<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

                                    FORM 10-Q


(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996

                                       OR

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

FOR THE TRANSITION PERIOD FROM                TO 
                               --------------     -------------

                         COMMISSION FILE NUMBER: 0-27276


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

                                MEDPARTNERS, INC
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                Delaware                               63-1151076
     (State or Other Jurisdiction of                 (I.R.S. Employer
     Incorporation or Organization)                  Identification No.)

                         3000 GALLERIA TOWER, SUITE 1000
                            BIRMINGHAM, ALABAMA 35244
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                                  (205)733-8996
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

        Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

              Class                        Outstanding at November 8, 1996
              -----                        -------------------------------

    Common stock, par value                                      *
      $.001 per share                                 159,219,926

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


                                       1

<PAGE>   2


No Information Submitted Under This Caption

                                MEDPARTNERS, INC.

                          QUARTERLY REPORT ON FORM 10-Q

                                      INDEX

<TABLE>
<CAPTION>
                                                                                                                Page
                                                                                                                ----

PART I - FINANCIAL INFORMATION                                                                                    
<S>                                                                                                               <C>
Item 1.           Financial Statements

         Consolidated Balance Sheets -
         December 31, 1995 (Audited) and September 30, 1996 (Unaudited).......................................... 3

         Consolidated Statements of Operations (Unaudited)-
         Three Months Ended September 30, 1995 and 1996.......................................................... 4

         Consolidated Statements of Operations (Unaudited) -
         Nine Months Ended September 30, 1995 and 1996........................................................... 5

         Consolidated  Statements of Cash Flows (Unaudited) -
         Nine Months Ended September 30, 1995 and 1996......................... ..................................6

         Notes to Consolidated Financial Statements (Unaudited)...................................................7

Item 2.           Management's Discussion and Analysis of Financial
                  Condition and Results of Operations............................................................14

PART II - OTHER INFORMATION

Item 1.           Legal Proceedings..............................................................................20

Item 4.           Submission of matters to a Vote of Security Holders............................................21

Item 6.           Exhibits and Reports on Form 8-K...............................................................21
</TABLE>


                                       2

<PAGE>   3


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

                                MEDPARTNERS, INC.
                           CONSOLIDATED BALANCE SHEETS

<TABLE>

<CAPTION>
                                                                                                  DECEMBER 31,    SEPTEMBER 30,
                                                                                                       1995          1996 
                                                                                                 -------------  -------------
                                                                                                    (AUDITED)     (UNAUDITED)
                                                                                                        (IN THOUSANDS)
                                                 ASSETS
<S>                                                                                              <C>                  <C>   
Current assets:
  Cash and cash equivalents......................................................                $     84,460         79,011
  Marketable securities..........................................................                      84,067              -
  Accounts receivable, less allowances for bad debts of $80,077,000 and $126,700,000                  500,710        543,097  
  Inventories....................................................................                     122,279        100,288
  Income tax receivable..........................................................                         900         31,763
  Prepaid expenses and other current assets......................................                      38,683         69,269
                                                                                                 -------------  ------------
         Total current assets....................................................                     831,099        823,428
Property and equipment, net......................................................                     454,658        545,124
Intangible assets, net...........................................................                     370,939        485,753
Deferred tax asset...............................................................                      72,392         97,593
Net assets of discontinued operations............................................                      36,300              -
Other assets.....................................................................                      39,611         75,647
                                                                                                 -------------  ------------
         Total assets............................................................                $  1,804,999   $  2,027,545   
                                                                                                 ============   ============
                                  LIABILITIES AND STOCKHOLDERS' EQUITY                                                      
Current liabilities:                                                                                                           
  Accounts payable...............................................................                $    278,240   $     229,132  
  Payable to physician groups....................................................                      31,810         30,194
  Accrued compensation...........................................................                      16,347         20,736
  Accrued medical claims payable.................................................                      52,434         86,632
  Other accrued expenses and liabilities.........................................                     166,381        309,922
  Notes payable..................................................................                      81,900              -
  Current portion of long-term liabilities.......................................                      13,173         42,367
                                                                                                 ------------   ------------
         Total current liabilities...............................................                     640,285        718,983
                                                                                                                            
