. Knight was Senior Vice President
of Finance and Treasurer of the Company from August 1993 to November 1994, and
from March 1993 to August 1993, Mr. Knight served as Vice President of Finance
of the Company. From 1980 to 1993, Mr. Knight was with Ernst & Young LLP, most
recently as Senior Manager. Mr. Knight is a member of the Alabama Society of
Certified Public Accountants and the American Institute of Certified Public
Accountants.

     Tracy P. Thrasher has been Executive Vice President of the Company since
November 1994 and has been Corporate Secretary since March 1994. Ms. Thrasher
was Senior Vice President of Administration from March 1994 to November 1994,
and from January 1993 to March 1994, she served as Corporate Comptroller and
Vice President of Development. From 1990 to 1993, Ms. Thrasher was the Audit and
Health Care Management Advisory Service Manager with Burton, Canady, Moore &
Carr, P.C., independent public accountants. Ms. Thrasher began her career with
Ernst & Young LLP in 1985, and became a certified public accountant in 1986.

     William R. Dexheimer has been Executive Vice President and Chief Operating
Officer -- East of the Company since August 1993. From 1989 to 1993, Mr.
Dexheimer was a principal stockholder and Chief Executive Officer of Strategic
Health Resources of the South, Inc., a healthcare development and consulting
firm. From 1986 to 1989, Mr. Dexheimer was employed by AMI Brookwood Medical
Center as Senior Vice President of Development and Chief Executive Officer of
AMI Brookwood Primary Care Centers, Inc.

     J. Rodney Seay has been Executive Vice President of Mergers and
Acquisitions of the Company since April 1995. From August 1993 to April 1995, he
served as Executive Vice President of Development of the Company. Mr. Seay was
also Secretary of the Company from August 1993 to March 1994. From 1992 to 1993,
he was Vice President of Finance of HEALTHSOUTH. From 1988 to 1992, Mr. Seay was
a Senior Manager with KPMG Peat Marwick. From 1982 to 1988, he served as Chief
Executive Officer of Medical Data Services, a physician practice management
company with over 650 employees and over 1,500 physician clients.

                                       55
<PAGE>   58

     J. Brooke Johnston, Jr. has been Senior Vice President and General Counsel
of the Company since April 1996. Prior to that, Mr. Johnston was a senior
principal of the law firm of Haskell Slaughter Young & Johnston, Professional
Association, Birmingham, Alabama, where he practiced corporate and securities
law for over seventeen years. Prior to that Mr. Johnston was engaged in the
practice of law in New York, New York and at another firm in Birmingham. Mr.
Johnston is a member of the Alabama State Bar and the New York and American Bar
Associations. Mr. Johnston is a member of the Board of Directors of United
Leisure Corporation, a publicly traded leisure time services company.

     Peter J. Clemens, IV has been Vice President of Finance and Treasurer of
the Company since April 1995. From 1991 to 1995, Mr. Clemens worked in Corporate
Banking with Wachovia Bank of Georgia, N.A. Mr. Clemens began his career with
AmSouth Bank, N.A. in 1987, and received a Masters Degree in Business
Administration from Vanderbilt University in 1991.

     Richard M. Scrushy has been a member of the Company's Board of Directors
since January 1993. Since 1984, Mr. Scrushy has been Chairman of the Board and
Chief Executive Officer of HEALTHSOUTH. Mr. Scrushy is also a member of the
Board of Directors of Capstone.

     Larry D. Striplin, Jr. has been a member of the Company's Board of
Directors since January 1993. Since December 1995, Mr. Striplin has been the
Chairman and Chief Executive Officer of Nelson-Brantley Glass Contractors, Inc.
and Chairman and Chief Executive Officer of Clearview Properties, Inc. Until
December 1995, Mr. Striplin had been Chairman of the Board and Chief Executive
Officer of Circle "S" Industries, Inc., a privately owned bonding wire
manufacturer. Mr. Striplin is a member of the Board of Directors of Kulicke &
Suffa, Inc., a publicly traded manufacturer of electronic equipment, and of
Capstone.

     Charles W. Newhall, III has been a member of the Company's Board of
Directors since September 1993. He has been a general partner of New Enterprise
Associates, a venture capital firm, since 1978. Mr. Newhall is a member of the
Board of Directors of HEALTHSOUTH, Integrated Health Services, Inc. and OPTA
Food Ingredients, Inc., all publicly traded companies. He is founder and
Chairman of the Mid-Atlantic Venture Association, which was organized in 1988.

     Ted H. McCourtney has been a member of the Company's Board of Directors
since August 1993. He has been a general partner of Venrock Associates, a
venture capital firm, since 1970. Mr. McCourtney is a member of the Board of
Directors of Cellular Communications, Inc., Cellular Communications of Puerto
Rico, Inc., Cellular Communications International, Inc., International CabelTel
Incorporated, SBSF, Inc. and Structural Dynamics Research Corporation, each of
which is publicly traded.

     Walter T. Mullikin, M.D., a surgeon, has been a member of the Company's
Board of Directors since November 1995. Dr. Mullikin was Chairman of the Board
of the general partner of MME from 1989 to 1995. He founded Pioneer Hospital and
the predecessors to MME's principal professional corporation in 1957. He was
also the Chairman of the Board, President and a shareholder of Mullikin
Independent Practice Association ("MIPA"), until November 1995. Dr. Mullikin is
a member of the Board of Directors of Health Net, a publicly traded HMO, and was
one of the founders and a past chairman of the Unified Medical Group
Association.

     John S. McDonald, J.D. has been a member of the Company's Board of
Directors since November 1995. Mr. McDonald was the Chief Executive Officer of
the general partner of MME from March 1994 to 1995, and he was an executive of
Pioneer Hospital and their related entities since 1967. Mr. McDonald was also a
director, the Secretary and a shareholder of MME's general partner. Mr. McDonald
is on the Board of Directors of the Truck Insurance Exchange and is a past
president of the Unified Medical Group Association.

