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

                                    FORM 10-K

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

      FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                                       OR

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

      FOR THE TRANSITION PERIOD FROM           TO

                         COMMISSION FILE NUMBER 0-24276

                          FPA MEDICAL MANAGEMENT, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

             DELAWARE                               3636 NOBEL DRIVE,
  (STATE OR OTHER JURISDICTION OF                      SUITE 200,
   INCORPORATION OR ORGANIZATION)                     SAN DIEGO, CA
                                        (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

             33-0604264                                  92122
          (I.R.S. EMPLOYER                             (ZIP CODE)
         IDENTIFICATION NO.)

Registrant's telephone number, including area code: (619) 453-1000

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

                     COMMON STOCK, $.002 PAR VALUE PER SHARE
                                (TITLE OF CLASS)


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

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

      The aggregate market value of the voting stock held by non-affiliates of
the registrant at March 17, 1998 was $766,909,974.

      The number of shares outstanding of the registrant's common stock as of
March 17, 1998 was 43,297,224.


                       DOCUMENTS INCORPORATED BY REFERENCE

       No documents are incorporated by reference into this Annual Report
                                 on Form 10-K.


<PAGE>   2
      FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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

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

      Factors That May Affect Future Results. The health care industry in
general and the physician practice management ("PPM") business in particular are
in a state of significant change. This, together with the circumstance that the
Company has an on-going acquisition program, makes the Company particularly
susceptible to various factors that may affect future results such as the
following: no assurance of successful integration of acquisitions and expanded
service offerings; risks of financial leverage; growth strategy and difficulty
in maintaining growth; risks related to intangible assets; difficulty in
controlling health care costs and capitated nature of revenue; risks related to
full risk capitation; risks related to fee-for-service contracts; dependence on
government and other third party payors; reliance on certain payors;
terminability of payor contracts; dependence on primary care physicians and
emergency medicine physicians; risks related to classification of physicians as
independent contractors; state laws regarding prohibition of corporate practice
of medicine; possible negative effects of prospective health care reform;
possible negative effects of governmental regulations; anti-trust regulation;
competitive market forces; potential liabilities; fluctuations in quarterly
results; possible volatility of stock price; dependence upon key personnel and
employment contracts; risk of dilution and additional capital needs; shares
eligible for future sale; and anti-takeover effect of certain provisions of the
Company's charter documents and credit facilities.

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


                                       2
<PAGE>   3
                                     PART I

ITEM 1. BUSINESS

GENERAL

      FPA is a national physician practice management company which acquires,
organizes and manages primary care physician practice networks and provides
contract management services to hospital-based emergency departments. The
Company provides primary and specialty care services to capitated managed care
enrollees and fee-for-service patients. As of December 31, 1997, FPA was
affiliated with approximately 7,690 primary care physicians (including emergency
department physicians), who provided services to approximately 1,193,800
enrollees of 53 health maintenance organizations ("HMOs") or other prepaid
health insurance plans (collectively, "Payors") in 29 states (including the
District of Columbia). FPA, through its subsidiary, Sterling Healthcare Group,
Inc. ("Sterling"), provides physician management services pursuant to
approximately 150 contracts to hospital emergency departments, urgent care,
radiology and correctional facilities.

      FPA's relationships with its subsidiaries and affiliated professional
corporations (the "Professional Corporations"), other providers of medical
services and Payors (collectively, the "FPA Network"), offer physicians the
opportunity to participate more effectively in managed care programs by
organizing physician groups within geographic areas to contract with Payors. FPA
enhances physician practice management operations by providing administrative
functions necessary in a managed care environment. These functions include
claims adjudication, utilization management of medical services, Payor contract
negotiations, credentialing, financial reporting and the operation of integrated
information systems. The Company believes that its management model is appealing
to physicians because it allows the physicians to retain control of their own
practices while gaining access to more patients through participation in a
managed care program.

      The FPA Network manages and is financially responsible for all covered
primary and specialty medical care for each enrollee who selects an FPA Network
physician as his or her primary care physician in exchange for monthly fixed or
percent of premium payments ("professional capitation") pursuant to contracts
with Payors. Certain physicians also provide services on a fee-for-service basis
(as opposed to capitation). Specialty care physician services, inpatient
hospitalization and certain other services managed by primary care physicians
are subject to pre-authorization guidelines and are provided through contracts
based on discounted fee-for-service, per diem or capitation rates. Contracts
with Payors and primary care physicians generally include shared risk
arrangements and other incentives designed to encourage the provision of
high-quality, cost-effective health care. Certain of the Company's subsidiaries
and Professional Corporations also accept financial responsibility for hospital
and ancillary health care services in addition to primary and specialty medical
care in return for payment from the Payors on a capitated or percent of premium
basis ("global capitation"). Pursuant to global capitation arrangements, FPA,
through its affiliated physicians, provides the majority of covered health care
services to enrollees and contracts with hospitals and other health care
providers for the balance of the covered services. Because the subsidiaries and
Professional Corporations are obligated to provide medical services for fixed
capitation fees, FPA's profitability may vary based on the ability of the
subsidiaries and Professional Corporations to control the costs of the health
care provided in return for such payments.

      In December 1996, the California Department of Corporations (the "DOC")
issued a restricted health care service plan license to one of FPA's
subsidiaries in accordance with the requirements of the Knox-Keene Health Care
Service Plan Act of 1975 (the "Knox-Keene Act"), which authorizes such
subsidiary to operate as a health care service plan in California. FPA utilizes
such restricted license to allow the subsidiary to contract with Payors for a
broad range of health care services.

      Sterling recruits physicians and contracts for their services to provide
staffing of hospital emergency departments and related facilities. Sterling also
assists its hospital clients in such areas as physician scheduling, operations
support, quality assurance and departmental accreditation as well as billing and
record keeping.


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<PAGE>   4
      Listed below is a breakdown of enrollees, primary care physicians
(including emergency department physicians) and emergency department business
contracts (including seven radiology, urgent care and correctional facility
contracts) by state (including District of Columbia) at December 31, 1997.

<TABLE>
<CAPTION>
                                                       EMERGENCY
                                      PRIMARY CARE     DEPARTMENT
                         ENROLLEES     PHYSICIANS      CONTRACTS
                         ----------   ------------     ----------
<S>                                   <C>              <C>

Alabama                          --        140              7
Arizona                     189,200        430              3
Arkansas                         --         20              2
California                  301,400      1,530             --
Delaware                     13,500         90             --
Florida                     167,900        430             12
Georgia                      31,500        210              6
Hawaii                           --         10              1
Illinois                         --        100             10
Indiana                          --         40              3
Kentucky                     12,000        110              5
Louisiana                     8,400        180             17
Maryland                         --        110              4
Michigan                     39,500        500             13
Mississippi                      --        110              8
Missouri                     13,000        150             13
Nevada                       42,600        240             --
New Jersey                   55,800        900             --
New York                    115,500        470              2
North Carolina               37,100        210             11
Ohio                             --         40              5
Oklahoma                         --         10              1
Pennsylvania                     --        360              1
South Carolina                1,200        170              3
Tennessee                        --         90              8
Texas                       133,600        990             13
Virginia                     17,200         30              1
Washington, D.C.             14,400         10             --
West Virginia                    --         10              1
                         ----------     ------           ----
    Total                 1,193,800      7,690            150
                         ==========     ======           ====
</TABLE>

STRATEGY

      FPA's strategy is to increase enrollment by adding new Payor relationships
and new providers to the existing FPA Network and by expanding the FPA Network
into new geographic areas where the penetration of managed health care is
growing. FPA believes it can attract new Payor and provider relationships
because of its ability to manage the cost of health care without sacrificing
quality. The Company seeks to manage two primary points of entry into the
managed health care delivery system - the primary care physician's office and
the emergency department - which the Company believes will enable it to more
fully coordinate patient care as it pursues global capitation arrangements. The
Company has recently entered into, and continues to pursue, several state and
national Payor contracts, which the Company believes will facilitate more rapid
development of provider networks in new markets and thus should enable FPA to
increase enrollment in an accelerated manner.

      The future growth of FPA is largely dependent on a continued increase in
the number of new enrollees in the FPA Network. This growth may come from (i)
affiliations with, or acquisitions of, group physician practices or independent
practice associations ("IPAs") serving enrollees of Payors in the FPA Network or
of new Payors, (ii) increased membership in plans of Payors with which the
Professional Corporations or subsidiaries of FPA have contracts and whose
members are patients of physicians in the FPA Network or (iii) agreements with
Payors, physicians and hospitals in other geographic markets. The Company is
also placing greater emphasis on developing and enhancing its infrastructure in
order to expand internal and same market growth.


                                       4
<PAGE>   5
ACQUISITION ACTIVITY

      FPA implements its business strategy through growth in existing markets,
expansion into new markets through (i) acquisitions of physician practices, (ii)
enhancement of its management capabilities by acquisition of practice management
companies in both the physician and emergency department fields and, (iii)
agreements with Payors, physicians and hospitals in other geographic markets.
The Company's principal methods of expansion are acquisitions of medical groups,
IPAs and physician practice management companies.

      The Company completed the following acquisitions in 1997 (all information
relating to the number of physicians and enrollees is at the time of
acquisition):

      -     In March 1997, the Company acquired AHI Healthcare Systems, Inc.
            ("AHI") in a stock-for-stock merger accounted for as a pooling of
            interests. AHI developed integrated health care delivery networks
            and provided managed care services primarily in California, Texas
            and Florida.