Long-term debt, net of current portion...........................................                     528,921        605,689
Other long-term liabilities......................................................                      42,053         39,988
Commitments and contingent liabilities (Note 5)                                                                             
                                                                                                                            
Stockholders' equity:                                                                                                       
  Common stock, $.001 par value; 200,000,000 shares authorized; issued 142,017,000 in 1995        
    and 158,421,000 in 1996.....................................................                          142            158
  Additional paid-in capital.....................................................                     476,472        732,379
  Notes receivable from stockholders.............................................                     (1,930)        (1,744)
  Unrealized loss on marketable equity securities, net of deferred taxes.........                         (7)           (34)
  Unamortized deferred compensation..............................................                     (2,682)              -
  Shares held in trust, 9,317,000 shares in 1995 and 1996........................                   (150,200)      (150,200)
  Retained earnings..............................................................                     271,945         82,326
                                                                                                 ------------   ------------
         Total stockholders' equity..............................................                     593,740        662,885
                                                                                                 ------------   ------------
         Total liabilities and stockholders' equity..............................                $  1,804,999   $  2,027,545
                                                                                                 ============   ============
</TABLE>


See accompanying notes to consolidated financial statements.  


                                       3

<PAGE>   4


                                MEDPARTNERS, INC.

                CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                              THREE MONTHS ENDED
                                                                                 SEPTEMBER 30,
                                                                          ----------------------------
                                                                             1995          1996
                                                                         ------------- --------------
                                                                           (IN THOUSANDS, EXCEPT
                                                                             PER SHARE AMOUNTS)
<S>                                                                        <C>            <C>         
  Net revenue.........................................................     $  907,046     $ 1,182,015  
                                                                              
  Operating expenses:
    Affiliated physician services.....................................        168,306         234,925
    Outside medical expense...........................................         41,929          82,373
    Clinic expenses...................................................        181,512         250,917
    Non-clinic goods and services.....................................        415,180         498,145
    General and administrative expenses...............................         35,744          33,001
    Depreciation and amortization.....................................         15,178          21,134
                                                                           ----------     -----------
            Operating income..........................................         49,197          61,520
  Non-operating expenses:
    Net interest expense..............................................          5,344           5,725
    Merger expenses...................................................          3,473         263,000
    Other, net........................................................            (27)            (37)
                                                                           ----------     -----------
  Income from continuing operations before income taxes...............         40,407        (207,168)
  Income tax expense (benefit)........................................         15,140         (55,634)
                                                                           ----------     -----------
  Income (loss) from continuing operations............................         25,267        (151,534)
  Loss from discontinued operations...................................         (5,791)              -
                                                                           ----------     -----------

  Net income (loss)...................................................     $   19,476     $  (151,534)  
                                                                           ==========     ===========

  Earnings per Common and Common equivalent Share:
     Income (loss) from continuing operations.........................     $     0.18     $    (1.00)
     Operating loss from discontinued operations......................          (0.04)             -
                                                                           ----------     -----------
     Net income (loss)................................................     $     0.14     $    (1.00)
                                                                           ==========     ===========

  Weighted average common and common equivalent shares outstanding....        137,969         151,629
                                                                           ==========     ===========
</TABLE>

See accompanying notes to consolidated financial statements.



                                       4

<PAGE>   5


                                MEDPARTNERS, INC.

                CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                               NINE MONTHS ENDED
                                                                                 SEPTEMBER 30,
                                                                         ---------------------------
                                                                             1995          1996
                                                                         ------------- -------------
                                                                           (IN THOUSANDS, EXCEPT
                                                                             PER SHARE AMOUNTS)
<S>                                                                      <C>           <C>         
  Net revenue.........................................................   $  2,576,146  $  3,495,717
  Operating expenses:
    Affiliated physician services.....................................        460,811       695,872
    Outside medical expense...........................................        106,485       228,070
    Clinic expenses...................................................        487,243       753,404
    Non-clinic goods and services.....................................      1,244,861     1,483,676
    General and administrative expenses...............................        109,238       103,647
    Depreciation and amortization.....................................         42,052        62,381
                                                                         ------------- ------------ 
           Operating income...........................................        125,456       168,667
  Non-operating expenses:
    Net interest expense..............................................         13,794        17,868
    Merger expenses...................................................          4,524       297,448
    Other, net........................................................           (428)         (410)
                                                                         ------------- ------------  
  Income (loss) from continuing operations before income taxes........        107,566      (146,239)
  Income tax expense (benefit)........................................         39,914       (31,715)
                                                                         ------------- ------------ 
  Income (loss) from continuing operations............................         67,652      (114,524)
  Discontinued operations:
    Loss from discontinued operations.................................       (152,407)      (68,879)
    Net gains on sales of discontinued operations.....................          7,085         2,080
                                                                         ------------  ------------ 
    Loss from discontinued operations.................................       (145,322)      (66,799)
                                                                         ------------  ------------ 
  Net loss............................................................   $    (77,670  $   (181,323
                                                                         ============  ============ 

  Earnings per Common and Common equivalent share:
     Income (loss) from continuing operations.........................   $       0.50  $      (0.76)
     Operating loss from discontinued operations......................          (1.12)        (0.46)
    Gain on sale of discontinued operations...........................           0.05          0.01
                                                                         ------------  ------------ 
    Net income (loss).................................................   $      (0.57) $      (1.21)
                                                                         ============  ============ 

  Weighted average common and common equivalent shares outstanding....        135,316       149,928
                                                                         ============  ============
</TABLE>



See accompanying notes to consolidated financial statements.

                                        5
<PAGE>   6


                                MEDPARTNERS, INC.

                CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                     NINE MONTHS ENDED                             
                                                                                       SEPTEMBER 30,                              
                                                                                -----------------------------                      
                                                                                    1995             1996                          
                                                                                -----------      ------------                     
                                                                                       (IN THOUSANDS)                              
<S>                                                                             <C>                <C>                           
Operating activities:                                                                                                            
 Net income (loss) from continuing operations..............................     $   67,652         $ (114,524)                   
                                                                                                                                 
 Adjustments to reconcile net income (loss) from continuing operations                                                           
   to net cash and cash equivalents provided by operating activities:                                                            
  Depreciation and amortization............................................         42,052             62,381                    
  Provision for deferred taxes.............................................         (7,355)           (31,776)                    
  Merger expenses..........................................................          4,524            297,448                    
  Other....................................................................            341                449                    
  Changes in operating assets and liabilities,  net of effects of                   (4,241)          (113,497)                   
   acquisitions............................................................     ----------         ----------                    
                                                                                                                                 
         Net cash and cash equivalents provided by operating activities....        102,973            100,481                    
Investing activities:                                                                                                            
  Cash paid for merger charges.............................................         (1,051)          (137,182)                    
  Net cash used to fund acquisitions.......................................       (190,969)          (116,244)                    
  Purchase of property and equipment.......................................        (79,331)          (105,950)                    
  Divestitures.............................................................        229,300                  -                    
  Net proceeds from marketable securities..................................            978             75,982                    
  Other....................................................................         (4,300)            (1,023)                    
                                                                                ----------         ----------                    
         Net cash and cash equivalents used in investing activities........        (45,373)          (284,417)                    
Financing activities:                                                                                                            
  Common stock issued and capital contributions............................        141,179            239,257                    
  Capital distributions....................................................        (33,373)                 -                    
  Proceeds from debt.......................................................         77,222            713,955                    
  Repayment of debt........................................................        (71,604)          (673,862)                    
  Other....................................................................         (6,179)            (1,372)                    
                                                                                ----------         ----------                    
         Net cash and cash equivalents provided by financing activities....        107,245            277,978                    
Cash used in discontinued operations.......................................       (184,400)          (103,591)                    
                                                                                ----------         ----------                    
Net decrease in cash and cash equivalents..................................        (19,555)            (9,549)                    
Cash and cash equivalents at beginning of period...........................         98,778             85,265                    
Beginning cash and cash equivalents of immaterial pooling-of-interests                                                           
   entities................................................................              -              3,295                    
                                                                                ----------         ----------                    
Cash and cash equivalents at end of period.................................     $   79,223         $   79,011                    
                                                                                ==========         ==========                    
</TABLE>

                                                    
                                       6
<PAGE>   7



                              MEDPARTNERS, INC.

             NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.  BASIS OF PRESENTATION

         The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries and have been prepared in accordance
with generally accepted accounting principles for interim financial reporting
and in accordance with Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and notes required by generally accepted
accounting principles for complete financial statements.

         In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
items) necessary for a fair presentation of results for the interim periods
presented. The results of operations for any interim period are not necessarily
indicative of results for the full year. These financial statements and footnote
disclosures should be read in conjunction with the December 31, 1995 audited
consolidated financials statements and the notes thereto.

         RESTATEMENT OF FINANCIAL STATEMENTS

         On February 22, 1996 and September 5, 1996 the Company combined with
Pacific Physician Services, Inc. (PPSI), and Caremark International Inc.
("Caremark"), respectively, in business combinations that were accounted for as
poolings of interests. Accordingly, the financial statements for all periods
prior to the effective dates of the mergers have been restated to include the
results of PPSI and Caremark and additional entities accounted for as immaterial
poolings of interests.

         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 nine months ending September 30, 1995 include the nine months ending
July 31, 1995 for PPSI.


         STOCK OPTION PLANS

         The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (ABP 25) and related
Interpretations in accounting for its employee stock options 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.

NOTE 2.   SECONDARY STOCK OFFERING

         On March 13, 1996, the Company completed a secondary public offering of
6,632,800 shares of its Common Stock. The net proceeds of the offering were $194
million. Proceeds of the offering were used to pay all the then outstanding
indebtedness under MedPartners' bank credit facility of $70 million. In April
1996, $69 million of the proceeds were used to pay-off PPSI's convertible
subordinated debentures.



                                       7

<PAGE>   8



                                MEDPARTNERS, INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 3.   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 90,585,168 shares
of its common stock for all of the outstanding common stock of PPSI and
Caremark, respectively. During the nine months ended September 30, 1996 the
Company also exchanged 6,923,415 shares of its common stock in additional
transactions accounted for as poolings of interests.

         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:
         Cost of affiliated physician services......................................       32,600
         Clinic salaries, wages and benefits........................................       13,142
         Outside referral expenses .................................................       14,861
         Clinic rent and lease expense..............................................        1,963
         Clinic supplies............................................................        3,556
         Other clinic costs.........................................................        7,373
         General corporate 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)
                                                                                       ========== 
       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
                                                                                       ========== 
</TABLE>



                                       8

<PAGE>   9




                                MEDPARTNERS, INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


NOTE 3.   MERGERS (CONTINUED)

         Caremark's revenue for the three months ended and the nine months ended
September 30, 1996 and 1995 were $795 million and $606 million, and $2,364
million and $1,727 million, respectively. Caremark's net income (loss) for the
corresponding periods, excluding merger expenses, was $28 million and $14
million, and $3 million and $(95) million, respectively.

Included in pre-tax loss for the nine months ended September 30, 1996 are merger
costs totaling $297.4 million. The components of this cost are as follows (in
thousands):

<TABLE>
       <S>                                                                                 <C>      
       Investment banking and professional fees.....................................       $  40,241
       Other transaction costs......................................................          35,099
       Restructuring charges:
           Abandonment of facilities................................................          31,768
           Severance costs for identified employees.................................          51,865
           Operational restructuring................................................          95,853
           Transition and debt restructuring........................................          21,922
           Noncompatible technology.................................................          20,700
                                                                                           ---------
       Total........................................................................       $ 297,448
                                                                                           =========
</TABLE>

NOTE 4.   ACQUISITIONS

         During the nine months ended September 30, 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 practice management agreements which generally have 30 to
40 year terms. 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. Generally, the
practice management agreements cannot be terminated by the physician group or
Company without cause, which includes material default or bankruptcy. Upon
termination for cause or expiration of the clinic services agreement, the
physician group has the option to purchase some or all of the assets owned by
the Company, generally at current book values. The acquisitions have been
accounted for by the purchase method of accounting and, accordingly, the
purchase price has been allocated to the net assets based on the estimated fair
values at the date of acquisition. The estimated fair value of assets acquired
is $136.8 million. A total of $116.2 million in cash and 751,000 shares of stock
valued at approximately $15.5 million were given in exchange for these assets
during the nine months ended September 30, 1996. Included in these amounts is
Caremark's acquisition of substantially all of the assets of CIGNA Medical
Group, CIGNA Healthcare's Los Angeles-area staff model delivery system, in
January 1996.