     Rosalio J. Lopez, M.D. has been a member of the Company's Board of
Directors since November 1995. Mr. Lopez had been a director of the general
partner of MME since 1989. Dr. Lopez joined MME's principal professional
corporation in 1984 and serves as the Chairman of its Medical Council and Family
Practice and Managed Care committees. He also acted as a director and a Vice
President of MME's principal professional corporation. He is also a director and
shareholder of MIPA.

                                       56
<PAGE>   59

     Richard J. Kramer has been a member of the Company's Board of Directors
since November 1995. Mr. Kramer is President/Chief Executive Officer and a
director of Catholic Healthcare West ("CHW"). Before joining CHW in September
1989, Mr. Kramer served as the Executive Vice President of LifeSpan, Inc., a
multi-hospital/healthcare system headquartered in Minneapolis, which he joined
in 1971, serving in a variety of capacities, including Vice President of
Planning and Marketing and administrator for Abbott-Northwestern Hospital. Mr.
Kramer is currently a member of the Board of Directors of the California
Association of Hospitals and Health Systems and the Hospital Council of Northern
and Central California, the Board of Directors of the California Chamber of
Commerce, the Governing Council of the American Hospital Association Section on
Health Systems and the House of Delegates of the American Hospital Association,
the Advisory Council for the Center for Clinical Integration and the Board of
Directors of the Alumni Association of the University of Minnesota Program in
Health Care Administration.

     C.A. Lance Piccolo has been Vice Chairman of the Company's Board of
Directors since September 1996. From August 1992 to September 1996, he was
Chairman of the Board of Directors and Chief Executive Officer of Caremark. From
1987 until November 1992, Mr. Piccolo was an Executive Vice President of Baxter
and from 1988 until November 1992, he served as a director of Baxter. Mr.
Piccolo also serves as a director of Crompton & Knowles Corporation ("CKC") and
Baxter, each of which is publicly traded.

     Roger L. Headrick has been a member of the Company's Board of Directors
since September 1996 and has been President and Chief Executive Officer of the
Minnesota Vikings Football Club since 1991. Additionally, since June 1989, Mr.
Headrick has been President and Chief Executive Officer of ProtaTek
International, Inc., a bio-process and biotechnology company that develops and
manufactures animal vaccines. Prior to 1989, he was Executive Vice President and
Chief Financial Officer of The Pillsbury Company, a food manufacturing and
processing company. Mr. Headrick also serves as a director of CKC.

     Thomas W. Hodson has been a member of the Company's Board of Directors
since September 1996, and was the Senior Vice President and Chief Financial
Officer of Caremark from August 1992 until September 1996. Mr. Hodson was a
Group Vice President of Baxter, from April 1992 to November 1992, and from 1990
to 1992 he was a Senior Vice President of Baxter responsible for financial
relations, strategic planning, acquisitions and divestitures and corporate
communications. From 1988 to 1990, Mr. Hodson was a corporate vice president of
Baxter. Mr. Hodson also serves as a director of APACHE Medical Systems, Inc., a
publicly traded provider of clinically-based decision support information
systems to the healthcare industry.

     Harry M. Jansen Kraemer, Jr. has been a member of the Company's Board of
Directors since September 1996, and is a Vice President and Chief Financial
Officer of Baxter, having served in that capacity since November 1993. He was
promoted to Baxter's three-member Office of the Chief Executive in June 1995,
and appointed to Baxter's Board of Directors in November 1995. In addition to
his duties as its chief financial officer he is responsible for Baxter's Global
Hospital Business, Global Renal Business, and the Baxter Japan subsidiary. Mr.
Kraemer has been an employee of Baxter since 1982 serving in a variety of
positions, including Vice President, Group Controller for Baxter's hospital and
alternate-site businesses, president of Baxter's Hospitex Division and Vice
President Finance and Operations for Baxter's global-business group.

     The executive employment agreement of Mr. House requires that he be
nominated as a director during the term of the employment agreement. Drs.
Mullikin and Lopez and Messrs. McDonald and Kramer initially became members of
the Board of Directors in connection with the acquisition of MME, and Messrs.
Piccolo, Headrick, Hodson and Kraemer became members of the Board of Directors
in connection with the Caremark Acquisition, where it was agreed that at least
four members of the Company's thirteen member Board of Directors would be
designated by Caremark to serve for a three-year period. There are no family
relationships between any Directors, nominees for director or executive officers
of the Company. The Board of Directors of the Company held a total of eight
meetings and acted by unanimous written consent nine times during 1996.

CLASSIFIED BOARD OF DIRECTORS

     Pursuant to the terms of the Company's Certificate of Incorporation and
Bylaws, the Board of Directors is divided into three classes, with each class
being as nearly equal in number as reasonably possible. One class

                                       57
<PAGE>   60

holds office for a term that will expire at the Annual Meeting of Stockholders
to be held in 1997, a second class holds office for a term that will expire at
the Annual Meeting of Stockholders to be held in 1998 and a third class holds
office for a term that will expire at the Annual Meeting of Stockholders to be
held in 1999. Each director holds office for the term to which he is elected and
until his successors is duly elected and qualified. At each annual meeting of
stockholders of the Company, the successors to the class of directors whose
terms expire at such meeting are elected to hold office for a term expiring at
the annual meeting of stockholders held in the third year following the year of
their election. Messrs. Scrushy, McCourtney and Piccolo and Dr. Lopez have terms
expiring in 1997, Messrs. House, McDonald, Kramer, Newhall and Headrick have
terms expiring in 1998, and Messrs. Striplin, Kraemer and Hodson and Dr.
Mullikin have terms expiring in 1999. The Company's Board of Directors elect
officers annually and such officers serve at the discretion of the Board of
Directors.

COMMITTEES OF THE BOARD OF DIRECTORS

     The Board of Directors of the Company currently has two committees: the
Audit Committee and the Compensation Committee.

     The Audit Committee has the responsibility for reviewing and supervising
the financial controls of the Company. The Audit Committee makes recommendations
to the Board of Directors of the Company with respect to the Company's financial
statements and the appointment of independent auditors, reviews significant
audit and accounting policies and practices, meets with the Company's
independent public accountants concerning, among other things, the scope of
audits and reports, and reviews the performance of overall accounting and
financial controls of the Company. The Audit Committee consists of Messrs.
McCourtney and Hodson and Dr. Lopez. During 1996, there were three meetings of
the Audit Committee.