      -     In June 1997, the Company acquired HealthCap, Inc. ("HealthCap") in
            a stock-for-stock merger accounted for as a pooling of interests.
            HealthCap provided PPM services primarily in California, Florida,
            Georgia, Missouri and Nevada.

      -     In September 1997, the Company acquired Emergency Medical Care
            Incorporated ("EMC") for cash and stock. EMC provided PPM services
            to hospital emergency departments and radiology departments in
            Missouri and Illinois.

      -     In September 1997, the Company acquired Axminster Medical Group,
            Inc. ("Axminster") in a stock-for-stock merger accounted for as a
            pooling of interests. Axminster is a medical group which employed
            approximately 20 physicians in the Los Angeles, California area and
            served approximately 17,000 enrollees.

      -     In October 1997, the Company acquired Health Partners, Inc. ("Health
            Partners") in a stock-for-stock merger accounted for as a pooling of
            interests. Health Partners is a PPM which invested in and managed
            multi-specialty group practices and IPAs, primarily in the New York
            City metropolitan area, northern Virginia, Washington, D.C.,
            northern Kentucky and San Antonio, Texas.

      -     In October 1997, the Company acquired Carolina Health Care Group
            ("CHCG") for cash. CHCG is a medical group which employed
            approximately 14 physicians in the Charlotte, North Carolina area
            and served approximately 26,000 enrollees.

      -     In November 1997, the Company acquired Cornerstone Physicians
            Corporation ("Cornerstone") in a stock-for-stock merger accounted
            for as a pooling of interests. Cornerstone provided management and
            administrative services to physician groups.

      The Company has completed certain acquisitions or entered into acquisition
arrangements since December 31, 1997 as follows:

      -     In January 1998, the Company acquired Avanti Health Systems of
            Texas, Inc. and its affiliated professional corporations ("Avanti").
            Avanti managed 20 health care clinics in Houston and Dallas, Texas
            and employs approximately 60 physicians which served approximately
            50,000 enrollees.

      -     In January 1998, the Company completed the acquisition of Physicians
            Quality Care, Ltd. ("PQC") and Associates in Managed Care, Ltd.
            ("AMC"). PQC provided physician practice management services in the
            Chicago area. AMC was affiliated with approximately 420 primary care
            physicians who provided services to approximately 27,000 enrollees.

      -     In February 1998, the Company completed the acquisition of Emergency
            Treatment Associates, Inc. ("ETA"). ETA provided contract management
            services to six hospitals in two states through approximately 40
            affiliated emergency department physicians.

      -     On March 20, 1998, the Company acquired Orange Coast Managed Care
            Services, Inc. ("OCMCS") and St. Joseph Medical Corporation ("SJMC")
            in a stock-for-stock transaction in which up to 2,828,680 shares of
            the Company's common stock will be issued in exchange for all the
            outstanding shares of capital stock and options of SJMC and OCMCS
            (except for certain shares which were canceled without consideration
            in connection with the merger). The merger with SJMC will be
            accounted for as a pooling of interests, while the merger with OCMCS
            will be treated as a purchase. OCMCS provides administrative
            management services to SJMC's IPA and medical group physicians in


                                       5
<PAGE>   6
            Orange County, California. OCMCS and SJMC served approximately
            120,000 managed care enrollees through approximately 250 primary
            care physicians as of December 31, 1997.

      -     On February 10, 1998, the Company entered into an Agreement and Plan
            of Merger between the Company and Meridian Medical Group, Inc.
            ("Meridian"). Meridian provided physician services through
            approximately 65 physicians to approximately 70,000 enrollees in the
            Atlanta, Georgia area as of December 31, 1997. Consummation of the
            merger, which is anticipated to occur in the second quarter of 1998,
            is subject to certain closing conditions, including Meridian
            shareholder approval and other customary conditions.

      Most of the Company's significant acquisitions have been accounted for as
poolings of interests for accounting and financial reporting purposes. As a
result, the Company's operating income has been reduced by related merger
expenses resulting in a net loss for the year ended December 31, 1997. Such
merger expenses as well as integration costs may result in future losses. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

      The Company's success in continuing its growth strategy will be dependent
upon many factors, including, its ability to identify suitable growth
opportunities and to integrate acquired practices. The process of identifying
and consummating suitable acquisitions of, or affiliations with, physician
groups can be lengthy and complex. The environment for such acquisitions is
subject to increasing competitive pressures. The Company is regularly in
discussions with potential acquisition candidates and may from time to time
enter into letters of intent or definitive agreements with respect to the
acquisition of such businesses. There can be no assurance that FPA will be
successful in identifying or acquiring additional physician groups or IPAs, that
the Company will be able to secure adequate financing to fund such acquisitions
or that the Professional Corporations or subsidiaries of FPA will be able to
contract with new Payors. In addition, there can be no assurance that the
Company's acquisitions will be successfully integrated on a timely basis or that
the anticipated benefits of these acquisitions will be realized. Failure to
continue its growth strategy or to effectively accomplish the integration of
acquired entities may have a material adverse effect on FPA's results of
operations and financial condition. FPA's ability to expand is also dependent
upon its ability to comply with legal and regulatory requirements in the
jurisdictions in which it operates or will operate and to obtain necessary
regulatory approvals, certificates and licenses.

THE MANAGED CARE INDUSTRY

      Concerns over the costs of health care have resulted in the rapid growth
of managed care in recent years. According to InterStudy Publications, HMO
enrollment grew 13% to over 66.8 million members in 1996. As markets evolve from
traditional fee-for-service arrangements to managed care, HMOs and health care
providers confront market pressures to provide high quality care in a
cost-effective manner. Employer groups have begun to bargain collectively in an
effort to reduce premiums and to bring about greater accountability of HMOs and
providers with respect to accessibility, choice of provider, quality of care and
other matters that are fundamental to consumer satisfaction. The increasing
focus on cost-containment has placed small to mid-sized physician groups and
solo practitioners at a disadvantage. They typically have higher operating costs
and little purchasing power with suppliers, they often lack the capital to
purchase new technologies that can improve quality and reduce costs and they do
not have the cost accounting and quality management systems necessary for entry
into sophisticated risk-sharing contracts with payors.

      Primary care physicians have increasingly become the conduit for the
delivery of medical care by acting as "case managers" or "gate-keepers" and
directing referrals to certain specialists, hospitals, alternate-site facilities
and diagnostic facilities. By contracting directly with Payors, organizations
such as the Company which manage primary care physicians are able to reduce the
administrative overhead expenses incurred by Payors and thereby reduce the cost
of delivering medical services.

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


                                       6
<PAGE>   7
      In order to compete effectively in this evolving environment, the Company
believes many physicians are concluding that they must obtain control over the
delivery and financial impact of a broader range of health care services through
global capitation arrangements. Groups of independent physicians and medium to
large medical groups are taking steps to assume the responsibility and the risk
associated with health care services that they do not provide, such as
hospitalization and pharmacy services. Physicians are increasingly abandoning
traditional private practice in favor of affiliation with larger organizations
such as the Company that offer skilled and innovative management, sophisticated
information systems and significant capital resources. Many Payors and their
intermediaries, including governmental entities and HMOs, are also looking to
outside providers of physician services to develop and maintain quality
outcomes, management programs and patient care data. In addition, such payors
and intermediaries look to share the risk of providing health care services
through capitation arrangements. Medical groups and independent physicians seem
to be concluding that while the acceptance of greater responsibility and risk
affords the opportunity to retain and enhance market share and to operate at a
higher level of profitability, the acceptance of global capitation carries with
it significant requirements for enhanced infrastructure, information systems,
capital, network resources and financial and medical management. As a result,
physicians are turning to organizations such as the Company to provide the
resources necessary to function effectively in a managed care environment.

      In addition to physician practices, hospitals have been affected by the
changing health care industry. Cost considerations are important to hospital
operations, particularly with respect to emergency room departments. FPA
believes that hospital emergency departments play a central role in determining
levels of admissions and profitability as well as in establishing a hospital's
reputation in the community. However, the ability of hospitals to provide high
quality health care services, including emergency care services, has been
adversely affected by recent trends in the United States health care industry.
Continuing cost-containment pressures are causing hospitals to seek new ways to
provide high quality services in a cost-effective manner. In addition, hospitals
face numerous problems in managing their emergency departments, including
difficulties in recruiting, evaluating, scheduling and retaining emergency
physicians. Hospital emergency departments also continue to experience
increasing patient volumes, a shortage of board certified emergency department
physicians and extensive use for routine primary care, particularly at night and
on weekends.

PHYSICIAN PRACTICE MANAGEMENT BUSINESS

      FPA provides physician practice management services to physicians in the
FPA Network pursuant to long-term administrative services agreements (the
"Administrative Services Agreements"). FPA's physician practice management
revenue is derived primarily from Payor contracts that compensate certain of
FPA's subsidiaries and the Professional Corporations on a capitated basis and
from the provision of fee-for-service medical services.