                                       9
<PAGE>   10

                                MEDPARTNERS, INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


NOTE 5.   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
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 Sates
District Court in Chicago claiming that Coram committed securities fraud in its
sale to Caremark of its securities in connection with the sale of Caremarks
home infusion business to Coram.  The lawsuit filed in federal court in Chicago
has been dismissed, and Caremarks appeal of the dismissal was argued on May 10,
1996 and is now under submission.  Corams lawsuit is currently in the discovery
phase.  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 first 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
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 nine months ended September 30, 1996 Caremark paid
$101.8 million, with an additional $6.6 million plus interest to be paid over
the next nine 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 Caremarks 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 non-governmental 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
these estimates.



                                      10

<PAGE>   11



                                MEDPARTNERS, INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 5.   CONTINGENCIES (CONTINUED)


        In May 1996, three pharmacies, 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, and 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 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 August 1994 and July 1995, stockholders filed derivative actions on
behalf of Caremark in the Court of Chancery of the State of Delaware, the
United States District Court for the Northern District of Illinois and the
Circuit Court of Cook County in Chicago, Illinois alleging breaches of
fiduciary duty, negligence in connection with Caremark's conduct of the
business and lack of corporate controls, and seeking unspecified damages,
attorneys' fees and expenses. In June 1996, the parties entered into a
Stipulation and Agreement of Compromise and Settlement which established
proposed terms for the settlement of the case. The Delaware court conducted a
hearing on August 16, 1996 to consider the proposed settlement and entered an
order on September 26, 1996 approving the settlement.  The settlement does not
provide for the payment of any damages by any defendant, although plaintiffs
were awarded $869,500 in attorneys fees and expenses in conjunction with
approval of the settlement.  The actions in the northern District of Illinois
and Cook County, which had been stayed pending revolution of the Delaware Case,
have now been dismissed.

        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 served (but have not yet 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 complaint seeks unspecified damages,
attorneys' fees and expenses and an award of punitive damages. 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. Caremark
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.





                                       11
<PAGE>   12



                                MEDPARTNERS, INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 5.   CONTINGENCIES (CONTINUED)


        Beginning in September 1994, Caremark was named as a defendant in a
series of new lawsuits added to a pending group of actions 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 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 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 to 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 Caremarks then proposed merger with the Company.  The
complaints seek unspecified damages, injunctive relief, and attorneys fees and
expenses.  The Company believes these complaints will not 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 income, cash flows or financial condition.  




                                       12
<PAGE>   13




                                MEDPARTNERS, INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 6.  DISCONTINUED OPERATIONS

         During 1995 Caremark divested its Clozaril Patient Management System,
Home Infusion business, Oncology Management Services business and Caremark
Orthopedic Services, Inc. subsidiary. Effective February 29, 1996, the Company
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. First
quarter 1996 discontinued operations also reflects a $65.6 million after-tax
charge related to the settlements with private payors discussed in Note 5. 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.

NOTE 7.   DEBT

        The Company entered into a $1 billion Revolving Credit and
Reimbursement Agreement (the Bank Credit Facility), which became effective
simultaneously with the closing of the Caremark Acquistion on September 5,
1996, replacing its then existing 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 offering
were used to reduce amounts under the Bank 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, $99,947,000 principal amount were tendered and purchased.  The
total consideration for each $1,000 principal amount of outstanding notes
tendered was $1,017.72.


                                       13
<PAGE>   14




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


         The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Consolidated
Financial Statements of the Company and notes thereto included elsewhere in this
document. Unless the context otherwise requires, as used herein, the term
"MedPartners" or the "Company" refers collectively to MedPartners, Inc. and its
predecessor, also named MedPartners, Inc. (the "Original Predecessor"), and
their respective subsidiaries and affiliates.