     The Compensation Committee has the responsibility for reviewing the
performance of the officers of the Company and recommending to the Board of
Directors of the Company's annual salary and bonus amounts for all officers of
the Company. The Compensation Committee also administers the Company's 1993
Stock Option Plan, 1995 Stock Option Plan, MedPartners Incentive Compensation
Plan and the MedPartners 1997 Long Term Incentive Compensation Plan. The
Compensation Committee consists of Messrs. Newhall, McDonald and Headrick.
During 1996, there were two meetings of the Compensation Committee.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Exchange Act requires the Company's officers and
directors and persons who beneficially own more than 10% of a registered class
of the Company's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission and the New York Stock
Exchange. Officers, directors and beneficial owners of more than 10% of the
Company's Common Stock are required by regulations promulgated by the Securities
and Exchange Commission to furnish the Company with copies of all Section 16(a)
forms that they file. Based solely on review of the copies of such forms
furnished to the Company, or written representations that no reports on Form 5
were required, the Company believes that during 1996, all of its officers,
directors and greater-than-10% beneficial owners complied with Section 16(a)
filing requirements to them, except that Harold O. Knight, Jr. filed a Form 4
due March 10, 1996 late as a result of an exchange of shares of MedPartners
Common Stock by operation of law, and John J. Gannon filed his Form 3 late as a
result of a difficult travel schedule.

                                       58
<PAGE>   61

ITEM 11.  EXECUTIVE COMPENSATION.

     Executive Officer Compensation.  The following table presents certain
information concerning compensation paid or accrued for services rendered to the
Company in all capacities during the years ended December 31, 1996, 1995 and
1994, for the Chief Executive Officer and the four other most highly compensated
executive officers of the Company whose total annual salary and bonus in the
last fiscal year exceeded $100,000 (collectively, the "Named Executive
Officers").

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                 LONG-TERM
                                                ANNUAL COMPENSATION             COMPENSATION
                                       --------------------------------------      AWARDS
                                                                    OTHER       ------------
                                                                    ANNUAL       SECURITIES     ALL OTHER
      NAME AND PRINCIPAL                                         COMPENSATION    UNDERLYING    COMPENSATION
        POSITION HELD           YEAR   SALARY ($)   BONUS ($)       ($)(1)      OPTIONS (#)        ($)
      ------------------        ----   ----------   ----------   ------------   ------------   ------------
<S>                             <C>    <C>          <C>          <C>            <C>            <C>
Larry R. House(2).............  1996    $717,852    $1,786,429           --      2,700,000(6)   $  25,000(8)
  Chairman of the Board,        1995     349,908       600,000           --        828,000         28,335
  President and Chief
     Executive                  1994     335,000            --           --        457,000         25,474
  Officer
Mark L. Wagar(3)..............  1996     350,002       317,174           --        700,000(7)      25,750(8)
  President -- Western
     Operations                 1995     346,601            --           --        250,000         30,485
James G. Connelly, III(4).....  1996     383,852     2,827,968(5)   $ 74,400       230,000        405,996(8)
  President -- Caremark
Kristen E. Gibney(4)..........  1996     330,147     2,153,582(5)    620,200       175,000        427,566(8)
  Vice President -- Caremark
Michelle J. Hooper(4).........  1996     253,641     1,318,713(5)         --       100,000        184,448(8)
  Vice President -- Caremark
</TABLE>

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

 (1) Dollar value of perquisites and other benefits were less than the lesser of
     $50,000 or 10% of total salary and bonus for each Named Executive Officer.
 (2) Pursuant to a reimbursement agreement, the Company paid HEALTHSOUTH the sum
     of $150,195 as reimbursement for services rendered by Mr. House from
     January 1, 1994 to August 31, 1994, when the agreement terminated. See
     "-- Compensation Committee Interlocks and Insider Participation".
 (3) Mr. Wagar commenced employment on January 1, 1995.
 (4) These Named Executive Officers commenced employment on September 5, 1996,
     at the time of the Caremark Acquisition but the table includes all
     compensation paid to them in 1996.
 (5) Bonuses for these Named Executive Officers include the following amounts:
     Mr. Connelly -- $2,707,968 retention bonus; Ms. Gibney -- $1,962,174
     retention bonus, and $55,800 restricted stock option; Ms.
     Hooper -- $1,127,305 retention bonus, and $55,800 restricted stock option.
 (6) Includes 500,000 options originally granted in 1995 and repriced in 1996,
     and 600,000 options granted in 1996 but effectively cancelled by subsequent
     repricing.
 (7) Includes 250,000 options originally granted in 1995 and repriced in 1996,
     and 150,000 options granted in 1996 but effectively cancelled by subsequent
     repricing.
 (8) Other compensation shown for the Named Executive Officers in 1996 includes
     contributions by the Company in the following amounts: Mr. House -- $25,750
     split dollar life insurance; Mr. Wagar -- $25,000 split dollar life
     insurance, and $750 401k plan; Mr. Connelly -- $10,357 split dollar life
     insurance, $21,946 401k plan, and $373,693 non-qualified pension plan; Ms.
     Hooper -- $2,994 split dollar life insurance, $15,384 401k plan, and
     $166,070 non-qualified pension plan; and Ms. Gibney -- $4,916 split dollar
     life insurance, $17,919 401k plan, and $404,731 non-qualified pension plan.