      Contracts with Payors. Contracts with Payors generally provide for terms
of one to thirty years, may be terminated earlier without cause, upon notice and
upon renewal or in a number of other circumstances and are subject to annual
renegotiation of capitation rates, covered benefits and other terms and
conditions. At times, Payor contracts may be continued on a month-to-month basis
while the parties renegotiate the terms of the contracts. Pursuant to Payor
contracts, the Professional Corporations or subsidiaries provide covered medical
services (including, in certain instances, hospital and ancillary health care
services) and receive capitation payments from Payors for each enrollee who
selects an FPA Network physician as his or her primary care physician. During
the years ended December 31, 1995, 1996 and 1997, 76.6%, 57.7% and 52.4%,
respectively, of the Company's managed care business operating revenues was
derived from professional capitation arrangements and 12.1%, 28.9% and 38.8%,
respectively, of the Company's managed care business operating revenues during
the same period was derived from global capitation arrangements. To the extent
that enrollees require more care than is anticipated or require supplemental
medical care that is not otherwise reimbursed by Payors, aggregate capitation
payments may be insufficient to cover the costs associated with the treatment of
enrollees. The Company maintains stop-loss insurance coverage, which mitigates
the effect of occasional high utilization of health care services. If revenues
are insufficient to cover costs or the Company is unable to maintain stop-loss
coverage at favorable rates, the Company's results of operations and financial
condition could be adversely affected. The loss of significant Payor contracts
and the failure to regain or retain such Payor's members or the related revenues
without entering into new Payor relationships could have a material adverse
effect on FPA's results of operations and financial condition.


                                       7
<PAGE>   8
      FPA is pursuing national and multi-state Payor contracts, which FPA
believes will facilitate more rapid development of provider networks in new
markets and thus should enable FPA to increase enrollment in an accelerated
manner. FPA has recently entered into several national and multi-state Payor
relationships, including agreements with NYLCare Health Plans, Inc., Oxford
Health Plans ("Oxford"), Humana, Inc., PacifiCare Health Systems, Inc.
("PacifiCare"), Aetna U.S. Healthcare and Foundation Health Systems, Inc.
("Foundation"). These agreements generally provide that managed care members of
the Payors in designated states or other geographic regions may utilize the FPA
Network.

      For the years ended December 31, 1995, 1996 and 1997, revenue related to
Payor contracts with FHP/PacifiCare Health Systems, Inc. accounted for
approximately 21.8%, 13.3% and 10.3%, respectively, of the Company's operating
revenue. For the years ended December 31, 1996 and 1997, revenue related to
Payor contracts with PCA Humana accounted for approximately 13.3% and 15.0%,
respectively, of operating revenue. For the year ended December 31, 1997,
revenue related to Payor contracts with Foundation and Oxford accounted for
approximately 17.3% and 13.2%, respectively, of operating revenue. As of
December 31, 1997, approximately 27.5%, 12.9%, 11.2% and 9.3% of the Company's
membership is pursuant to Payor contracts with Foundation, PCA Humana,
PacifiCare and Oxford, respectively. A significant modification to or
termination of such agreements could have a material adverse effect on FPA's
results of operations and financial condition.

      Fee-for-Service Arrangements. Certain of the FPA Network physicians who
render services on a fee-for-service basis (as opposed to capitation) typically
bill various Payors, such as governmental programs (e.g., Medicare and
Medicaid), private insurance plans and managed care plans, for the health care
services provided to their patients. During the years ended December 31, 1995,
1996 and 1997, approximately 3.3%, 5.6% and 4.5%, respectively, of the Company's
managed care business operating revenues was derived from fee-for-service
payments. The Company anticipates that fee-for-service revenue as a percentage
of total managed care business operating revenues will decrease over time as the
Company enters into more professional capitation and global capitation
contracts. There can be no assurance that payments under governmental programs
or from other Payors will remain at present levels. In addition, Payors can deny
reimbursement if they determine that treatment was not performed in accordance
with the cost-effective treatment methods established by such Payors or was
experimental or for other reasons.

      Contracts with Providers. FPA, through certain of its subsidiaries and the
Professional Corporations, contracts with a variety of providers, including
primary and specialty care physicians, hospitals and other ancillary providers.
These agreements generally have terms up to three years, are automatically
renewable and are terminable by either party at specified periods upon at least
90 days prior notice. A primary care physician's affiliation and compensation
arrangement with a Professional Corporation or subsidiary may take one of
several forms, including (i) capitation payments based on the number of
enrollees "linked" to such physician and additional compensation based upon
efficiency in utilizing the services of specialty care providers and compliance
with contractual quality standards, (ii) base compensation plus performance
bonuses, or (iii) base compensation plus a percentage of a Professional
Corporation's net revenues generated by physicians employed by such Professional
Corporation. Physicians may also participate in FPA's Physician Stock Option
Plan if they reach objective quality performance standards set by FPA. FPA
periodically surveys physician compensation patterns and programs in HMO and
other group practice settings to ensure that FPA Network physicians'
compensation and benefits are competitive within the geographic area in which
each physician is employed.

      Specialty care providers contract with a Professional Corporation or
subsidiary to provide medical services to enrollees and are compensated on a
discounted fee-for-service or capitated basis. Hospital and affiliated medical
facilities contract with a Professional Corporation or subsidiary and Payors to
provide both inpatient and outpatient services to enrollees on a
fee-for-service, per diem or capitated basis, which are discounted from
customary charges.

      Administrative Services Agreements. FPA generally provides the following
services to the Professional Corporations pursuant to the Administrative
Services Agreements:

      Integrated Information Systems. FPA develops and maintains integrated
information systems ("IS") to support its growth and acquisition plans. FPA
maintains an on-line database that provides inpatient and outpatient utilization
statistics and patient encounter reporting and tracking. FPA believes that the
availability of timely information on utilization patterns improves primary care
physician productivity and effectiveness. This data also plays an integral role
in the specialty care physician and hospital utilization review process by
enabling the medical directors and utilization review


                                       8
<PAGE>   9
nurses to monitor encounter data, case management decisions and patient
outcomes. Further, the IS assist FPA in performing various administrative
functions, including insurance verification, payment of accounts payable,
financial reporting and claims payment. The IS also include the customer service
documentation system which assists FPA in resolving concerns enrollees may have
and in evaluating patient and physician satisfaction. In addition, Sterling has
developed IS specific to hospital and clinical management services. The IS
collect data regarding patient flow utilization, physician efficiency and other
data used by Sterling and hospital clients. In particular, Sterling uses the
data to develop staffing patterns.

      Claims Administration and Billing Services. FPA performs comprehensive
complete medical bill review and claims processing, invoicing and payment
functions. These capabilities include determining enrollee eligibility,
identifying appropriate benefits, issuing payments to providers, processing
hospital and outpatient facility charges for the payment of claims, invoicing
fee-for-service visits and providing and analyzing encounter data.

      Utilization Management. Physicians within the FPA Network have established
a utilization management program to help ensure the delivery of high quality,
cost-effective health care. Utilization management encourages physicians in the
FPA Network to provide cost-effective, quality care by emphasizing preventive
medicine and by eliminating unnecessary tests, procedures, surgeries,
hospitalizations and specialty care physician referrals. Referrals to specialty
care physicians and all hospital admissions, with the exception of emergencies,
generally require prior approval by the utilization management committees of the
various Professional Corporations or subsidiaries. Each utilization management
committee has established guidelines for routine referrals which can be
authorized by the committee's staff. Following admission, a patient's status is
monitored daily by a member of the utilization management committee, in
conjunction with the admitting physician or in-house intensivist, to assure
timely and appropriate hospital discharge. A member of the utilization
management committee coordinates with hospital nurses for discharge planning and
use of sub-acute alternatives to hospitalization. FPA has developed separate
utilization management committees on a regional basis due to expansion into new
geographic markets.

      Case Management. Case management is a service administered by the various
utilization management committees and is a clinical and administrative process
by which health care services are identified, coordinated, implemented and
evaluated on an ongoing basis for enrollees experiencing selected health
problems. Such selected health problems include chronic disability, complex
medical cases or problems requiring long-term care. Case management involves the
coordination of a variety of services, including home nursing, home infusion and
the provision of durable medical equipment. This approach ensures a continuum of
quality care throughout the extended treatment period.

      Quality Assurance. The FPA Network maintains, as a service to both its
physicians and Payors, a comprehensive quality assurance program designed to
improve patient care. The quality assurance program incorporates peer review,
patient satisfaction surveys, medical records audit, continuing medical staff
development and regular continuing medical education seminars as required by
accrediting organizations, state law and licensing requirements. Medical staff
development includes the provision of training and support programs to encourage
the team-oriented delivery of high quality, cost-effective medical care.

      Physician Credentialing and Recruitment. As a service to Payors and the
Professional Corporations, FPA verifies that the credentials of physicians in
the FPA Network meet the minimum requirements specified in Payor contracts. In
addition, FPA assists the Professional Corporations in the recruitment of highly
competent physicians who share in the philosophy of prepaid managed health care.
The recruitment process includes a lengthy series of interviews and reference
checks incorporating a number of credentialing and competency assurance
protocols. All of the FPA Network's physicians are licensed to practice medicine
in the state where they provide medical services and are generally either board
certified or board eligible.

      Succession Agreements. In certain states in which FPA conducts or may
conduct business, general business corporations are not permitted to practice
medicine, exercise control over physicians who practice medicine or engage in
certain practices such as fee-splitting with physicians. As stated in Note 1 to
FPA's Consolidated Financial Statements, FPA believes it has direct or indirect
unilateral and perpetual control over the assets and operations of the
Professional Corporations whose operations FPA consolidates.