GENERAL

         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. The
Company is the result of the business combination between the Original
Predecessor and MME, which was consummated in November 1995. In February and
September of 1996 the Company combined with Pacific Physician Services, Inc.
("PPSI") and Caremark International Inc. ("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 entities accounted for as immaterial
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 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 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 managed care 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. In all instances, 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.



                                       14
<PAGE>   15





ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND 
          RESULTS OF OPERATIONS - (CONTINUED)


         The Company also manages outpatient prescription drug benefit programs
for more than 1,200 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 53,000 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.

RESULTS OF OPERATIONS

         Through the Company's network of affiliated group and IPA physicians,
MedPartners provides primary and specialty healthcare services to prepaid
managed care enrollees and fee-for-service patients. The Company also provides
prescription benefit services to more than 15 million people 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 (in thousands):

<TABLE>
<CAPTION>
                                                THREE MONTHS ENDED                 NINE MONTHS ENDED
                                                   SEPTEMBER 30                       SEPTEMBER 30
                                               1995             1996             1995             1996
                                           -------------    -------------    -------------    -------------
<S>                                           <C>              <C>            <C>              <C>       
Physician Services
    Net revenue                               $ 431,394        $ 625,383      $ 1,160,514      $ 1,839,021
    Operating income                             20,945           33,415           53,358           90,203
    Margin                                          4.9%             5.3%             4.6%             4.9%

Pharmaceutical Services
    Net revenue                                $356,084        $ 438,636      $ 1,049,050      $ 1,303,790
    Operating income                             14,883           19,887           37,169           53,401
    Margin                                          4.2%             4.5%             3.5%             4.1%

Specialty Services
    Net revenue                               $ 119,568        $ 117,996        $ 366,582        $ 352,906
    Operating income                             18,821           12,616           54,425           42,242
    Margin                                         15.7%            10.7%            14.8%            12.0%

Corporate Services
    Operating (loss)                          $  (5,452)       $  (4,398)       $ (19,496)       $ (17,179)
    Percentage of total net revenue                (0.6)%           (0.4%)           (0.8%)           (0.5%)
</TABLE>


                                       15

<PAGE>   16



ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND 
         RESULTS OF OPERATIONS -(CONTINUED)


         The following table sets forth the breakdown of net revenue for
Physician Services for the periods indicated (in thousands):


<TABLE>
<CAPTION>
                                                          THREE MONTHS ENDED                   NINE MONTHS ENDED
                                                             SEPTEMBER 30,                       SEPTEMBER 30,
                                                     ------------------------------     --------------------------------
                                                         1995             1996               1995              1996
                                                     -------------     ------------     ---------------    -------------
 <S>                                                 <C>               <C>              <C>                <C>
 Prepaid health care..............................   $    239,004      $   355,512      $      638,899     $  1,040,100
 Fee-for-service..................................        185,471          267,367             507,460          788,418
 Other............................................          6,919            2,504              14,155           10,503
                                                     ------------      -----------      --------------     ------------
 Net Revenue......................................   $    431,394      $   625,383      $    1,160,514     $  1,839,021
                                                     ============      ===========      ==============     =============
</TABLE>

ENROLLMENT

         The Company's prepaid health care revenue is reflective of the number
of HMO enrollees for whom it receives monthly capitation payments.  Enrollment
is categorized as either "commercial enrollment" (enrollees generally under the
age of 65 whose health coverage is sponsored by employers) or "senior 
enrollment" (enrollees over the age of 65 who are retired and whose coverage is
sponsored by Medicare).  The Company receives professional capitation to provide
physician services and institutional capitation to provide hospital care and
other non-professional services.  The table below sets forth the changes in
enrollment for professional and institutional capitation.