                                       59
<PAGE>   62

     Option Grants in 1996.  The following table contains information concerning
the grant of stock options under the Stock Option Plans (as defined below) to
the Named Executive Officers in 1996:

                       OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                                                                               POTENTIAL REALIZABLE
                                                                                                 VALUE AT ASSUMED
                                                 INDIVIDUAL GRANTS                                 ANNUAL RATES
                          ----------------------------------------------------------------        OF STOCK PRICE
                              NUMBER OF        PERCENT OF TOTAL                                  APPRECIATION FOR
                              SECURITIES       OPTIONS GRANTED    EXERCISE OR                     OPTION TERM(2)
                          UNDERLYING OPTIONS     TO EMPLOYEES     BASE PRICE    EXPIRATION   -------------------------
NAME                        GRANTED (#)(1)      IN FISCAL YEAR      ($/SH)         DATE        5% ($)        10% ($)
----                      ------------------   ----------------   -----------   ----------   -----------   -----------
<S>                       <C>                  <C>                <C>           <C>          <C>           <C>
Larry R. House..........        500,000(3)(4)         4.4%          $16.625      11/21/05    $ 4,791,434   $11,911,841
                                600,000(3)(5)         5.3            25.759       4/10/06
                                                                                               9,716,422    24,623,321
                                600,000(3)(6)         5.3            16.625       4/10/06
                                                                                               6,046,764    15,197,843
                              1,000,000(3)            8.9            16.625       7/24/06
                                                                                              10,455,373    26,495,968
Mark L. Wagar...........        150,000(4)            1.3%          $16.625      11/29/05    $ 1,441,636   $ 3,586,240
                                100,000(3)(4)         0.9            16.625      11/29/05
                                                                                                 961,091     2,390,827
                                150,000(5)            1.3            25.750       4/10/06
                                                                                               2,429,105     6,155,830
                                150,000(6)            1.3            16.625       4/10/06
                                                                                               1,511,691     3,799,461
                                150,000               1.3            16.625       7/24/06
                                                                                               1,568,306     3,974,395
James G. Connelly,                                                                           $ 2,874,835   $ 7,285,395
  III...................        230,000               2.0%          $19.875        9/5/06
Kristen E. Gibney.......        175,000               1.6%          $19.875        9/5/06    $ 2,187,374   $ 5,543,235
Michele J. Hooper.......        100,000               0.9%          $19.875        9/5/06    $ 1,249,928   $ 3,167,563
</TABLE>

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

(1) The vesting of each option is cumulative and no vested portion expires until
    the expiration of the option. Unless otherwise noted, options vest at the
    rate of 20% per year over a 5-year period beginning on the original grant
    date.
(2) The potential realizable value is calculated based on the term of the option
    at its time of grant (10 years) or its time of repricing (remaining term),
    as applicable. It is calculated by assuming that the stock price on the date
    of grant appreciates at the indicated annual rate compounded annually for
    the entire term of the option and that the option is exercised and sold on
    the last day of its term for the appreciated stock price. No gain to the
    optionee is possible unless the stock price increases over the option term,
    which will benefit all stockholders.
(3) These options are 100% vested.
(4) These options were originally granted in 1995, but were repriced in 1996.
    See "Repricing of Outstanding Options".
(5) These options were granted in 1996, but were effectively cancelled by
    subsequent repricing. See "Repricing of Outstanding Options".
(6) These options are the repriced options that effectively replaced options
    granted earlier in 1996. See "Repricing of Outstanding Options".

                                       60
<PAGE>   63

     Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values.  The following table provides information with respect to options
exercised by the Named Executive Officers during 1996 and the number and value
of securities underlying unexercised options held by the Named Executive
Officers at December 31, 1996.

   AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
                                     VALUES

<TABLE>
<CAPTION>
                                                                                               VALUE OF
                                                                                              UNEXERCISED
                                                             NUMBER OF SECURITIES            IN-THE-MONEY
                                                            UNDERLYING UNEXERCISED            OPTIONS AT
                                                             OPTIONS AT FY-END(#)            FY-END($)(1)
                           SHARES ACQUIRED      VALUE      -------------------------   -------------------------
          NAME             ON EXERCISE(#)    REALIZED($)   EXERCISABLE/UNEXERCISABLE   EXERCISABLE/UNEXERCISABLE
          ----             ---------------   -----------   -------------------------   -------------------------
<S>                        <C>               <C>           <C>                         <C>
Larry R. House...........       55,000       $1,694,000                2,428,000/  --              $11,532,500/$--
Mark L. Wagar............           --       $       --                  220,000/330,000             $   907,500/$1,361,250
James G. Connelly, III...           --       $       --                  610,465/184,000             $ 5,401,324/$161,000
Kristen E. Gibney........       47,388(2)    $  620,200                  211,236/   --              $1,408,721/$--
Michele J. Hooper........           --       $       --                  213,170/ 80,000              $1,588,429/$70,000
</TABLE>

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

(1) Based on December 31, 1996 closing price for MedPartners Common Stock of
    $20.75.
(2) Includes options to purchase shares of Caremark exercised prior to the
    Caremark Acquisition and gives effect to the exchange ratio of 1.21 shares
    of MedPartners Common Stock for each share of Caremark.

DIRECTOR COMPENSATION

     Officers of the Company do not receive any additional compensation for
serving as members of the Board of Directors or any of its committees. Effective
January 1, 1996 and prior to July 25, 1996, non-employee directors were paid
directors' fees of $2,500 for each meeting of the Board of Directors attended in
person, $500 for each meeting of the Board of Directors attended by phone, and
$1,000 for each meeting of the Audit Committee or the Compensation Committee
attended in person. Directors were reimbursed for travel costs and other
out-of-pocket expenses incurred in attending each meeting of the Board of
Directors or one of its committees. In addition, non-employee directors received
an annual grant of stock options for 10,000 shares of the Company's Common Stock
under the Stock Option Plans (as hereinafter defined). Such options vest in 20%
increments and expire ten years after the grant date. The exercise price of such
options was determined by the closing price of the Company's Common Stock on the
NYSE on the date of the option grant. Effective July 26, 1996, non-employee
directors were paid directors' fees of $3,000 for each meeting of the Board of
Directors attended in person, $1,000 for each meeting of the Board of Directors
attended by phone, and $1,000 for each meeting of the Audit Committee or the
Compensation Committee attended in person. In addition, non-employee directors
receive an annual grant of stock options for 25,000 shares of the Company's
Common Stock under the Stock Option Plans. In July 1996, each of Messrs. Kramer,
McCourtney, McDonald, Mullikin, Newhall, Scrushy and Striplin were granted an
option to purchase 10,000 shares of Common Stock, all at an exercise price of
$16.625 per share, the market price on the grant date. See "Executive Officer
Compensation and Other Matters -- Option Grants in 1996".