                                       9
<PAGE>   10
EMERGENCY DEPARTMENT BUSINESS

      FPA provides management services to 143 hospital emergency departments,
one radiology department, three urgent care clinics and three correctional
institutional health facilities in 24 states pursuant to 150 contracts. FPA
contracts with approximately 1,700 affiliated physicians who typically provide
all necessary physician coverage for these services on a 24-hour, 365-day basis.
The Company identifies and recruits physicians as candidates for admission to a
client's medical staff and coordinates the on-going scheduling of staff
physicians, who provide clinical coverage primarily in the area of emergency
medicine. The Company also provides on-site medical directors for the hospitals'
emergency departments, who work directly with the hospital medical staff and
administration in such areas as quality assurance, risk management and
departmental accreditation.

      Physician Contracts. The Company contracts with physicians as independent
contractors to provide services to hospital clients. The physicians are
typically compensated on a flat rate based on the number of hours of coverage
provided. Some physicians may receive additional compensation based upon
departmental performance and their individual contribution to such performance.
Affiliating with FPA for the provision of emergency department services offers
physicians the opportunity to minimize their administrative burden and
concentrate on the practice of medicine. The Company believes that many
physicians enjoy the relative freedom from the business aspects of medicine,
including the development of a patient base, the financing of a practice and the
complexity associated with billing and collection procedures, that results from
these arrangements. As a provider of contract management services across a broad
geographic spectrum, the Company can offer a physician substantial flexibility
in terms of geographic location, type of facility and opportunities for
relocation. The physician also tends to gain greater individual control over the
number and scheduling of hours worked.

      Emergency Department Contracts. The Company's services to hospitals are
provided under fee-for-service and flat-rate contracts. A substantial portion of
the Company's hospital-based net revenues are derived from payments made on a
fee-for-service basis. During the years ended December 31, 1995, 1996 and 1997,
84.4%, 83.7% and 80.0%, respectively, of the Company's emergency department
revenues was derived from fee-for-service payments. Agreements with hospitals to
provide contract management services generally have terms of one or two years
and are renewable automatically unless either party gives written notice of its
intent not to renew at least 90 days prior to the end of the term. Many of these
agreements provide for termination by the hospital without cause on relatively
short notice. There can be no assurance that any of such contracts will not be
terminated early, will be renewed or that they will contain favorable terms.
Since January 1994, a number of Sterling's hospital agreements have been
terminated as a result of non-renewal, termination by the hospital, termination
by Sterling or hospital closure. Future consolidation in the health care
industry may result in future hospital agreements being terminated. The loss of
certain hospital contracts and the failure to regain or retain related revenues
without entering into new hospital contracts could have a material adverse
effect on FPA's results of operations and financial condition. Pursuant to the
contracts, the hospitals authorize the Company and its contracted health care
professionals to bill and collect the professional component of the charges for
medical services rendered by the contracted health care professionals. The
Company receives direct disbursements of the amounts collected and, depending on
the magnitude of services provided to the hospital and Payor mix, may also
receive a subsidy from the hospital client for the Company's services. Pursuant
to such arrangements, the Company accepts responsibility for billing and
collection and assumes the risks of changes in patient volume, Payor mix and
third-party reimbursement rates, delays attendant to reimbursement through
government programs and other Payors and uncollectibility of accounts. All of
these factors are taken into consideration by the Company in arriving at
contractual arrangements with health care institutions and professionals.
Hospitals with flat-rate contracts pay fees to the Company based on the hours of
physician coverage provided. Sterling's fee-for-service hospital billing and
collection services are provided by a nonaffiliated billing firm (the "Billing
Firm"). The Billing Firm's parent has publicly disclosed that the government was
investigating allegations concerning certain applications of the coding process
of the Billing Firm's operations. According to the disclosure, the government
has requested that the Billing Firm voluntarily produce records, and the Billing
Firm is complying with that request. Neither Sterling nor the Company has been
requested to produce records. The Company does not believe that an adverse
result in the investigation of the Billing Firm will have a material adverse
effect on the Company's results of operations or financial condition.

      In November 1997, Sterling received letters from certain Medicare carriers
requesting specific information on Sterling's compliance with the Health Care
Financing Administration's ("HCFA") requirement regarding the Medicare
reassignment for claims for services rendered by Sterling's independent
contractor physicians. Sterling believes that other emergency department
management companies received similar letters regarding this HCFA requirement.
Since February 1997, Sterling has been working with HCFA's Central and Region 4
offices to reach an agreement on the issues raised by such Medicare carriers.
Sterling is in the final stages of obtaining approval of its compliance plan
from the individual carriers. As a result of this process, Sterling's
reimbursement for Medicare billings has been significantly delayed. While the
Company believes that it will favorably resolve the issues raised by such
Medicare carriers, there can be no assurance that Medicare payments to the
Company will not be further delayed as a result of these inquiries. The accounts
receivable related to this inquiry are reflected in the accompanying financial
statements as estimated collectible amounts of approximately $10 million as of
December 31, 1997.


                                       10
<PAGE>   11
COMPETITION

      The health care industry is highly competitive and is subject to
continuing changes in the provision of services and the selection and
compensation of providers. Generally, FPA and the Professional Corporations
compete with any entity that contracts with Payors for the provision of prepaid
health care services. The FPA Network also competes with other companies,
including PPMs, which provide management services to health care providers. FPA
also competes with local physician groups and hospitals for the provision of
physician practice management services to hospital emergency departments. FPA
also competes with other companies for acquisition, affiliation and other
expansion opportunities with national, regional and local PPMs, IPAs and
physician practices. Certain competitors are significantly larger and better
capitalized than FPA, provide a wider variety of services, have greater
experience in providing physician practice management services and have
longer-established relationships with buyers of such services than does the
Company.

GOVERNMENTAL REGULATION

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

      Federal Reimbursement, Fraud and Abuse and Referral Laws. During 1997,
approximately 36.9% of the Company's revenues was derived from payments made by
government-sponsored health care programs (principally, Medicare and
state-reimbursed programs). As a result, the Company is subject to the laws and
regulations that govern reimbursement under Medicare and Medicaid. Any change in
reimbursement regulations, policies, practices, interpretations or statutes
could adversely affect the operations of the Company. There are also state and
federal civil and criminal statutes imposing substantial penalties (including
civil penalties and criminal fines and imprisonment) on health care providers
that fraudulently or wrongfully bill governmental or other third-party payors
for health care services. The Company believes it is in material compliance with
such laws, but there can be no assurance that the Company's activities will not
be challenged or scrutinized by governmental authorities or that any such
challenge or scrutiny would not have a material adverse effect on the Company's
results of operations and financial condition.

      Certain provisions of the Social Security Act, commonly referred to as the
"Anti-Kickback Statute," prohibit the offer, payment, solicitation, or receipt
of any form of remuneration in return for the referral of Medicare or state
health program patients or patient care opportunities, or in return for the
recommendation, arrangement, purchase, lease or order of items or services that
are covered by Medicare or state health programs. Many states have adopted
similar prohibitions against payments intended to induce referrals of Medicaid
and other third-party payor patients. The Anti-Kickback Statute contains
provisions prescribing civil and criminal penalties to which individuals or
providers who violate such statute may be subject. The criminal penalties
include fines up to $25,000 per violation and imprisonment for five years or
more. Additionally, the Department of Health and Human Services (the "DHHS") has
the authority to exclude anyone, including individuals or entities, who has
committed any of the prohibited acts from participation in the Medicare or
Medicaid programs. If applied to the Company or any of its subsidiaries or
Professional Corporations, such exclusion could result in a significant loss of
reimbursement for the Company, which could have a material adverse effect on the
Company's results of operations and financial condition. Although the Company
believes that it is not in violation of the Anti-Kickback Statute or similar
state statutes, its operations do not fit within any of the existing or proposed
federal safe harbors.

      Federal law prohibits the offer, payment, solicitation or receipt of any
form of remuneration in return for, or in order to induce: (i) the referral of a
person for services; (ii) the furnishing or arranging for the furnishing of
items or services; or (iii) the purchase, lease or order of, or arranging or
recommending purchasing, leasing or ordering of, any item or service, in each
case, reimbursable under Medicare or Medicaid (the "Medicare Referral Payments
Law"). The federal government has announced a policy of increased scrutiny of
joint ventures and other transactions among health care providers in an


                                       11
<PAGE>   12
effort to reduce potential fraud and abuse relating to Medicare patients. The
applicability of these provisions to many kinds of business transactions in the
health care industry has not yet been subject to judicial and regulatory
interpretation. In addition, federal legislation restricts the ability of
physicians to refer patients to entities providing "designated health services"
in which the physicians have an ownership interest or other compensation
arrangement. Some states have also enacted anti-kickback and anti-referral laws.

      FPA believes that its business operations do not violate the Medicare
Referral Payments Law because compensation arrangements with primary care
physicians who make referrals are designed to discourage referrals to the extent
they are unnecessary. These physicians are paid either on a capitation or
fee-for-service basis and do not receive any financial benefit from making
referrals. FPA also believes that its business arrangements do not involve the
referral of patients to entities with whom referring physicians have an
ownership interest or compensation arrangement within the meaning of federal and
state anti-referral laws, because most referrals are made directly to other
providers rather than to entities in which referring physicians have an
ownership or compensation arrangement. FPA further believes its compensation
arrangements with physicians fall within various exceptions to state and federal
anti-referral laws, including exceptions for ownership or compensation
arrangements with certain managed care organizations and for physician incentive
plans that limit referrals. In addition, FPA believes that the methods used to
acquire existing physician practices and to recruit new physicians do not
violate anti-kickback and anti-referral laws and regulations. A determination of
liability under the anti-kickback or anti-referral laws and regulations could
have a material adverse effect on FPA's results of operations and financial
condition.

