<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, 1997

                                       OR

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

FOR THE TRANSITION PERIOD FROM              TO             
                               ------------    ------------
                         COMMISSION FILE NUMBER: 0-27276


                                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 October 31, 1997
                 -----                 -------------------------------
       COMMON STOCK, PAR VALUE                    196,805,009*
             $.001 PER SHARE

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


                                        1

<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
purposes 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. (the "Company") cautions readers that
such "forward looking statements", including without limitation, those relating
to the Company's future business prospects, revenue, 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 discussion herein under Item 1,
"Legal Proceedings," and in "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
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 revenue; 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.


                                       2

<PAGE>   3




                                MEDPARTNERS, INC.

                          QUARTERLY REPORT ON FORM 10-Q

                                      INDEX

<TABLE>
<CAPTION>
                                                                                             Page
                                                                                             ----
<S>                                                                                          <C>
PART I - FINANCIAL INFORMATION

Item 1.           Financial Statements

         Consolidated Balance Sheets -
         December 31, 1996 (Audited) and September 30, 1997 (Unaudited) ...................     4

         Consolidated Statements of Operations (Unaudited)-
         Three Months Ended September 30, 1996 and 1997 ...................................     5

         Consolidated Statements of Operations (Unaudited)-
         Nine Months Ended September 30, 1996 and 1997 ....................................     6

         Consolidated  Statements of Cash Flows (Unaudited) -
         Nine Months Ended September 30, 1996 and 1997 ....................................     7

         Notes to Consolidated Financial Statements (Unaudited) ...........................     8

Item 2.           Management's Discussion and Analysis of Financial
                  Condition and Results of Operations .....................................    11

PART II - OTHER INFORMATION

Item 1.           Legal Proceedings .......................................................    18

Item 2.           Changes in Securities ...................................................    21

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


                                       3


<PAGE>   4


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

                                MEDPARTNERS, INC.
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                    DECEMBER 31,       SEPTEMBER 30,
                                                                                        1996                1997
                                                                                    ------------       -------------
                                                                                      (AUDITED)          (UNAUDITED)
                                                                                             (IN THOUSANDS)
<S>                                                                                 <C>                <C>       
                                                   ASSETS
Current assets:
  Cash and cash equivalents .................................................        $  127,397          $  235,725
  Accounts receivable, less allowances for bad debts of $143,449 and
    $174,675.................................................................           660,150             774,153
  Inventories ...............................................................           150,586             138,185
  Income tax receivable .....................................................             2,496                  --
  Deferred tax assets, net ..................................................            52,261              83,698
  Prepaid expenses and other current assets .................................            69,225              57,851
                                                                                     ----------          ----------
         Total current assets ...............................................         1,062,115           1,289,612
Property and equipment, net .................................................           516,769             544,559
Intangible assets, net ......................................................           686,975           1,039,907
Deferred tax asset ..........................................................            18,333                  --
Other assets ................................................................           138,928             185,847
                                                                                     ----------          ----------
         Total assets .......................................................        $2,423,120          $3,059,925
                                                                                     ==========          ==========
                                  LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable ..........................................................        $  288,023          $  342,011
  Accrued medical claims payable ............................................           114,753             143,686
  Other accrued expenses and liabilities ....................................           404,334             333,824
  Income tax payable ........................................................                --              17,099
  Current portion of long-term debt .........................................            28,596              13,679
                                                                                     ----------          ----------
         Total current liabilities ..........................................           835,706             850,299

Long-term debt, net of current portion ......................................           715,996           1,230,376
Other long-term liabilities .................................................            34,010              44,958
Deferred tax liability ......................................................                --              14,105

Stockholders' equity:
  Common stock, $.001 par value;  400,000 shares authorized;
    issued -- 183,950 in 1996 and 196,342 in 1997 ...........................               184                 196
  Additional paid-in capital ................................................           855,162             921,213
  Notes receivable from stockholders ........................................            (1,665)             (1,452)
  Shares held in trust, 9,317 shares in 1996 and 1997 .......................          (150,200)           (150,200)
  Retained earnings .........................................................           133,927             150,430
                                                                                     ----------          ----------
         Total stockholders' equity .........................................           837,408             920,187
                                                                                     ----------          ----------
         Total liabilities and stockholders' equity .........................        $2,423,120          $3,059,925
                                                                                     ==========          ==========
</TABLE>

See accompanying notes to unaudited consolidated financial statements.


                                       4

<PAGE>   5


                                MEDPARTNERS, INC.

                CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                              THREE MONTHS ENDED
                                                                                 SEPTEMBER 30,
                                                                        -------------------------------
                                                                           1996                 1997
                                                                        -----------         -----------
                                                                             (IN THOUSANDS, EXCEPT
                                                                               PER SHARE AMOUNTS)
<S>                                                                     <C>                 <C>        
Net revenue ....................................................        $ 1,313,019         $ 1,614,062
Operating expenses:
  Clinic expenses ..............................................            683,847             889,165
  Non-clinic goods and services ................................            498,145             548,140
  General and administrative expenses ..........................             42,317              45,423
  Depreciation and amortization ................................             22,537              29,414
  Net interest expense .........................................              5,395              13,969
  Merger expenses ..............................................            263,000                  --
  Other, net ...................................................                328                  --
                                                                        -----------         -----------
Income (loss) from continuing operations before income taxes ...           (202,550)             87,951
Income tax expense (benefit) ...................................            (53,423)             33,509
                                                                        -----------         -----------
Income (loss) from continuing operations .......................           (149,127)             54,442
Loss from discontinued operations ..............................                 --              (5,273)
                                                                        -----------         -----------

Net income (loss) ..............................................        $  (149,127)        $    49,169
                                                                        ===========         ===========

Earnings per common and common equivalent share:
  Income (loss) from continuing operations ....................         $     (0.85)        $      0.29
  Loss from discontinued operations ...........................                  --               (0.03)
                                                                        -----------         -----------
  Net income (loss) ...........................................         $     (0.85)        $      0.26
                                                                        ===========         ===========

Weighted average common and common equivalent shares 
  outstanding ..................................................            174,717             190,382
                                                                        ===========         ===========
</TABLE>

See accompanying notes to unaudited consolidated financial statements.


                                       5

<PAGE>   6


                                MEDPARTNERS, INC.

                CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                               NINE MONTHS ENDED
                                                                                 SEPTEMBER 30,
                                                                        -------------------------------
                                                                            1996               1997
                                                                        -----------         -----------
                                                                           (IN THOUSANDS, EXCEPT
                                                                             PER SHARE AMOUNTS)
<S>                                                                     <C>                 <C>        
Net revenue ....................................................        $ 3,837,426         $ 4,642,595
Operating expenses:
  Clinic expenses ..............................................          1,976,745           2,480,939
  Non-clinic goods and services ................................          1,483,676           1,669,678
  General and administrative expenses ..........................            127,904             130,984
  Depreciation and amortization ................................             66,556              83,871
  Net interest expense .........................................             16,583              36,299
  Merger expenses ..............................................            297,698              59,434
  Other, net ...................................................                272                  --
                                                                        -----------         -----------
Income (loss) from continuing operations before income taxes ...           (132,008)            181,390
Income tax expense (benefit) ...................................            (25,274)             80,503
                                                                        -----------         -----------
Income (loss) from continuing operations .......................           (106,734)            100,887
Discontinued operations:
  Loss from discontinued operations ............................            (71,221)            (80,707)
  Net gains on sales of discontinued operations ................              2,523                  --
                                                                        -----------         -----------
Loss from discontinued operations ..............................            (68,698)            (80,707)
                                                                        -----------         -----------

Net income (loss) ..............................................        $  (175,432)        $    20,180
                                                                        ===========         ===========

Earnings per common and common equivalent share:
  Income (loss) from continuing operations .....................        $     (0.61)        $      0.53
  Loss from discontinued operations ............................              (0.40)              (0.42)
                                                                        -----------         -----------
  Net income (loss) ............................................        $     (1.01)        $      0.11
                                                                        ===========         ===========

Weighted average common and common equivalent shares
  outstanding ..................................................            173,088             188,640
                                                                        ===========         ===========
</TABLE>

See accompanying notes to unaudited consolidated financial statements.


                                       6



<PAGE>   7


                                MEDPARTNERS, INC.

                CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                                 NINE MONTHS ENDED
                                                                                                   SEPTEMBER 30,
                                                                                           ---------------------------
                                                                                              1996              1997
                                                                                           ---------         ---------
                                                                                                 (IN THOUSANDS)
<S>                                                                                        <C>               <C>      
Operating activities:
 Income (loss) from continuing operations .........................................        $(106,734)        $ 100,888
 Adjustments for non-cash items:
   Depreciation and amortization ..................................................           66,556            83,871
   Provision for deferred taxes ...................................................          (33,572)           25,836
   Merger expenses ................................................................          297,698            59,434
   Other ..........................................................................            1,319               612
Changes in operating assets and liabilities, net of effects of acquisitions .......         (110,466)         (116,559)
                                                                                           ---------         ---------
         Net cash and cash equivalents provided by continuing operations ..........          114,801           154,082
Investing activities:
  Net cash used to fund acquisitions ..............................................         (119,298)         (327,486)
  Cash paid for merger charges ....................................................         (137,182)         (116,998)
  Purchase of property and equipment ..............................................         (109,014)          (67,077)
  Additions to intangibles, net of acquisitions ...................................          (15,538)          (16,025)
  Net proceeds from marketable securities .........................................           76,604                --
  Other ...........................................................................           14,700             2,813
                                                                                           ---------         ---------
         Net cash and cash equivalents used in investing activities ...............         (289,728)         (524,773)
Financing activities:
  Common stock issued and capital contributions ...................................          240,710            46,894
  Proceeds from debt ..............................................................          724,655           856,699
  Repayment of debt ...............................................................         (693,717)         (357,347)
  Other ...........................................................................           (1,372)              249
                                                                                           ---------         ---------
         Net cash and cash equivalents provided by financing activities ...........          270,276           546,495
Cash used in discontinued operations ..............................................         (103,591)          (67,977)
                                                                                           ---------         ---------
Net increase (decrease) in cash and cash equivalents ..............................           (8,242)          107,827
Cash and cash equivalents at beginning of period ..................................           88,386           127,397
Beginning cash and cash equivalents of immaterial pooling of interests entities....            3,295               501
                                                                                           ---------         ---------
Cash and cash equivalents at end of period ........................................        $  83,439         $ 235,725
                                                                                           =========         =========
</TABLE>


See accompanying notes to unaudited consolidated financial statements.


                                       7

<PAGE>   8



                                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, 1996 audited
consolidated financials statements and the notes thereto.

         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.

         RESTATEMENT OF FINANCIAL STATEMENTS

         On June 26, 1997 the Company combined with InPhyNet Medical Management
Inc. ("InPhyNet") in a business combination that was accounted for as a pooling
of interests. Accordingly, the financial statements for periods prior to the
effective dates of the merger have been restated to include the results of
InPhyNet and additional entities accounted for as immaterial poolings of
interests.

NOTE 2.  INCOME TAXES

         Significant variations exist in the customary relationship between
income tax expense and pretax income. These variations exist primarily because
certain merger expenses are non-deductible for income tax purposes.


NOTE 3.  DISCONTINUED OPERATIONS

         Effective February 29, 1996, Caremark International, Inc. ("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 $2.5 million. In
March 1996, Caremark agreed to settle all disputes with a number of private
payors. The settlements resulted in an after-tax charge of $43.8 million. These
disputes related to businesses that were covered by Caremark's settlement with
federal and state agencies in June 1995. In addition, Caremark agreed to pay
$24.1 million after-tax to cover the private payors' pre-settlement and
settlement-related expenses. An after-tax charge for the above amounts is
included in discontinued operations for the nine month period ended September
30, 1996. Included in discontinued operations for the nine months ended
September 30, 1997 is an after-tax charge of $75.4 million related to the
settlement of a dispute arising from Caremark's sale of its home infusion
therapy business to Coram Healthcare Corporation ("Coram") in April 1995. The
Company returned for cancellation all securities issued by Coram in connection
with the sale and agreed to pay Coram $45 million in cash. Also included in
discontinued operations for the nine months ended September 30, 1997 is an
after-tax charge of $5.3 million related to the settlement of a class action
lawsuit filed in August and September 1994 against Caremark.


                                       8

<PAGE>   9


MEDPARTNERS, INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 4. MERGERS

         In June 1997, the Company merged with InPhyNet in a transaction that
was accounted for as a pooling of interests. The Company exchanged approximately
19.3 million shares of its common stock for all of the outstanding common stock
of InPhyNet.

         Included in pre-tax loss for the nine months ended September 30, 1997,
are merger costs totaling $59.4 million with approximately $50.0 million related
to the business combination with InPhyNet and $9.4 million to various immaterial
business combinations. The components of this cost are as follows (in
thousands):

<TABLE>
<S>                                                             <C>    
Operational restructuring                                       $17,800
Brokerage fees, professional fees, filing fees and other
      transaction costs                                          19,000
Conforming of accounting policies                                11,100
Severance and related benefits                                    3,074
Transition costs                                                  6,500
Debt restructuring                                                  560
Abandonment of facilities                                           900
Noncompatible technology                                            500
                                                                -------
Total                                                           $59,434
                                                                =======
</TABLE>

NOTE 5. ACQUISITIONS

         During the nine months ended September 30, 1997, 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 40
year term. 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 $344.3 million. A total of $327.5
million in cash and approximately 0.8 million shares of stock valued at
approximately $16.8 million were given in exchange for these assets during the
nine months ended September 30, 1997, of which $56.8 million relates to the
acquisition of Aetna U.S. Healthcare's physician practice management business
and $187.1 million to the acquisition of Talbert Medical Management.