     Dr. Lopez was granted an option to purchase 30,000 shares of Common Stock
in April 1996 and 35,000 shares of Common Stock in September 1996, which shares
have an exercise price of $16.625 per share and $19.875 per share, respectively.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     Messrs. Newhall, McCourtney and McDonald served on the Compensation
Committee of the Board of Directors of the Company throughout 1996, joined by
Mr. Headrick in September 1996. Mr. House served on the Compensation Committee
until February 1996.

     In connection with the MME Acquisition, the Company entered into a
Termination and a Consulting Agreement with Mr. McDonald. Under the Termination
Agreement, Mr. McDonald's employment agreement with MME was terminated in
consideration for which Mr. McDonald received a lump sum payment of $796,000,
continuation of certain fringe benefits and perquisites under the former
employment agreement for

                                       61
<PAGE>   64

36 months, access to an office and support staff until death or disability,
payments from the Company and a trust set up by the Company to fund the
remainder of MME's pension obligations to Mr. McDonald, and payment of all
health and medical care (including prescriptions) for Mr. McDonald for the
remainder of his life through a Company-sponsored health insurance plan. Under
the five-year Consulting Agreement, Mr. McDonald will receive in consideration
for his services a consulting fee of $2,230,000, to be paid over the term of the
agreement with an initial payment of $669,000 on November 29, 1995, and equal
payments of $390,250 on each anniversary of such date, access to an office and
support staff and certain other benefits. See "Certain Relationships and Related
Transactions -- MME Acquisition Agreements".

EMPLOYMENT AGREEMENTS

     The Company has employment agreements with Messrs. House and Wagar
(individually, the "Executive" and collectively, the "Executives"). Mr. House's
employment agreement, which has a term of five years, provides that Mr. House
shall be employed as the Chairman of the Board, President and Chief Executive
Officer and shall be nominated as a director of the Company during such term.
The agreement provides for a base salary of $935,700, an annual incentive bonus
of up to $776,700, based on the achievement of certain performance standards
established by the Compensation Committee, and eligibility for other benefits
normally found in executive employment agreements. The employment agreement for
Mr. Wagar provides for a base salary of $350,000 and for an annual incentive and
performance bonus of up to 75% of base salary in addition to employee benefits
similar to those provided in Mr. House's agreement. Each of the employment
agreements is automatically extended for an additional year on the anniversary
thereof unless the Company shall give prior notice of non-extension.

     The Executives are entitled to certain compensation upon termination of
their employment agreement prior to its expiration. If the Company terminates
the agreement for "Cause" (as defined) or if the Executive terminates without
"Good Reason" (as defined), the Executive will receive a lump sum payment of six
months base salary (12 months in the case of Mr. House) plus certain employment
benefits. If the agreement terminates due to the Executive's death, disability
or retirement, the Executive will receive a lump sum payment of six months base
salary (12 months in the case of Mr. House), accrued bonus and immediate vesting
of all stock options. If the Executive terminates the agreement for "Good
Reason" and no "Change in Control" (as defined) of the Company has occurred, the
Executive will receive continued salary and bonus payments for three years (or,
if greater, for the remainder of the contract term in the case of Mr. House),
continued participation in employee benefit plans for such period and immediate
vesting of all stock options. If the Company terminates the agreement without
Cause after a Change in Control or if the Executive terminates after a Change in
Control for Good Reason, the Executive shall receive a lump sum payment equal to
three times the Executive's base salary and bonus at the time of termination,
continued benefits for a term of three years and immediate vesting of all stock
options. The agreements provide that any payment by the Company to the Executive
which is subject to the excise tax imposed by Section 4999 of the Code shall be
"grossed up" such that the Executive retains an amount of the "gross up" payment
equal to the excise tax imposed on the original payment.

                                       62
<PAGE>   65

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The following table sets forth certain information regarding beneficial
stock ownership of the Company as of March 1, 1997: (i) each director and Named
Executive Officer of the Company, (ii) all directors and executive officers as a
group, and (iii) each stockholder known by the Company to be the beneficial
owner of more than 5% of the outstanding MedPartners Common Stock. Except as
otherwise indicated, each person or entity listed below has sole voting and
investment power with respect to all shares shown to be beneficially owned by
him or it except to the extent such power is shared by a spouse under applicable
law.

<TABLE>
<CAPTION>
                                                                                 NUMBER OF
                                                                                 SHARES OF
                                                                                MEDPARTNERS        %
      NAME OF BENEFICIAL OWNER                      POSITION HELD               COMMON STOCK     OWNED
      ------------------------                      -------------               ------------     -----
<S>                                    <C>                                      <C>              <C>
Larry R. House.......................  Chairman of the Board, President and
                                       Chief Executive Officer                    4,820,522(1)   2.76%
Mark L. Wagar........................  President -- Western Operations              331,005(2)    *
James G. Connelly, III...............  President -- Caremark                        649,145(3)    *
Kristen E. Gibney....................  Vice President -- Caremark                    19,633(4)    *
Michele J. Hooper....................  Vice President -- Caremark                   267,584(5)    *
Roger L. Headrick....................  Director                                      91,938(6)    *
Thomas W. Hodson.....................  Director                                     584,046(7)    *
Harry M. Jansen Kraemer, Jr..........  Director                                       5,565(8)    *
Richard J. Kramer....................  Director                                   1,876,974(9)    *
Rosalio J. Lopez, M.D................  Director                                     120,069(10)   *
Ted H. McCourtney....................  Director                                      63,841(11)   *
John S. McDonald, J.D................  Director                                     310,281(12)   *
Walter T. Mullikin, M.D..............  Director                                     439,424(13)   *
Charles W. Newhall, III..............  Director                                   1,509,000(14)   *
C. A. Lance Piccolo..................  Director                                   1,427,519(15)   *
Richard M. Scrushy...................  Director                                   1,927,500(16)  1.13%
Larry D. Striplin, Jr................  Director                                     110,100(17)   *
All executive officers & directors as
  a group (23 persons)...............                                            15,925,703(18)  8.95%
</TABLE>