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

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

      Knox-Keene Act. State laws in California, operations in which represented
approximately 17.3% of FPA's operating revenues for the year ended December 31,
1997, require entities such as FPA to be licensed as health care service plans.
In December 1996, the DOC issued a restricted Knox-Keene license to one of FPA's
California subsidiaries. The loss or revocation of such license would have a
material adverse effect on FPA's results of operations and financial condition.
In addition, there can be no assurance that regulatory authorities in the other
states in which FPA or its affiliates operate will not impose similar
requirements.

      Future Legislation and Regulation. As a result of the continued escalation
of health care costs and the inability of many individuals to obtain health
insurance, numerous proposals have been introduced or may be introduced in the
United


                                       12
<PAGE>   13
States Congress and state legislatures relating to health care reform.
Legislation is pending in various states and in Congress to more intensely
regulate managed care, including managed care liability legislation which would
enable managed care companies to be named as defendants in medical malpractice
actions, legislation, such as the Patient Access to Responsible Care Act to
provide consumers of health care with more information and choice in health care
and legislation to address quality of care issues. The adoption of such
legislation or regulations may make it more difficult for the Company to control
health care costs and could adversely affect the Company's results of operations
and financial condition.

EMPLOYEES

      At December 31, 1997, the Company had approximately 4,700 full time
employees. Management believes that its employee relations are good. On December
5, 1996, the Thomas-Davis Medical Centers, P.C., a Professional Corporation
("TDMC") physicians located in Tucson, Arizona (the "Petitioners") voted to be
represented by the Federation of Physicians and Dentists (the "Union"). On
February 13, 1997, the TDMC employees located in Tucson, Arizona voted to be
represented by the Union of Health and Hospital Care Employees. On September 24,
1997, the District Court Judge for the United States District Court for the
District of Arizona granted a temporary injunction and ordered, among other
things, FPA and TDMC to recognize the Union as the exclusive bargaining agent
for the Petitioners and to refrain from making unilateral changes in the terms
and conditions of employment, and upon request of the Union, to recognize and
bargain in good faith with the Union as the exclusive collective bargaining
agent of the Petitioners concerning wages, hours and other terms and conditions
of employment. TDMC and the Union commenced bargaining on October 1, 1997. TDMC
and FPA are in the process of appealing certain aspects related to such
representation; however, there can be no assurance as to the outcome of such
appeals. Although FPA does not expect union affiliations of its Arizona
employees to have a material adverse effect on its results of operations or
financial condition, there can be no assurance that future affiliations and/or
collective bargaining arrangements will not have a material adverse effect on
FPA's results of operations or financial condition.

ITEM 2. PROPERTIES

      The Company leases approximately 26,200 square feet of rental space at
3636 Nobel Drive, Suite 200, San Diego, California, where the Company's
executive offices are located. The Company pays approximately $52,000 per month
in rent pursuant to a lease which expires in December 2001 for such space.
Additionally, the Company has administrative offices in approximately eight
states. The Company believes that these arrangements and other available space
are adequate for its current uses and anticipated growth. The Company also
leases or subleases clinic facilities where physicians provide medical services
in approximately 21 states. The Company anticipates that as the Company acquires
or affiliates with additional physician practices, expanded facilities will be
required; however, the Company believes that suitable facilities will be
available for its purposes.

ITEM 3. LEGAL PROCEEDINGS

      In recent years, physicians, hospitals and other participants in the
managed health care industry have become subject to an increasing number of
lawsuits alleging medical malpractice and related claims based on the
withholding of approval for or reimbursement of necessary medical services. Many
of these lawsuits involve large claims and substantial defense costs. The
Company requires all physicians in the FPA Network to carry certain minimum
amounts of malpractice insurance coverage. The Professional Corporations and
certain subsidiaries maintain their own malpractice insurance. The Company also
maintains an errors and omissions insurance policy which covers utilization
review activities. The Company maintains professional liability insurance for
itself, its hospital clients and its contracted physicians, in amounts it deems
to be appropriate, based upon historical claims and the nature and risks of its
business. In addition to any potential tort liability of the Company, Sterling's
contracts with hospitals generally contain provisions under which Sterling
agrees to indemnify the hospitals for certain losses resulting from the
negligence of the hospital or hospital personnel. FPA and certain of its
subsidiaries and Professional Corporations are parties to certain legal actions
arising in the ordinary course of business. While there can be no assurance that
FPA, the subsidiaries or Professional Corporations will be successful in any
such litigation, management of the Company does not believe any such litigation
will have a material adverse effect on the Company's results of operations or
financial condition.

      AHI, a subsidiary of the Company, is a defendant in a purported class
action securities lawsuit entitled In re AHI Healthcare Systems, Inc. Securities
Litigation filed in the United States District Court for the Central District of
California, Western Division. The suit was initially filed against AHI, certain
of its officers and directors, and its underwriters on December 20, 1995 prior
to the merger of AHI with the Company. The suit asserts that AHI artificially
inflated the price


                                       13
<PAGE>   14
of its stock by, among other things, misleading securities analysts and by
failing to disclose in its initial public offering prospectus alleged
difficulties with the acquisition of Lakewood Health Plan, Inc. and with two of
AHI's payor contracts with FHP, Inc. The plaintiffs seek unspecified damages on
behalf of the stockholders who purchased AHI's common stock between September
28, 1995 and December 19, 1995. On January 17, 1997 the district court (a)
granted AHI's motion for partial summary judgment and dismissed the class
plaintiffs' claims concerning the alleged misrepresentations regarding AHI's
intended use of initial public offering proceeds and AHI's relationship with
FHP, Inc. but (b) denied summary judgment on the claims relating to the proposed
acquisition of Lakewood Health Plan, Inc. As a result, only those claims
relating to Lakewood Health Plan and AHI's alleged liability for the public
statements of securities analysts following AHI remain in the suit. FPA intends
to vigorously defend this lawsuit and does not expect that the outcome of this
lawsuit will have a material adverse effect on its financial condition or
results of operations.

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

      Not applicable.


                                       14
<PAGE>   15
                                     PART II

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

      FPA's common stock is traded on the NASDAQ Stock Market under the symbol
FPAM. The table below shows the high and low bid prices for FPA's common stock
for each quarter during 1996 and 1997.

<TABLE>
<CAPTION>
          1996                   HIGH               LOW
          ----                   ----               ---
<S>                            <C>               <C>

1st Quarter                    $13.0000          $ 8.6250
2nd Quarter                    $19.8750          $12.3750
3rd Quarter                    $26.8750          $12.5000
4th Quarter                    $29.3750          $16.3750
</TABLE>


<TABLE>
<CAPTION>
          1997                   HIGH               LOW
          ----                   ----               ---
<S>                            <C>               <C>

1st Quarter                    $28.5000          $18.2500
2nd Quarter                    $24.5000          $14.8750
3rd Quarter                    $35.1250          $23.5000
4th Quarter                    $39.8125          $16.8750
</TABLE>

      At March 17, 1998, there were approximately 587 holders of record of
common stock. FPA declared no cash dividends during 1996 or 1997 and has no
plans to declare cash dividends in the foreseeable future.

UNREGISTERED SALES OF SECURITIES

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


<TABLE>
<CAPTION>
TRANSACTION                                          PURPOSE AND AMOUNT SOLD                              DATE
-----------                                          -----------------------                              ----
<S>                                                  <C>                                                  <C>

$2.5 million Convertible Promissory Note             Note converted to 243,191 shares of FPA common       1996
                                                     stock

Emergency Medical Care Incorporated                  Merger; 372,959 shares of FPA common stock           September 2, 1997

Axminster Medical Group, Inc.                        Merger; 482,372 shares of FPA common stock           September 30, 1997

Cornerstone Physicians Corporation                   Merger; 1,416,804 shares of FPA common stock         November 26, 1997

Avanti Corporate Health Systems, Inc.                Stock Acquisition; 1,402,123 shares of FPA common    January 1, 1998
                                                     stock

Physicians Quality Care, Ltd. and Associates in      Stock Acquisition; 299,165 shares of FPA common      January 1, 1998
Managed Care, Ltd.                                   stock

Emergency Treatment Associates, Inc.                 Merger; 142,288 shares of FPA common stock           February 17, 1998

J. T. M. S. O. , Inc.                                Merger; 11,432 shares of FPA common stock            February 2, 1998
</TABLE>


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


                                       15
<PAGE>   16
ITEM 6. SELECTED FINANCIAL DATA

     The following consolidated statement of operations data and balance sheet
data have been derived from the audited consolidated financial statements of the
Company. The selected financial data below should be read in conjunction with
the consolidated financial statements and notes thereto, included elsewhere in
this report. All amounts in the following table have been restated to give
effect to the poolings of interests of FPA with Sterling, AHI, HealthCap,
Axminster, Health Partners and Cornerstone.