<TABLE>
<CAPTION>
                                         COMMERCIAL           SENIOR                               TOTAL
                                          ENROLLEES          ENROLLEES           OTHER           ENROLLEES
                                          ---------          ---------           -----           ---------
<S>                                      <C>                   <C>              <C>              <C>
PROFESSIONAL CAPITATION(1):
September 30, 1996                       1,255,059             109,329          162,325          1,526,713
September 30, 1995                         928,046              88,448           46,912          1,063,406
INSTITUTIONAL CAPITATION:
September 30, 1996                         430,871              55,179          115,001            601,051
September 30, 1995                         342,374              51,316           14,668            408,358
</TABLE>

(1) Includes enrollees counted in Institutional below as well as those enrolled 
    only for professional services.

         RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 

         For the three months ended September 30, 1996, net revenue was $1,182
million, compared to $907 million for the same period in 1995, an increase of
30.3%.  The increase in net revenue primarily resulted from the affiliation with
new physician practices and the increase in pharmaceutical services net         
revenue, which accounted for $97.5 million and $82.6 million of the increase in
net revenue, respectively.  The most significant physician practice acquisition 
affecting this period was the CIGNA Medical Group which was acquired in January 
1996.  This acquisition accounted for 84% of the new practice revenue.  The
increase in pharmaceutical services net revenue is attributable to
pharmaceutical price increases, the addition of customers, further penetration
of existing customers and the sale of new products.




                                      16

<PAGE>   17



ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
         RESULTS OF OPERATIONS -(CONTINUED)


         Operating income grew 59.5% and 33.6% in the third quarter of 1996, as
compared to the same period of 1995, for the physician services and
pharmaceutical services areas, respectively. This growth is 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 physician services areas. 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 its growth hormone products.

        Included in pre-tax loss for the third quarter of 1996 were merger
expenses totaling $250 million relating to the business combination with
Caremark and $13 million related to several other entities. The major
components of this expense are discussed below.

         RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995

         For the nine months ended September 30, 1996, net revenue was $3,496
million, compared to $2,576 million for the same period in 1995, an increase of
35.7%. The increase in net revenue primarily resulted from the affiliation with
new physician practices and the increase in pharmaceutical services net revenue,
which accounted for $263.7 million and $254.7 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 88% of the new practice revenue. The
increase in pharmaceutical services net revenue is attributable to
pharmaceutical price increases, the addition of customers, further penetration
of existing customers and the sale of new products.

        Operating income grew 69.1% and 43.7% for the nine months ended
September 30, 1996, as compared to the same period of 1995, for the physician
services and pharmaceutical services areas, respectively. This growth is 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 physician services areas.
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 its growth hormone products.

         Included in pre-tax loss for the nine months ended September 30, 1996
were merger expenses totaling $297.4 million relating to the business
combinations with Caremark, PPSI and several other entities. The major
components of the $297.4 million are listed in Note 3 of the unaudited
consolidated financial statements.

        DISCONTINUED OPERATIONS

        During 1995 Caremark divested its Clozaril Patient Management System
Home Infusion business, Oncology Management Services business and Caremark
Orthopedic Services, Inc. subsidiary. In accordance with APB 30, which
addresses the reporting for disposition of business segments, the Company's
consolidated financial statement 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 the nine months ended September 30, 1995 reflects the net
after-tax gain on the disposal of the Clozaril Patient Management System, the
Home Infusion business, and a $145.0 million after-tax charge for the
settlement discussed in Note 5 related to the OIG investigation. Discontinued
operations for the nine months ended September 30, 1996 reflects a $65.6
million after-tax charge related to the settlements with private payors
discussed in Note 5 of the unaudited consolidated financial statements and an
after-tax gain on disposition of the Nephrology Services business, net of
disposal costs, of $2.1 million.



                                      17


<PAGE>   18





ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
         RESULTS OF OPERATIONS -(CONTINUED)


LIQUIDITY AND CAPITAL RESOURCES

         As of September 30, 1996, the Company had working capital of $104.4
million, including cash and cash equivalents of $79 million. For the first nine
months of 1996, cash flow from operations was $100.5 million compared to $103.0
million for the same period of 1995. Cash flow from continuing operations for
the first nine months of 1996 has been negatively impacted by the build up of
accounts receivable in the physician service area relative to the growth of the
existing practices. Various factors affect this build up including conversion of
billing systems and the initial build up of accounts receivable for new
providers and contracts. In addition, cash flow from continuing operations was
negatively impacted by the timing of payments for inventory in the 
pharmaceutical services area during the third quarter of 1996 compared to the
timing of similar payments in prior periods.