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

  * Less than one percent.
 (1) Includes options to purchase 3,653,000 shares.
 (2) Includes options to purchase 328,000 shares.
 (3) Includes options to purchase 610,465 shares.
 (4) Includes no options.
 (5) Includes options to purchase 213,170 shares.
 (6) Includes options to purchase 59,208 shares, and 1,210 shares held by
     spouse.
 (7) Includes options to purchase 5,000 shares, and 6,142 shares held by the
     Hodson Foundation.
 (8) Includes options to purchase 5,000 shares, and 50 shares held by spouse.
 (9) Includes options to purchase 9,000 shares, and 1,867,674 shares held by
     DCNHS -- West Partnership, L.P. ("DCNHS"). Mr. Kramer is the President and
     Chief Executive Officer of Catholic Healthcare West, which is the sole
     general partner of DCNHS. Mr. Kramer disclaims beneficial ownership of the
     shares held by DCNHS.
(10) Includes options to purchase 31,000 shares, and 81,293 shares held in trust
     for the benefit of Dr. Lopez and members of his family.
(11) Includes options to purchase 9,000 shares.
(12) Includes options to purchase 9,000 shares, and 301,281 shares held by
     certain trusts for the benefit of Mr. McDonald.
(13) Includes options to purchase 9,000 shares, and 430,424 shares held by the
     Mullikin Family Trust U/D/T, dated February 10, 1976, for the benefit of
     Dr. Mullikin and members of his family.

                                       63
<PAGE>   66

(14) Includes options to purchase 9,000 shares, and 1,500,000 shares held by New
     Enterprise Associates VI, Limited Partnership ("NEA"). Mr. Newhall is a
     general partner of NEA Partners VI, Limited Partnership, which is the
     general partner of NEA. Mr. Newhall disclaims beneficial ownership of the
     shares held by NEA.
(15) Includes options to purchase 1,317,126 shares.
(16) Includes options to purchase 29,000 shares, 250,000 shares held in trust
     for minor children, and 1,098,500 shares held by HEALTHSOUTH Rehabilitation
     Corporation ("HEALTHSOUTH"). Mr. Scrushy is Chairman of the Board,
     President and Chief Executive Officer of HEALTHSOUTH. Mr. Scrushy disclaims
     beneficial ownership of the shares held by HEALTHSOUTH.
(17) Includes options to purchase 13,000 shares.
(18) Includes options to purchase 7,055,599 shares.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

MME ACQUISITION AGREEMENTS

     Termination Agreements.  In November 1995 in connection with the MME
Acquisition, the Company and each of Dr. Walter T. Mullikin, M.D. and John S.
McDonald, J.D., entered into a Termination Agreement that terminated their
previous employment agreements with MME, in consideration of which they
received, or shall receive, a lump sum payment of $1,064,000, in the case of Dr.
Mullikin, and $796,000 in the case of Mr. McDonald, continuation of certain
fringe benefits and perquisites for 36 months, payments from the Company and a
trust set up by the Company to fund the remainder of MME's pension obligations
to Dr. Mullikin or to Dr. Mullikin's spouse, should she survive him, and Mr.
McDonald, payment of all health and medical care (including prescriptions) for
Dr. Mullikin and his spouse and Mr. McDonald for the remainder of their lives
through a Company-sponsored health insurance plan, a death payment benefit to be
paid to Dr. Mullikin's designated beneficiary or estate of $2,700,000, and
certain other benefits.

     Consulting Agreements.  In November 1995, the Company and each of Dr.
Mullikin and Mr. McDonald entered into five-year Consulting Agreements whereby
they will receive in consideration for their services: consulting fees of
$2,480,000 to Dr. Mullikin, to be paid over the term of the agreement with an
initial payment of $744,000 on November 29, 1995 and equal payments of $434,000
on each anniversary of such date, and $2,230,000 to Mr. McDonald, to be paid
over the term of the agreement with an initial payment of $669,000 on November
29, 1995 and equal payments of $390,250 on each anniversary thereof, access to
an office and support staff and certain other benefits.

CAREMARK ACQUISITION AGREEMENTS

     Termination Agreements.  In September 1996 in connection with the Caremark
Acquisition, the employment of Messrs. Piccolo and Hodson was terminated,
entitling them to severance payments of $2,805,426 and $1,052,138, respectively,
and certain other benefits provided in their severance agreements. See
"Executive Compensation and Other Information -- Compensation Committee
Interlocks and Insider Participation".

     Consulting Agreements.  In September 1996, the Company and each of Messrs.
Piccolo and Hodson, non-directors of the Company, entered into a consulting
agreement (the "Piccolo Agreement" and "Hodson Agreement", respectively). The
term of the Piccolo Agreement is ten years, unless terminated sooner. Over the
course of such ten-year period, Mr. Piccolo will be paid consulting fees
totaling approximately $5.4 million. The "gross up" provisions of that severance
agreement will apply to payments made pursuant to the Piccolo Agreement in the
event such consulting payments are determined to be "excess parachute" payments.
Mr. Piccolo or his spouse will be eligible to participate in all health and
medical employee benefit plans and programs available, from time to time, to
employees of the Company and Caremark until he reaches the age of 65. After age
65, Mr. Piccolo and his spouse will be provided with a prescription drug program
comparable to that provided Caremark employees through Caremark's prescription
drug benefit program. Mr. Piccolo will be provided with an adequate office and
secretarial support, as well as reimbursement of reasonable expenses, and will
be subject to certain non-compete and confidentiality restrictions.

                                       64
<PAGE>   67

     The term of the Hodson Agreement is one year, unless terminated sooner.
Over the term, Mr. Hodson will be paid consulting fees of $318,856. The Hodson
Agreement may be extended on the same terms for an additional one-year period.
The "gross up" provisions of that severance agreement will apply to payments
made pursuant to the Hodson Agreement in the event such consulting payments are
determined to be "excess parachute" payments.