<TABLE>
<CAPTION>
                                                                               YEARS ENDED DECEMBER 31,
                                                   --------------------------------------------------------------------------------
                                                       1993             1994             1995             1996             1997
                                                   ------------     ------------     ------------     ------------     ------------
                                                                    (in thousands, except share and per share data)
                                                   --------------------------------------------------------------------------------
<S>                                                <C>              <C>              <C>              <C>              <C>
CONSOLIDATED STATEMENTS OF OPERATIONS:
Operating revenue                                  $     59,766     $    136,679     $    340,822     $    678,462     $  1,166,340
Medical services expense                                 41,791           92,544          235,889          519,409          841,936
                                                   ------------     ------------     ------------     ------------     ------------
                                                         17,975           44,135          104,933          159,053          324,404
General and administrative expense                       16,063           46,174          111,031          188,975          268,523
Merger, restructuring and other unusual charges              --               --            1,590           52,572           55,005
                                                   ------------     ------------     ------------     ------------     ------------
Income (loss) from operations                             1,912           (2,039)          (7,688)         (82,494)             876
Other income (expense), net                                 125              385           (1,126)          (3,847)         (13,667)
                                                   ------------     ------------     ------------     ------------     ------------
Income (loss) before income taxes                         2,037           (1,654)          (8,814)         (86,341)         (12,791)
Minority interests                                           --              367              683              866              122
Income tax (expense) benefit                                (85)          (1,709)          (1,692)          (1,276)             891
                                                   ------------     ------------     ------------     ------------     ------------
   Net income (loss)                               $      1,952     $     (2,996)    $     (9,823)    $    (86,751)    $    (11,778)
                                                   ============     ============     ============     ============     ============

PER SHARE DATA - BASIC AND DILUTIVE:
Net income (loss) per share                        $       0.18     $      (0.20)    $      (0.43)    $      (2.66)    $      (0.29)
Weighted average shares outstanding                  10,887,401       14,625,625       22,817,097       32,639,412       40,402,267

CONSOLIDATED BALANCE SHEET DATA:
Cash and marketable securities                     $      7,621     $     19,726     $     50,695     $     69,486     $     16,143
Working capital surplus (deficit)                         3,063           22,585           40,636          (41,219)           7,752
Total assets                                             17,930           88,910          265,761          638,822          831,159
Long-term liabilities                                       371           13,009           28,640          199,701          373,724
Stockholders' equity                                      2,862           41,026          154,390          160,287          182,273
</TABLE>

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

GENERAL

      The Company derives substantially all of its operating revenue from (i)
the payments made by Payors to the Professional Corporations and certain of the
Company's subsidiaries for managed care medical services, (ii) fee-for-service
revenues for the performance of medical services, (iii) fee-for-service revenues
from emergency department medical services, and (iv) medical management services
revenue.

MANAGED CARE BUSINESS

      The Company has two types of Payor contracts: contracts for both inpatient
and outpatient services ("global capitation" contracts) and those limited to
covered primary and specialty medical care ("professional capitation"
contracts). Under global capitation contracts, the Company receives a fixed
monthly amount per enrollee for which the Company is financially responsible to
provide the enrollee with necessary covered inpatient and outpatient care. Under
professional capitation contracts, the Company receives a fixed monthly amount
per enrollee for which the Company is financially responsible to provide the
enrollee with all necessary covered primary and specialty medical care.
Additionally, under professional capitation contracts, the Company is generally
a party to shared risk arrangements with Payors which generally reward the
Company for the efficient utilization of hospital inpatient services. Under
these shared risk arrangements, the Company shares any surplus or, in some
cases, deficit, of amounts pre-established by the Payor in relation to inpatient
expense. Revenue under global capitation contracts represented 12.1%, 28.9% and
38.8% for 1995, 1996 and 1997, respectively, of managed care business operating
revenue. Revenue under professional capitation contracts represented 76.6%,
57.7% and 52.4% for 1995, 1996 and 1997, respectively, of managed care business
operating revenue.


                                       16
<PAGE>   17
      The Company also generates fee-for-service revenue for the performance of
medical services through the Professional Corporations and its subsidiaries.
These revenues are presented net of contractual deductions and represented 3.3%,
5.6% and 4.5% for 1995, 1996 and 1997, respectively, of managed care business
operating revenue.

      Management services revenue represented 7.1%, 5.4% and 2.9% of managed
care business operating revenues in 1995, 1996 and 1997, respectively.
Management services revenue is generated from several different types of
arrangements, including (i) contracted sharing of revenue and profits and (ii)
cost plus either a percentage of revenue or a fixed dollar amount or revenue
minus expenses. The ranges and types of management services fees payable are (i)
5% to 14% of revenue as defined in the applicable administrative services
agreements; (ii) cost plus $.4 million to cost plus $1 million or cost plus 8%
of revenue as defined in the administrative services agreements, or (iii)
revenues minus expenses.

      Through the Professional Corporations and certain of its subsidiaries, the
Company contracts with various health care providers to provide primary care and
specialty medical services to covered enrollees. Primary care physicians are
compensated on either a salary or capitation basis. Specialty care physician
services are paid for on either a fee-for-service or capitation basis.

EMERGENCY DEPARTMENT BUSINESS

      Through the emergency department business, the Company provides contract
management and support services primarily to emergency departments. As of
December 31, 1997, the Company provided management services on a contract basis
to 143 emergency departments, one radiology department, three correctional
health care facilities and three urgent care clinics located in 24 states. As of
December 31, 1997, the Company contracted with approximately 1,700 physicians
who provided certain medical services to approximately 1.6 million patients.

      The Company's contractual arrangements with hospitals are primarily
fee-for-service contracts whereby hospitals generally agree, in exchange for the
Company's services, to authorize the Company and its contracted health care
professionals to bill and collect the professional component of the charges for
medical services rendered by such professionals. Fee-for-service contracts may,
depending on the hospital's patient volume and payor mix, involve the payment of
a subsidy to the Company by the hospital. In 1995, 1996 and 1997, 84.4%, 83.7%
and 80.0%, respectively, of the Company's emergency department business
operating revenue was earned on a fee-for-service basis. The Company emphasizes
fee-for-service reimbursement arrangements in its marketing activities.

      Medical services expense for the emergency department business consists
primarily of payments made to independent contractor and employee physicians
("Physician Costs") and, to a lesser extent, the costs of medical supplies,
malpractice insurance and laboratory fees. In 1995, 1996 and 1997, Physician
Costs accounted for 91.8%, 92.1% and 95.7%, respectively, of emergency
department medical services expense.


                                       17
<PAGE>   18
RESULTS OF OPERATIONS

      The following tables set forth for 1995, 1996 and 1997 selected financial
data and selected financial data expressed as a percentage of operating revenue
(in thousands).


<TABLE>
<CAPTION>
                                                           YEARS ENDED DECEMBER 31,

                                              1995                                         1996
                         -------------------------------------------------------------------------------------------
                           MANAGED         EMERGENCY                      MANAGED        EMERGENCY
                             CARE         DEPARTMENT                       CARE          DEPARTMENT
                           BUSINESS        BUSINESS        TOTAL         BUSINESS         BUSINESS         TOTAL
                         -----------     -----------    -----------     -----------     -----------     -----------
<S>                      <C>             <C>            <C>             <C>             <C>             <C>
Operating revenue        $   225,162     $   115,660    $   340,822     $   541,701     $   136,761     $   678,462
Medical services
  expense                    159,903          75,986        235,889         425,159          94,250         519,409
General and
  administrative
  expense                     74,560          29,313        103,873         145,911          27,656         173,567
Depreciation and
  amortization                 4,889           2,269          7,158          12,204           3,204          15,408
Merger, restructuring
  and other unusual
  charges                         --           1,590          1,590          34,767          17,805          52,572
                         -----------     -----------    -----------     -----------     -----------     -----------
Income (loss)
  from operations            (14,190)          6,502         (7,688)        (76,340)         (6,154)        (82,494)
Other (income)
  expense                       (632)          1,758          1,126           2,993             854           3,847
                         -----------     -----------    -----------     -----------     -----------     -----------
Income (loss)
  before minority
  interests and income
  taxes                      (13,558)          4,744         (8,814)        (79,333)         (7,008)        (86,341)
Minority interests'
  share in net loss              683              --            683             866              --             866
Income tax benefit
  (expense)                      220          (1,912)        (1,692)         (1,276)             --          (1,276)
                         -----------     -----------    -----------     -----------     -----------     -----------
Net income (loss)        $   (12,655)    $     2,832    $    (9,823)    $   (79,743)    $    (7,008)    $   (86,751)
                         ===========     ===========    ===========     ===========     ===========     ===========
</TABLE>


<TABLE>
<CAPTION>
                                 YEAR ENDED DECEMBER 31,

                                           1997
                         ------------------------------------------
                          MANAGED        EMERGENCY
                            CARE         DEPARTMENT
                          BUSINESS        BUSINESS          TOTAL
                         -----------     -----------    -----------
<S>                      <C>             <C>            <C>
Operating revenue        $ 1,009,314     $   157,026    $ 1,166,340
Medical services
  expense                    724,232         117,704        841,936
General and
  administrative
  expense                    216,488          24,246        240,734
Depreciation and
  amortization                24,023           3,766         27,789
Merger, restructuring
  and other unusual
  charges                     55,005              --         55,005
                         -----------     -----------    -----------
Income (loss)
  from operations            (10,434)         11,310            876
Other (income)
  expense                     13,587              80         13,667
                         -----------     -----------    -----------
Income (loss)
  before minority
  interests and income
  taxes                      (24,021)         11,230        (12,791)
Minority interests'
  share in net loss              122              --            122
Income tax benefit
  (expense)                      891              --            891
                         -----------     -----------    -----------
Net income (loss)        $   (23,008)    $    11,230    $   (11,778)
                         ===========     ===========    ===========
</TABLE>