NOTE 6. THRESHOLD APPRECIATION PRICE SECURITIES

         During the third quarter of 1997, the Company issued $481.4 million in
Threshold Appreciation Price Securities ("TAPS"), due three years from the date
of issue. The TAPS require that the investor purchase the Company's common
stock in three years at a price of $27.07, which was 22% above the stock price
on the date of issue. The proceeds from the TAPS offering were used to buy U.S.
Treasury Notes, which pay the investor interest 6.25% and are pledged to a
collateral agent to secure the investor's obligation to purchase stock. The
Company is also required to pay the investor an enhanced yield payment of .25%.
Proceeds from the maturation of the Treasury Notes will be used to purchase the
$481.4 million in common stock from the Company in August 2000. The resulting
impact on the Company's financial statements will be increases in cash and
stockholders' equity of $481.4 million in August 2000.

NOTE 7. SENIOR SUBORDINATED NOTES

         During the third quarter of 1997, the Company issued $420 million of
6-7/8% senior subordinated notes, due in September 2000. Interest on these notes
is payable March 1 and September 1 of each year.


                                       9

<PAGE>   10

MEDPARTNERS, INC.

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 8.  INTEREST RATE SWAP

         During the third quarter of 1997, the Company entered into an interest
rate swap agreement, the effect of which is to modify the interest rate
characteristics of a portion of its debt from fixed to floating rate. At
September 30, 1997, the Company had one contract with a notional principal
amount of $200 million that expires in 2006. Under the terms of the contract,
the Company and the financial institution agree to pay, on a semi-annual basis,
the differential between interest calculated using a fixed interest rate and
interest calculated using a weighted average of various LIBOR rates, as
stipulated in the contract. Amounts paid or received under the contract are
recorded as adjustments to interest expense.

NOTE 9.  SUBSEQUENT EVENTS

         On October 1, 1997, the Company announced that it entered into an
agreement to acquire America Service Group, Inc. (ASG) in a stock transaction
valued at approximately $59 million. ASG is a provider of correctional medical
services operating in 14 states providing capitated services to approximately
50,000 inmates. The transaction will be accounted for as a pooling of interests
and is expected to close in the fourth quarter of 1997.

         On October 16, 1997, the Company announced that it entered into a
letter of intent to acquire MacGregor Medical Association (MMA), a physician
practice management company with 237 primary and specialty care physicians, 27
clinics and approximately 190,000 prepaid enrollees. The acquisition will be
accounted for as a purchase transaction and is expected to close by the end of
1997.

         On October 29, 1997, the Company announced the signing of a definitive
merger agreement under which the Company will be acquired by PhyCor, Inc.,
forming a nationwide physician management company with revenues in excess of
$8.4 billion. Under the terms of the agreement, holders of MedPartners common
stock will receive a fixed ratio of 1.18 shares of PhyCor common stock for each
share of MedPartners common stock held. The transaction, which is expected to be
accounted for as a pooling of interests, is subject to the approval of
shareholders of both companies, certain state and federal regulatory agencies,
and other conditions. The transaction is expected to close in the first quarter
of 1998.

         On November 6, 1997, the Company announced that it entered into an
agreement to purchase the Health Centers Division of Blue Cross Blue Shield of
Massachusetts. The transaction includes 10 health centers representing 125
primary and specialty care physicians. The transaction also includes a 10-year
provider agreement that extends to all current and future MedPartners-affiliated
physicians in Massachusetts. The acquisition will be accounted for as a purchase
transaction and is expected to close by the end of 1997.


                                       10

<PAGE>   11


ITEM 2. 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 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 subsidiaries and affiliates.

GENERAL

         MedPartners is the largest physician practice management ("PPM")
company in the United States, based on revenues. The Company develops,
consolidates and manages integrated healthcare delivery systems, consisting of
primary care and specialty physicians, as well as the nation's largest group of
physicians engaged in the delivery of emergency medicine and other
hospital-based services. Through its network of affiliated group and IPA
physicians, the Company provides healthcare services to prepaid managed care
enrollees and fee-for-service patients. As an integral part of its PPM business,
the Company operates one of the largest independent pharmacy 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. 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. 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.