                                    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 consolidated financial statements of the Company and its subsidiaries
filed as a part of this Annual Report on Form 10-K are listed in Item 8 of the
Annual Report on Form 10-K, which listing is hereby incorporated herein by
reference.

  2. Financial Statement Schedules.

     All schedules for which provision is made in the applicable accounting
regulations of the Commission have been omitted because they are not required
under the related instructions, or are inapplicable, or because the information
has been provided in the consolidated financial statement or the Notes thereto.

  3. Exhibits.

     The Exhibits filed as a part of this Annual Report are listed in Item 14(c)
of this Annual Report on Form 10-K, which is hereby incorporated herein by
reference.

(B) REPORTS ON FORM 8-K.

     The following reports on Form 8-K were filed during the fourth quarter of
1996.

          (a) Current Report on Form 8-K filed October 29, 1996 reporting the
     agreement with Integrated Health Services, Inc. related to the settlement
     of the Coran litigation.

          (b) Current Report on Form 8-K filed December 5, 1996 reporting the
     updating of certain information about the Company as a result of
     acquisitions during 1996.

          (c) Current Report on Form 8-K filed December 6, 1996 reporting the
     acquisition of Drs. Sheer, Ahearn and Associates, P.A. and Cardinal
     Healthcare, P.A. and the earnings of the Company for October, 1996.

(C) EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
  NO.                                  DESCRIPTION
-------                                -----------
<C>       <C>  <S>
  (2)-1    --  Amended and Restated Agreement to Purchase Assets, dated as
               of March 11, 1996, as amended by Amendment No. 1 dated June
               28, 1996, by and among MedPartners/Mullikin, Inc.,
               MedPartners, Inc. and New Management, filed as Exhibit (2)-2
               to the Company's Registration Statement on Form S-4
               (Registration No. 333-4348), is hereby incorporated herein
               by reference.
  (2)-2    --  Plan and Agreement of Merger, dated as of May 13, 1996,
               among MedPartners/Mullikin, Inc., PPM Merger Corporation and
               Caremark International, Inc., filed as Exhibit (2)-1 to the
               Company's Registration Statement on Form S-4 (Registration
               No. 333-09767), is hereby incorporated herein by reference.
  (2)-3    --  Amended and Restated Plan of Agreement of Merger, dated as
               of October 24, 1996, among MedPartners, Inc. and Cardinal
               HealthCare, P.A.
</TABLE>

                                       65
<PAGE>   68
<TABLE>
<CAPTION>
EXHIBIT
  NO.                                  DESCRIPTION
-------                                -----------
<C>       <C>  <S>
  (2)-4    --  Plan and Agreement of Merger, dated as of November 20, 1996,
               among MedPartners, Inc., SA Merger Corporation and Drs.
               Sheer Ahearn & Associates, P.A.
  (3)-1    --  MedPartners, Inc. Third Restated Certificate of
               Incorporation.
  (3)-2    --  MedPartners, Inc. Second Amended and Restated Bylaws, filed
               as Exhibit (3)-2 to the Company's Registration Statement on
               Form S-1 (Registration No. 333-12465), is hereby
               incorporated herein by reference.
  (4)-1    --  MedPartners, Inc. Rights Plan, filed as Exhibit (4)-1 to the
               Company's Registration Statement on Form S-4 (Registration
               No. 33-00774), is hereby incorporated herein by reference.
  (4)-2    --  Amendment No. 1 to the Rights Plan of MedPartners, Inc.
  (4)-3    --  Amendment No. 2 to the Rights Plan of MedPartners, Inc.,
               filed as Exhibit (4)-2 to the Company's Registration
               Statement on Form S-3 (Registration No. 333-17339), is
               hereby incorporated herein by reference.
 (10)-1    --  Consulting Agreement, dated as of August 7, 1996, by and
               among Caremark International Inc., MedPartners, Inc. and
               C.A. Lance Piccolo, filed as Exhibit (10)-1 to the Company's
               Registration Statement on Form S-4 (Registration No.
               333-09767), is hereby incorporated herein by reference.
 (10)-2    --  Consulting Agreement, dated as of August 7, 1996, by and
               among Caremark International Inc., MedPartners, Inc. and
               Thomas W. Hodson, filed as Exhibit (10)-2 to the Company's
               Registration Statement on Form S-4 (Registration No.
               333-09767), is hereby incorporated herein by reference.
 (10)-3    --  Consulting Agreement, dated as of November 29, 1995, by and
               between MedPartners, Inc. and Walter T. Mullikin, M.D.,
               filed as Exhibit (10)-1 to the Company's Registration
               Statement on Form S-1 (Registration No. 333-1130), is hereby
               incorporated herein by reference.
 (10)-4    --  Termination Agreement, dated as of November 29, 1995, by and
               between MedPartners/Mullikin, Inc. and Walter T. Mullikin,
               filed as Exhibit (10)-2 to the Company's Registration
               Statement on Form S-1 (Registration No. 333-1130), is hereby
               incorporated herein by reference.
 (10)-5    --  Consulting Agreement, dated as of November 29, 1995, by and
               between MedPartners/Mullikin, Inc. and John S. McDonald,
               filed as Exhibit (10)-3 to the Company's Registration
               Statement on Form S-1 (Registration No. 333-1130), is hereby
               incorporated herein by reference.
 (10)-6    --  Termination Agreement, dated as of November 29, 1995, by and
               between MedPartners/Mullikin, Inc. and John S. McDonald,
               filed as Exhibit (10)-4 to the Company's Registration
               Statement on Form S-1 (Registration No. 333-1130), is hereby
               incorporated herein by reference.
 (10)-7    --  Employment Agreement, dated July 24, 1996, by and between
               MedPartners, Inc. and Larry R. House, filed as Exhibit
               (10)-7 to the Company's Registration Statement on Form S-1
               (Registration No. 333-12465), is hereby incorporated herein
               by reference.
 (10)-8    --  Employment Agreement, dated July 24, 1996, by and between
               MedPartners, Inc. and Mark L. Wagar, filed as Exhibit (10)-8
               to the Company's Registration Statement on Form S-1
               (Registration No. 333-12465), is hereby incorporated herein
               by reference.
 (10)-9    --  Employment Agreement, dated July 24, 1996, by and between
               MedPartners, Inc. and Harold O. Knight, Jr., filed as
               Exhibit (10)-9 to the Company's Registration Statement on
               Form S-1 (Registration No. 333-12465), is hereby
               incorporated herein by reference.
(10)-10    --  Employment Agreement, dated July 24, 1996, by and between
               MedPartners, Inc. and Tracy P. Thrasher, filed as Exhibit
               (10)-10 to the Company's Registration Statement on Form S-1
               (Registration No. 333-12465), is hereby incorporated herein
               by reference.
(10)-11    --  Credit Agreement, dated September 5, 1996, by and among
               MedPartners, Inc., NationsBank, National Association
               (South), as administrative agent for the Lenders, The First
               National Bank of Chicago, as Documentation Agent for the
               Lenders, and the Lenders thereto, filed as Exhibit (10)-17
               to the Company's Registration Statement on Form S-1
               (Registration No. 333-12465), is hereby incorporated herein
               by reference.
</TABLE>