         For the nine months ended September 30, 1996 and 1995, the Company
invested $116.2 million and $191 million, respectively, in acquisitions of the
assets of physician practices, and $106 million and $79.3 million, respectively,
in property and equipment. During the nine months ended September 30, 1996, the
Company paid $137.2 million in cash for merger costs. Investments in
acquisitions and property and equipment are anticipated to continue to be
substantial uses of funds in future periods.

         On March 13, 1996, the Company sold 6.6 million shares of Common Stock.
The Company raised net proceeds of $194 million, $70 million of which was
applied to reduce the indebtedness under the Company's credit facility. In April
1996, $69 million of the proceeds were used to pay off the PPSI's convertible
subordinated debentures.

        The Company entered into a $1 billion Revolving Credit and
Reimbursement Agreement (the Bank 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 Bank 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 September 30, 1996, there was $445
million outstanding under the facility. The Bank 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 Bank Credit Facility is
unsecured but provides a negative pledge on substantially all assets of the
Company. As of September 30, 1996, the Company was in compliance with the
covenants in the Bank 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%. 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. The notes are
rated BBB/Baa3 by Standard & Poors and Moody's Investor Services, respectively. 
Net proceeds from the offering were used to reduce amounts under the Bank 
Credit Facility. The notes are pari passu to the Bank 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, $99,947,000 principal amount were tendered and 
purchased.  The total consideration for each $1,000 principal amount of 
outstanding notes tendered was $1,017.72.



                                      18

<PAGE>   19






ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND 
         RESULTS OF OPERATIONS -(CONTINUED)


         The Company intends to acquire the assets of additional physician
practices and to fund this growth with existing cash and cash equivalents and
borrowings under the Bank Credit Facility. 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 Bank Credit
Facility, will be sufficient to meet the Company's anticipated acquisition,
expansion and working capital needs for the next twelve months. The Company may
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 and terms as management deems appropriate and
the market allows, in order to meet the capital needs of the Company on a
long-term basis (i.e., for a period in excess of 12 months).

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. Additionally, the future operating results and financial
condition of the Company may be affected by a number of other 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 5 of the unaudited consolidated financial
statements.




                                      19

<PAGE>   20







PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

         The information set forth in Note 5 of the unaudited consolidated
financial statements regarding certain litigation matters is hereby incorporated
herein by reference.




                                      20


<PAGE>   21




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

         On September 5, 1996, a Special Meeting of the Stockholders of the
Company was held, at which the following actions were taken:

                 The shares of Common Stock represented at the Special Meeting
              were voted for the Plan and Agreement of Merger, dated as of May
              13, 1996, among the Corporation, PPM Merger Corporation and
              Caremark International, Inc., as follows:


                  NUMBER                                                  
                  VOTING          FOR         AGAINST       ABSTENTIONS   
                ----------    ----------    -----------     -----------   
                36,171,994    35,830,816      293,756         47,422      



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.


(a)      Exhibits

         The exhibits filed as a part of the Quarterly Report are listed in Item
         6(c) of this Quarterly Report on Form 10-Q, which is hereby
         incorporated herein by reference.


(b)      Reports on Form 8-K

         Current report on Form 8-K filed September 12, 1996 reporting the
         acquisition of Caremark and CHS Management.


(c)      Exhibits

         The exhibits required by Regulation S-K are set forth in the following
list.

(11)     -        Statement re: Computation of Per Share Earnings (Unaudited)
(27)     -        Financial Data Schedule (for  SEC use only)

         No other Items of Part II are applicable to the Company for the period
         covered by this Quarterly Report on Form 10-Q.



                                      21

<PAGE>   22



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


MedPartners, Inc.

<TABLE>
<S>  <C>
By:   /s/ Harold O. Knight, Jr.
     ----------------------------------------------------------------------------------
     Harold O. Knight, Jr.         Executive Vice President and Chief Financial Officer

Date: November 14, 1996



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

Date: November 14, 1996
</TABLE>



                                      22