         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.

         In June 1997, the Company combined with InPhyNet Medical Management
Inc. ("InPhyNet") in a transaction that was accounted for as a pooling of
interests. The financial information referred to in this discussion reflects the
combined operations of this entity and several additional entities accounted for
as additional poolings of interests.


                                       11


<PAGE>   12


         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 prescriptions daily through four mail service pharmacies
and manages patients' immediate prescription needs through a network of national
retail pharmacies. The Company is in the process of 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.

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 fills in
excess of 50 million prescriptions on an annual basis 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,
                                             1996                1997                1996                 1997
                                        --------------     ---------------     ----------------    -----------------
<S>                                     <C>                <C>                 <C>                 <C>        
Physician Services
    Net revenue                            $ 756,387          $ 998,705          $ 2,180,730          $ 2,782,339
    Operating income                          40,616             68,850              112,096              187,227
    Margin                                       5.4%               6.9%                 5.1%                 6.7%

Pharmaceutical Services
    Net revenue                            $ 438,636          $ 477,092          $ 1,303,790          $ 1,478,554
    Operating income                          19,887             22,474               53,401               63,723
    Margin                                       4.5%               4.7%                 4.1%                 4.3%

Specialty Services
    Net revenue                            $ 117,996          $ 138,265          $   352,906          $   381,702
    Operating income                          12,616             16,606               42,242               44,920
    Margin                                      10.7%              12.0%                12.0%                11.8%

Corporate Services
    Operating (loss)                       $  (6,946)         $  (6,011)         $   (25,194)         $   (18,748)
    Percentage of total net revenue             (0.7)%             (0.4)%               (1.0)%               (0.6)%
</TABLE>


                                       12

<PAGE>   13


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

Physician Practice Management Services

         The Company's PPM revenue has increased primarily due to growth in
prepaid enrollment, existing practice growth and new practice affiliations. 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
(in thousands):

<TABLE>
<CAPTION>
                             THREE MONTHS ENDED                 NINE MONTHS ENDED
                                SEPTEMBER 30,                     SEPTEMBER 30,
                          ------------------------        ----------------------------
                            1996            1997             1996              1997
                          --------        --------        ----------        ----------
<S>                       <C>             <C>             <C>               <C>       
Prepaid healthcare ..     $420,622        $532,615        $1,186,861        $1,460,704
Fee-for-service .....      332,918         452,427           982,367         1,298,321
Other ...............        2,847          13,663            11,502            23,314
                          --------        --------        ----------        ----------
Net Revenue .........     $756,387        $998,705        $2,180,730        $2,782,339
                          ========        ========        ==========        ==========
</TABLE>

         The Company's prepaid healthcare 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 sets forth the changes in enrollment for professional and global
capitation:

<TABLE>
<CAPTION>
                                         AT SEPTEMBER 30,
                                   --------------------------
                                      1996             1997
                                   ---------        ---------
<S>                                <C>              <C>      
Professional only enrollees          795,874        1,174,221

Global enrollees ..........          772,656          962,645
                                   ---------        ---------
  Total enrollees .........        1,568,530        2,136,866
                                   =========        =========
</TABLE>


         The Company has consolidated the majority of its acquisitions into its
management infrastructure, eliminating substantial overhead expenses and
improving integration of medical, administrative, and operations management.
This integration has been a significant factor in increasing operating margins
in the PPM service area from 5.1% in the first nine months of 1996 to 6.7% in
the first nine months of 1997.

         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. During the first nine months of 1997, for example, the Company
converted approximately 225,000 lives from professional to global capitation.
These changes are expected to result in material internal growth.

         The Company operates the largest hospital-based group in the country
with over 2,200 physicians providing services at over 365 sites, primarily
hospitals, nationwide. The Company provides emergency medicine, radiology,
anesthesiology, primary care and other hospital-based physician services.
InPhyNet's hospital-based group continues to be integrated into the Company's
hospital-based operations. The Company also provides comprehensive medical
services to inmates in various state and local correctional institutions. As of
September 30, 1997, the Company had contracts with 51 correctional institutions.
The Company provides physicians, nurses and clerical support services for active
duty and retired military personnel and their dependents in emergency
departments, ambulatory care centers and primary care clinics operated by the
Department of Defense. At September 30, 1997, the Company's military medical
services were provided under 16 contracts with the Department of Defense.