                                       66
<PAGE>   69
<TABLE>
<CAPTION>
EXHIBIT
  NO.                                  DESCRIPTION
-------                                -----------
<C>       <C>  <S>
(10)-12    --  Amendment No. 1 to Credit Agreement and Consent, dated
               September 5, 1996, by and among MedPartners, Inc.,
               NationsBank, National Association (South), as administrative
               agent for the Lenders, The First National Bank of Chicago,
               as Documentation Agent for the Lenders, and the Lenders
               thereto, filed as Exhibit (10)-18 to the Company's
               Registration Statement on Form S-1 (Registration No.
               333-12465), is hereby incorporated herein by reference.
(10)-13    --  MedPartners/Mullikin, Inc. 1993 Stock Option Plan, filed as
               Exhibit (4)-1 to the Company's Registration Statement on
               Form S-8 (Registration No. 333-00234), is hereby
               incorporated herein by reference.
(10)-14    --  MedPartners/Mullikin, Inc. 1995 Stock Option Plan, as
               amended, filed as Exhibit (4)-2 to the Company's
               Registration Statement on Form S-4 (Registration No.
               333-00774), is hereby incorporated herein by reference.
(10)-15    --  MedPartners Incentive Compensation Plan, filed as Exhibit
               (4)-2 to the Company's Registration Statement on Form S-8
               (Registration No. 333-11875), is hereby incorporated herein
               by reference.
(10)-16    --  Caremark International Inc. 1992 Stock Option Plan for
               Non-Employee Directors, filed as Exhibit (4)-2 to the
               Company's Registration Statement on Form S-8 (Registration
               No. 333-14163), is hereby incorporated herein by reference.
(10)-17    --  MedPartners 1997 Long Term Incentive Compensation Plan,
               dated as of February 25, 1997.
   (11)    --  Statement re: Earnings per share.
   (21)    --  Subsidiaries of MedPartners, Inc.
   (23)    --  Consent of Ernst & Young LLP.
   (27)    --  Financial Data Schedule (for SEC use only)
</TABLE>

                                       67
<PAGE>   70

                                   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.

                                          MEDPARTNERS, INC.

                                          By        /s/ LARRY R. HOUSE
                                            ------------------------------------
                                                       Larry R. House
                                                    Chairman, President
                                                and Chief Executive Officer

                                          Date:  March 28, 1997

     Pursuant to the requirements of the Securities 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.

<TABLE>
<CAPTION>
                      SIGNATURE                                     CAPACITY                    DATE
                      ---------                                     --------                    ----
<C>                                                      <S>                               <C>

                /s/ S. LARRY R. HOUSE                    Chairman of the Board,            March 28, 1997
-----------------------------------------------------      President and Chief
                   Larry R. House                          Executive Officer and
                                                           Director

              /s/ HAROLD O. KNIGHT, JR.                  Executive Vice President and      March 28, 1997
-----------------------------------------------------      Chief Financial Officer
                Harold O. Knight, Jr.

               /s/ RICHARD M. SCRUSHY                    Director                          March 28, 1997
-----------------------------------------------------
                 Richard M. Scrushy

             /s/ LARRY D. STRIPLIN, JR.                  Director                          March 28, 1997
-----------------------------------------------------
               Larry D. Striplin, Jr.

             /s/ CHARLES W. NEWHALL, III                 Director                          March 28, 1997
-----------------------------------------------------
               Charles W. Newhall, III

                /s/ TED H. MCCOURTNEY                    Director                          March 28, 1997
-----------------------------------------------------
                  Ted H. McCourtney

            /s/ WALTER T. MULLIKIN, M.D.                 Director                          March 28, 1997
-----------------------------------------------------
              Walter T. Mullikin, M.D.

             /s/ JOHN S. MCDONALD, J.D.                  Director                          March 28, 1997
-----------------------------------------------------
               John S. McDonald, J.D.

                /s/ RICHARD J. KRAMER                    Director                          March 28, 1997
-----------------------------------------------------
                  Richard J. Kramer

             /s/ ROSALIO J. LOPEZ, M.D.                  Director                          March 28, 1997
-----------------------------------------------------
               Rosalio J. Lopez, M.D.
</TABLE>

                                       68
<PAGE>   71
<TABLE>
<CAPTION>
                      SIGNATURE                                     CAPACITY                    DATE
                      ---------                                     --------                    ----
<C>                                                      <S>                               <C>

               /s/ C.A. LANCE PICCOLO                    Director                          March 28, 1997
-----------------------------------------------------
                 C.A. Lance Piccolo

                /s/ THOMAS W. HODSON                     Director                          March 28, 1997
-----------------------------------------------------
                  Thomas W. Hodson

                /s/ ROGER L. HEADRICK                    Director                          March 28, 1997
-----------------------------------------------------
                  Roger L. Headrick

          /s/ HARRY M. JANSEN KRAEMER, JR.               Director                          March 28, 1997
-----------------------------------------------------
            Harry M. Jansen Kraemer, Jr.
</TABLE>

                                       69