                                       18
<PAGE>   19
<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31,

                                                1995                                              1996
                             ----------------------------------------------------------------------------------------------
                               MANAGED        EMERGENCY                          MANAGED        EMERGENCY
                                CARE         DEPARTMENT                            CARE         DEPARTMENT
                              BUSINESS        BUSINESS          TOTAL            BUSINESS        BUSINESS        TOTAL
                             ----------      ----------      ----------         ----------      ----------     ----------
<S>                          <C>             <C>             <C>                <C>             <C>            <C>
Operating revenue                 100.0%          100.0%          100.0%             100.0%          100.0%         100.0%
Medical services
  expense                          71.0%           65.7%           69.2%              78.5%           68.9%          76.6%
General and
  administrative
  expense                          33.1%           25.3%           30.5%              26.9%           20.3%          25.6%
Depreciation and
  amortization                      2.2%            2.0%            2.1%               2.3%            2.3%           2.3%
Merger, restructuring
  and other unusual
  charges                           0.0%            1.4%            0.5%               6.4%           13.0%           7.7%
                             ----------      ----------      ----------         ----------      ----------     ----------
Income (loss) from
  operations                       (6.3)%           5.6%           (2.3)%            (14.1)%          (4.5)%        (12.2)%
Other (income)
  expense                          (0.3)%           1.5%            0.3%               0.6%            0.6%           0.6%
                             ----------      ----------      ----------         ----------      ----------     ----------
Income (loss)
  before minority
  interests and income
  taxes                            (6.0)%           4.1%           (2.6)%            (14.7)%          (5.1)%        (12.8)%
Minority interests'
  share in net loss                 0.3%            0.0%            0.2%               0.2%            0.0%           0.2%
Income tax benefit
  (expense)                         0.1%           (1.7)%          (0.5)%             (0.2)%           0.0%          (0.2)%
                             ----------      ----------      ----------         ----------      ----------     ----------
Net income (loss)                  (5.6)%           2.4%           (2.9)%            (14.7)%          (5.1)%        (12.8)%
                             ==========      ==========      ==========         ==========      ==========     ==========
</TABLE>


<TABLE>
<CAPTION>
                                        YEAR ENDED DECEMBER 31,

                                                  1997
                             -----------------------------------------------
                              MANAGED           EMERGENCY
                                CARE            DEPARTMENT
                              BUSINESS           BUSINESS            TOTAL
                             ----------         ----------        ----------
<S>                          <C>                <C>               <C>
Operating revenue                 100.0%             100.0%            100.0%
Medical services
  expense                          71.8%              75.0%             72.2%
General and
  administrative
  expense                          21.4%              15.4%             20.6%
Depreciation and
  amortization                      2.4%               2.4%              2.4%
Merger, restructuring
  and other unusual
  charges                           5.4%               0.0%              4.7%
                             ----------         ----------        ----------
Income (loss) from
  operations                       (1.0)%              7.2%              0.1%
Other (income)
  expense                           1.3%               0.0%              1.2%
                             ----------         ----------        ----------
Income (loss)
  before minority
  interests and income
  taxes                            (2.3)%              7.2%             (1.1)%
Minority interests'
  share in net loss                 0.0%               0.0%              0.0%
Income tax benefit
  expense                           0.1%               0.0%              0.1%
                             ----------         ----------        ----------
Net income (loss)                  (2.2)%              7.2%             (1.0)%
                             ==========         ==========        ==========
</TABLE>


                                       19
<PAGE>   20
MANAGED CARE BUSINESS

YEARS ENDED DECEMBER 31, 1995, 1996 and 1997

      OPERATING REVENUE: The Company's managed care business operating revenue
increased to $1.01 billion in 1997 from $541.7 million in 1996 and $225.2
million in 1995. The increase in revenue is attributable to increases in
enrollment to 1,193,800, resulting from acquisitions, internal growth,
enrollment from new Payor contracts and the transition of existing Payor
contracts to capitated arrangements from fee-for-service. In 1997, managed care
business operations generated net fee-for-service revenue of $45.8 million
compared to 1996 net fee-for-service revenue of $30.6 million and $7.4 million
in 1995. The growth in fee-for-service revenue is attributable to the increasing
number of medical facilities managed by the Company, as well as the Company's
recent acquisitions, as these companies have historically had proportionally
greater fee-for-service revenue than the Company. This trend is not expected to
continue as the Company negotiates contracts with existing Payors to move from
fee-for-service to capitation arrangements. Management services revenue for 1997
was $29.2 million or 2.9% of managed care business operating revenue compared to
$29.1 million or 5.4% of such operating revenue in 1996 and $16.0 million or
7.1% of such operating revenue in 1995. The decrease, in recent years, in
management services revenue as a percentage of managed care business operating
revenue can be attributed to the increase in total managed care business
operating revenue combined with the stability of management services revenue.

      MEDICAL SERVICES EXPENSE: Medical services expense for 1997 was $724.2
million or 71.8% of managed care business operating revenue as compared to
$425.2 million or 78.5% of such operating revenue in 1996 and $160.0 million or
71.0% of such operating revenue in 1995. The decrease in medical services
expense as a percentage of such operating revenue from 1996 to 1997 resulted
from referrals to physicians who have subcapitated contracts and a continued
decline in hospital utilization. The increase in medical services expense as a
percentage of such operating revenue from 1995 to 1996 resulted primarily from
significantly increased membership under global capitation contracts which
initially experience a higher medical loss ratio than professional capitation
contracts.

      GENERAL AND ADMINISTRATIVE EXPENSE: General and administrative expense
including depreciation and amortization for 1997 was $240.5 million or 23.8% of
managed care business operating revenue as compared to $158.1 million or 29.2%
of such operating revenue in 1996 and $79.5 million or 35.3% of such operating
revenue in 1995. The percentage decrease resulted from integration of acquired
companies, achievement of synergies and an increase in efficiencies.

      MERGER, RESTRUCTURING AND OTHER UNUSUAL CHARGES: During 1997, the managed
care business of the Company incurred approximately $55.0 million in merger,
restructuring and other unusual charges. This amount relates to the AHI,
HealthCap, Axminster and Health Partners mergers, and is comprised of investment
bankers' fees, attorneys' fees, accountants' fees, wind-down costs and severance
and compensation paid as part of the mergers. As these mergers were accounted
for as poolings of interests, generally accepted accounting principles require
that transaction costs be expensed in the period in which the merger was
consummated.

      During 1996, the managed care business of the Company incurred
approximately $34.8 million in merger, restructuring and other unusual charges.
Approximately $21.1 million resulted from write-offs of goodwill and other
assets related to unprofitable operations in Arizona and California.
Approximately $11.7 million related to costs of legal fees, accounting fees,
investment bankers' fees and other costs associated with the Sterling merger.
Approximately $2.0 million arose from the costs of severance payments, lease
terminations and other costs associated with consolidating medical centers and
adjusting staffing in Florida, Arizona and as a result of the Sterling merger.

      NET INCOME (LOSS) FROM OPERATIONS: In 1997, the managed care business of
the Company generated a loss from operations of $23.0 million including merger,
restructuring and other unusual charges. Excluding such merger, restructuring
and other unusual charges, income from operations was $32.0 million in 1997 as
compared to a loss from operations of $45.0 million in 1996 and $12.7 million in
1995. The increase in managed care business income from operations in 1997
results primarily from the increase in average enrollment, growth through
acquisitions and reduction in operating expenses through increased efficiencies.
The increase in the managed care business loss from operation (excluding merger,
restructuring and other unusual charges) from 1995 to 1996 can be attributed to
the increased


                                       20
<PAGE>   21
membership under global capitation contracts which initially experience a higher
medical loss ratio, as well as a decrease in general and administrative expense
which is a result of integration of acquired companies, achievement of synergies
and increased efficiencies.

EMERGENCY DEPARTMENT BUSINESS

YEARS ENDED DECEMBER 31, 1995, 1996 and 1997

      OPERATING REVENUE: Emergency department business operating revenue
consists of patient revenue, net of contractual deductions, plus other revenue,
which consists principally of hospital subsidy payments, flat-rate hospital
contract revenue and non-patient generated revenues. Emergency department
business operating revenue increased to $157.0 million in 1997 as compared to
$136.8 million in 1996 and $115.7 million in 1995. On a percentage basis, the
emergency department business operating revenue grew 18.2% in 1996 and 14.8% in
1997. The increases were primarily attributable to the increases in the number
of the Company's hospital emergency department contracts from 89 in 1995 and 104
in 1996 to 143 in 1997.

      MEDICAL SERVICES EXPENSE: Medical services expense increased to $117.7
million in 1997 as compared to $94.2 million in 1996 and $76.0 million in 1995.
The increase in medical services expense is primarily due to the increase in the
number of health care professionals under contract, resulting from the increase
in the number of the Company's emergency department contracts, as well as
negotiated increases in fees paid to certain health care professionals. Medical
services expense as a percentage of emergency department business operating
revenue was 75.0% in 1997, 68.9% in 1996 and 65.7% in 1995.

      GENERAL AND ADMINISTRATIVE EXPENSE: General and administrative expense
including depreciation and amortization was $28.0 million in 1997, $30.9 million
in 1996 and $31.6 million in 1995. As a percentage of emergency department
business operating revenue, general and administrative expense was 17.8% in
1997, 22.6% in 1996 and 27.3% in 1995. The decrease in general and
administrative expense is primarily attributable to internal growth without
added administrative infrastructure and reductions in expense as a result of the
Sterling Merger.