                                       13

<PAGE>   14

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

         In addition to the increased revenue 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, significant cost savings continue to
be identified at several of the Company's larger affiliated groups.

         The PPM service area has also created a national 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
management area's expertise in an effort to formulate and implement disease
management programs for the Company.

Pharmacy Benefit Management Services

         Pharmaceutical Services revenue continues to exhibit sustained growth
reflecting increases in both mail and retail related services. Revenue for the
nine months ended September 30, 1997 is 13.4% above the same period of 1996.
This growth is due to increased pharmacy transaction volume (8.1%) and drug cost
inflation, product mix and pricing (5.3%). Key factors contributing to this
growth include increased penetration of existing clients and new customer
contracts. The majority of Pharmaceutical Services revenue is earned on a
fee-for-service basis through contracts covering one to three year periods.

         Operating income experienced growth of 19.3% in the first nine months
of 1997 over the same period of 1996. Operating margins increased from 4.1% to
4.3% for the nine months ended September 30, 1996 and 1997, respectively.
Leveraging operating expenses combined with improved operating efficiencies have
contributed to the overall growth in operating income.

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 operates home care businesses in
Canada, Germany, the Netherlands, and the United Kingdom; however, in August
1997, the Company entered into an agreement to sell the international home care
business to Fresenius AG of Germany. Revenue growth in the specialty services
area is due primarily to sales of the Company's new multiple sclerosis drug,
Copaxone, and other products. Gross profit margins for specialty services had
been declining slightly as a result of managed care pricing pressures,
restructuring of benefit plans by payors and reduced reimbursement for Medicaid
and other state agency payors. However, operating margins have increased
continuously from the first quarter of 1997 through the third quarter of 1997.
This increase can be attributed to the reduction in operating expenses through
increased efficiencies.


                                       14

<PAGE>   15


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

RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996

         For the three months ended September 30, 1997, net revenue was $1,614.1
million, compared to $1,313.0 million for the same period in 1996, an increase
of 22.9%. The increase in net revenue primarily resulted from affiliations with
new physician practices and the increase in pharmaceutical services net revenue,
which accounted for $154.8 million and $38.5 million of the increase in net
revenue, respectively. The majority of the remainder of the increase in PPM net
revenue can be attributed to growth in existing physician practices including
the increase in global capitation revenue. The increase in pharmaceutical
services net revenue is attributable to pharmaceutical price increases, the
addition of new customers, further penetration of existing customers and the
sale of new products, offset by the strategic termination of accounts with
unacceptable levels of profitability.

         Income from continuing operations, excluding merger expenses, grew for
the physician services, pharmaceutical and specialty services areas in the third
quarter of 1997, as compared to the same period of 1996, by 69.5%, 13.0%, and
31.6%, respectively. The increase in the physician services area is the result
of higher net revenue and increases in operating margins resulting from the
spreading of fixed overhead expenses over a larger revenue base and continued
integration of operations. The pharmaceutical and specialty services areas'
increase in operating income was primarily due to reductions in operating
expenses, more efficient use of systems resources, and higher net revenue.

         Net income for the third quarter of 1997 was $49.2 million, as compared
to net loss of $(149.1) million for the same period of 1996. Included in the net
loss for the third quarter of 1996 were merger charges totaling $186.4 million
on an after tax basis primarily related to the Caremark merger. Net income for
the third quarter of 1997 included non-recurring charges from discontinued
operations of $5.3 million. The 1997 charges are discussed in Note 4 of the
accompanying unaudited consolidated financial statements. 

RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996

         For the nine months ended September 30, 1997, net revenue was $4,642.6
million, compared to $3,837.4 million for the same period in 1996, an increase
of 21.0%. The increase in net revenue primarily resulted from affiliations with
new physician practices and the increase in pharmaceutical services net revenue,
which accounted for $263.8 million and $174.8 million of the increase in net
revenue, respectively. Additional increases resulted from the shift of enrollees
from professional only to global capitation; approximately 225,000 enrollees
shifted in the nine months ended September 30, 1997. The majority of the
remainder of the increase in PPM net revenue can be attributed to growth in
existing physician practices.

         Income from continuing operations, excluding merger expenses, for the
physician services, pharmaceutical and specialty services areas grew for the
nine months ended September 30, 1997, as compared to the same period of 1996,
67%, 19.3% and 6.3%, respectively. The increase in the physician services area
is the result of higher net revenue and increases in operating margins resulting
from the spreading of fixed overhead expenses over a larger revenue base and
continued integration of operations. The pharmaceutical and specialty services
areas' increase in operating income was primarily due to reductions in operating
expenses, more efficient use of system resources and higher net revenue.
Operating income and margins declined in the corresponding periods for the
specialty services area as a result of continued pricing pressures for certain
products.

         Included in pre-tax loss for the nine months ended September 30, 1997
and 1996 were merger expenses totaling $59.4 and $297.7 million, respectively.
The major components of the $59.4 million, $50.0 million of which relates to the
business combination with InPhyNet, are listed in Note 5 of the unaudited
consolidated financial statements. The $297.7 million relates primarily to the
business combination with Caremark in 1996. Also included in the pre-tax loss
for the nine months ended September 30, 1997 and 1996 were other non-recurring
charges from discontinued operations of $80.7 million and $68.7 million,
respectively, which are discussed in Note 4 of the accompanying unaudited
consolidated financial statements.


                                       15

<PAGE>   16


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

DISCONTINUED OPERATIONS

         During the first quarter of 1996, Caremark divested its Nephrology
Services business, in addition to settling disputes with private payors, both
discussed in Note 4 of the accompanying unaudited consolidated financial
statements. During the second quarter of 1997, the Company settled a dispute
with Coram Health Corporation arising from Caremark's sale of its home infusion
therapy business to Coram, and during the third quarter of 1997 the Company
settled a class action lawsuit also related to Caremark. These issues are
discussed in Note 4 of the accompanying unaudited financial statements. In
accordance with APB 30, which addresses the reporting for disposition of
business segments, the Company's consolidated financial statements present the
operating income of these discontinued operations separately from continuing
operations.

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 Part II, Item 1 of this Quarterly report on Form 10-Q
for further discussion.

LIQUIDITY AND CAPITAL RESOURCES

         As of September 30, 1997, the Company had working capital of $439.3
million, including cash and cash equivalents of $235.7 million. For the first
nine months of 1997, cash flow from operations was $154.1 million compared to
$114.8 million for the same period of 1996.

         For the nine months ended September 30, 1997 and 1996, the Company
invested cash of $327.5 million and $119.3 million, respectively, in
acquisitions of the assets of physician practices, and $67.1 million and $109.0
million, respectively, in property and equipment. During the nine months ended
September 30, 1997 and 1996, the Company paid $117.0 and $137.2 million,
respectively, in cash for merger costs. These expenditures were funded by
approximately $46.9 million derived primarily from stock option exercises and
net incremental borrowings of $499.3 million for the nine months ending
September 30, 1997 and net incremental borrowings of $30.9 million and $224.1
million derived from a secondary stock offering for the same period of 1996.
Investments in acquisitions and property and equipment are anticipated to
continue to be substantial uses of funds in future periods.

         The Company entered into a $1 billion Revolving Credit and
Reimbursement Facility, which became effective simultaneously with the closing
of the Caremark acquisition on September 5, 1996, replacing its then existing
credit facility. No principal is due on the facility until its maturity date of
September 2001. As of September 30, 1997, there was $273 million outstanding
under the facility. During the third quarter of 1997, the Company issued $420.0
million of 6 7/8% senior subordinated notes, due in September 2000.

         During the third quarter of 1997, the Company issued $481.4 million in
Threshold Appreciation Price Securities ("TAPS"), due three years from the date
of issue. The TAPS require that the investor purchase the Company's common stock
in three years at a price of $27.07, which was 22% above the stock price on
the date of issue. The proceeds from the TAPS offering were used to buy U.S.
Treasury Notes, which pay the investor interest 6.25% and are pledged to a
collateral agent to secure the investor's obligation to purchase stock. The
Company is also required to pay the investor an enhanced yield payment of .25%.
Proceeds from the maturation of the Treasury Notes will be used to purchase the
$481.4 million in common stock


                                       16

<PAGE>   17

from the Company in August 2000. The resulting impact on the Company's financial
statements will be increases in cash and stockholders' equity of $481.4 million
in August 2000.

         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.


                                       17

<PAGE>   18


PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

         MedPartners 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 the two hospitals it owns, 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, MedPartners' 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 MedPartners.

         In June 1995, Caremark agreed to settle an investigation with the U.S.
Department of Justice ("DOJ"), the Office of the Inspector General of the U.S.
Department of Health and Human Services ("OIG"), the Veterans Administration,
the Federal Employee Health Benefits Program ("FEHBP"), 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 MedPartners' 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 MedPartners.

         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 MedPartners.

         In March 1996, Caremark agreed to settle all disputes with a number of
private payers. These disputes relate to businesses that were covered by the OIG
Settlement. The settlements resulted in an after-tax charge of approximately
$43.8 million. In addition, Caremark paid $24.1 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 connection with the matters described above relating to the OIG
Settlement, Caremark is a party to various nongovernmental 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 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. Caremark is engaged in discussions
with a group of approximately 23 health insurance companies and HMOs regarding
their claim for reimbursement of certain claims paid to us on behalf of Caremark
based on the OIG settlement. The parties are endeavoring to settle this matter
without litigation. MedPartners cannot determine at this time what costs or
liabilities may be incurred in connection with future disposition of
nongovernmental claims or litigation. Such additional costs or liabilities, if
incurred, could have a material adverse effect on the operating results and
financial condition of MedPartners.


                                       18

<PAGE>   19


ITEM 1. LEGAL PROCEEDINGS - (CONTINUED)

         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 sought 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. This action has been settled for
$25 million, most of which will be paid by Caremark's directors and officers'
insurance. MedPartners recorded an after tax charge of $5.3 million in the third
quarter of 1997 in connection with the settlement.

         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 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. On March 27, 1996, the Minnesota state court lawsuit was dismissed
with prejudice, which decision was affirmed by the Minnesota Court of Appeals on
November 7, 1997. 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 was then pending against this physician. All
charges against the physician have now been dismissed. MedPartners 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 MedPartners, 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 MedPartners.

         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
of California's unfair business practices statute. The complaint seeks
unspecified treble damages and attorneys' fees and expenses. MedPartners 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 MedPartners, there can be no assurance that the ultimate
resolution of the matter, if adversely determined would not have a material
adverse effect on the operating results and financial condition of MedPartners.

         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


                                       19

<PAGE>   20


ITEM 1. LEGAL PROCEEDINGS - (CONTINUED)

and attorneys fees and expenses. All of these actions have been transferred by
the Judicial Panel for Multi-district 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
manufactures. 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. MedPartners 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 MedPartners, 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 MedPartners.

         In December 1994, Caremark was notified by the FTC that it was
conducting a civil investigation of the PBM 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.
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 MedPartners, 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 MedPartners.


                                       20

<PAGE>   21


ITEM 2. CHANGES IN SECURITIES

         The following table indicates all unregistered sales of the Company's
Common Stock during the quarter ended September 30, 1997:

<TABLE>
<CAPTION>
TRANSACTION                           PURPOSE                    DATE                      MARKET VALUE
--------------------   --------------------------------------    ------------------    ---------------------
<S>                    <C>                                       <C>                   <C>        
Suburban Heights       Acquisition                               July 28, 1997             $10,000,000
</TABLE>


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

(a)      Exhibits

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

Item 
No.
----

(4)-1             Form of Purchase Contract Agreement by and between the
                  Company and First National Bank of Chicago filed as Exhibit 
                  (4)-4 to the Company's Registration Statement on Form S-3 
                  (Registration No. 333-30921), is hereby incorporated herein
                  by reference.
(4)-2             Form of Pledge Agreement by and between the Company and PNC
                  Bank, Kentucky, Inc., filed as Exhibit (4)-5 to the Company's
                  Registration Statement on Form S-3 (Registration No. 
                  333-30921), is hereby incorporated herein by reference.
(4)-3             Form of Trust Indenture between the Company and PNC Bank,
                  Kentucky, Inc. as Trustee for the Company's 6 7/8% Senior 
                  Subordinated Notes due 2000 filed as Exhibit (4)-4 to the 
                  Company's Registration Statement on Form S-3 (Registration No.
                  333-30923), is hereby incorporated herein by reference.
(10.1)   -        Amendment No. 2 to Credit Agreement among MedPartners, Inc.,
                  Nationsbank National Association, and The First National Bank
                  of Chicago 
(10.2)   -        Plan and Agreement of Merger By and Between PhyCor, Inc. and
                  MedPartners, Inc.
(11)     -        Statement re: Computation of Per Share Earnings (Unaudited)
(27)     -        Financial Data Schedule (for SEC use only)


(b)      Reports on Form 8-K

         Current Report on Form 8-K filed August 27, 1997 reporting the 
         updating of certain information about the Company as a result of
         acquisitions during 1997.



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


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<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.


By:  /s/ Harold O. Knight, Jr.
     --------------------------------------------------------------------------
     Harold O. Knight, Jr. Executive Vice President and Chief Financial Officer

Date: November 14      , 1997
      -----------------

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

Date: November 14      , 1997
      -----------------

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