      MERGER, RESTRUCTURING AND OTHER UNUSUAL CHARGES: During 1996, the
emergency department business incurred approximately $17.8 million in merger,
restructuring and other unusual charges. Approximately $12.4 million resulted
from write-offs of goodwill and other assets related to terminated emergency
department contracts. Approximately $5.1 million related to costs of legal fees,
accounting fees, investment bankers' fees and other costs associated with the
Sterling merger. Approximately $.3 million related to restructuring charges
which arose from the costs of severance payments, lease terminations and other
costs associated with the Sterling merger.

      NET INCOME (LOSS) FROM OPERATIONS: In 1997, the emergency department
business generated income from operations of $11.2 million. Excluding merger,
restructuring and other unusual charges, the emergency department business
income from operations would have been $10.8 million in 1996 and $4.4 million in
1995. The increase in emergency department business income from operations is
attributable to the increase in emergency department contracts, internal growth
and reduction in operating expenses through increased efficiencies.


                                       21
<PAGE>   22
QUARTERLY RESULTS

      The following table presents financial information for the eight quarters
ended December 31, 1997. In the opinion of management, this information has been
prepared on the same basis as the audited consolidated financial statements
appearing elsewhere in this report and all necessary adjustments, consisting
only of normal recurring adjustments, have been included in the amounts
presented below to present fairly the quarterly results when read in conjunction
with the audited consolidated financial statements of the Company and notes
thereto. The Company's quarterly results have been subject to fluctuation in the
past and as a result, the operating results for any quarter are not necessarily
indicative of results for any future period. All amounts in the following table
are in thousands and have been restated to give effect to the poolings of
interests of FPA with Sterling, AHI, HealthCap, Axminster, Health Partners and
Cornerstone for all periods presented.


                                       22
<PAGE>   23
<TABLE>
<CAPTION>
                                                                     QUARTERS ENDED
-----------------------------------------------------------------------------------------------------------------------------------
                                                        (in thousands, except share and per share data)

                               MARCH 31,         JUNE 30,        SEPTEMBER 30,     DECEMBER 31,        MARCH 31,         JUNE 30,
                                 1996              1996              1996              1996              1997              1997
                             ------------      ------------      ------------      ------------      ------------      ------------
<S>                          <C>               <C>               <C>               <C>               <C>               <C>
Operating revenue            $    130,508      $    147,458      $    184,291      $    216,205      $    270,067      $    287,350

Medical services
  expense                          95,249           110,953           141,793           171,414           194,453           206,947
General and
  administrative
  expense                          33,686            37,996            42,878            59,007            61,350            59,869
Depreciation and
  amortization                      2,931             3,247             3,911             5,319             7,031             7,755
Merger, restructuring
  and other unusual
  charges                              --                --             1,707            50,865            36,834             1,171
                             ------------      ------------      ------------      ------------      ------------      ------------
Income (loss) from
  operations                       (1,358)           (4,738)           (5,998)          (70,400)          (29,601)           11,608
Other (income)
  expense                              86               517               673             2,571             3,144               847
                             ------------      ------------      ------------      ------------      ------------      ------------
Income (loss) before
  minority interest
  and income taxes                 (1,444)           (5,255)           (6,671)          (72,971)          (32,745)           10,761
Minority interests'
  share of net loss                   220               132               164               350               102                67
Income tax benefit
  (expense)                        (1,187)           (2,044)           (1,997)            3,952             8,110            (4,772)
                             ------------      ------------      ------------      ------------      ------------      ------------
Net income (loss)            $     (2,411)     $     (7,167)     $     (8,504)     $    (68,669)     $    (24,533)     $      6,056
                             ============      ============      ============      ============      ============      ============
Net income (loss) per
  share -- basic
  and dilutive               $       (.07)     $       (.22)     $       (.25)     $      (1.93)     $       (.63)     $        .15
                             ============      ============      ============      ============      ============      ============
Weighted average shares
  outstanding -- basic
  and dilutive                 32,569,234        32,211,372        33,661,579        35,542,571        39,155,605        40,867,538
</TABLE>


<TABLE>
<CAPTION>
                                     QUARTERS ENDED
-----------------------------------------------------------
                               (in thousands, except share
                                   and per share data)

                             SEPTEMBER 30,     DECEMBER 31,
                                 1997              1997
                             ------------      ------------
<S>                          <C>               <C>
Operating revenue            $    285,960      $    322,963

Medical services
  expense                         210,588           229,948
General and
  administrative
  expense                          59,400            60,115
Depreciation and
  amortization                      5,499             7,504
Merger, restructuring
  and other unusual
  charges                              --            17,000
                             ------------      ------------
Income (loss) from
  operations                       10,473             8,396
Other (income)
  expense                           5,037             4,639
                             ------------      ------------
Income (loss) before
  minority interest
  and income taxes                  5,436             3,757
Minority interests'
  share of net loss                   (47)               --
Income tax benefit
  (expense)                        (5,926)            3,479
                             ------------      ------------
Net income (loss)            $       (537)     $      7,236
                             ============      ============
Net income (loss) per
  share -- basic
  and dilutive               $       (.01)     $        .17
                             ============      ============
Weighted average shares
  outstanding -- basic
  and dilutive                 39,981,522        43,594,548
</TABLE>




                                       23
<PAGE>   24
      Operating and medical services expense during the first and third quarters
have been and continue to be affected by movements of members in Payor plans
from one plan to another during periods of open enrollment for Payors.
Retroactive capitation rate increases generally take effect during the second
quarter, while medical services expense increases tend to occur ratably
throughout the year. Quarterly results may be affected by final settlements of
shared risk distributions which generally occur between six and eighteen months
following the respective shared risk year end. Final settlements may differ from
estimated amounts. As the Company adds new Payors into the FPA Network, the
timing of these adjustments may vary and, consequently, quarterly results may be
affected in the future, especially due to the start-up of operations in new
regions where there is no operating history. Similarly, if medical services
expense varies from amounts previously accrued for claims incurred but not
reported ("IBNR"), quarterly operating results may fluctuate. A portion of the
Company's expansion strategy includes the acquisition of individual and group
physician practices by the FPA Network, and any such acquisition may materially
affect quarterly operating results, causing quarterly fluctuations.

LIQUIDITY AND CAPITAL RESOURCES

       The Company requires capital primarily to develop physician networks,
acquire physician practices and establish infrastructure in new regions as well
as in acquired practices. Capitation arrangements positively impact cash flow
because FPA generally receives capitation revenue prior to paying costs
associated with services provided under those agreements. However, shared risk
arrangements negatively impact cash flow because settlements in connection with
these arrangements are typically not collected until significantly after the end
of the period in which they were accrued. Fee-for-service revenues also
negatively impact cash flow because payment for services rendered generally lags
by 90 to 120 days.

      At December 31, 1997, the Company had cash, cash equivalents and
marketable securities of $16.1 million and working capital of $7.8 million
compared to cash, cash equivalents and marketable securities of $69.5 million
and working capital deficit (current liabilities in excess of current assets) of
$41.2 million at December 31, 1996.

      During 1997, non-operating sources of cash include net borrowings pursuant
to the Credit Agreement (as described below) of approximately $227.6 million,
proceeds of approximately $5.5 million from the exercise by the initial
purchasers of the overallotment option granted to them in connection with the
1996 offering of convertible subordinated debentures as described below and
proceeds from the exercise of stock options and warrants of approximately as
$8.2 million. Non-operating uses of cash include the purchase of property and
equipment for approximately $17.5 million, payment on long-term debt of
approximately $186.0 million and approximately $15.9 million of cash payments in
connection with acquisitions.

      At December 31, 1997, approximately 55% of the Company's current
liabilities consist of amounts accrued as payable to specialty care physicians,
ancillary providers, hospital and other providers of medical services. These
accrued liabilities include claims received by the Company which have not yet
been paid as well as an estimate of costs for IBNR claims. These amounts are not
due and payable until after the provider has presented a claim and are typically
paid within 45 business days of receipt of such claims. The increase in claims
payable, including IBNR, from approximately $110.5 million at December 1996 to
$150.3 million at December 31, 1997 resulted primarily from significantly
increased membership and membership under global capitation contracts (which
includes hospital services).

      During 1997, the Company entered into a credit agreement for a $175
million three-year revolving line of credit ("Line of Credit") and a $100
million four and one-quarter year term loan ("Term Loan") (collectively, the
"Credit Agreement"). A maximum of $155 million and $30 million of the proceeds
of the Line of Credit can be used to refinance debt and to secure the Company's
capitation deposits, respectively. The remaining proceeds of the Line of Credit
can be used for working capital. The proceeds of the Term Loan may be used to
refinance debt. The borrowings bear interest based on the prime rate plus 50-75
basis points or the Interbank Eurodollar rate plus 150-175 basis points, as
defined in the Credit Agreement. The Credit Agreement contains customary terms,
events of default and covenants (including financial covenants) which, among
other things, limit payment of cash dividends, the consummation of certain
acquisitions and the incurrence of additional debt. The obligations of the
Company under the Credit Agreement are collateralized by the assets of the
Company and the capital stock and assets of its subsidiaries and the
Professional Corporations. The Credit Agreement was further amended effective
January 8, 1998, to increase the Line of Credit to


                                       24
<PAGE>   25
$215 million. At December 31, 1997, the Company had $127.8 million outstanding
on the Line of Credit and $99.8 million outstanding under the Term Loan.

      During 1996, the Company entered into a $55.0 million credit, security,
guarantee and pledge agreement (the "1996 Credit Agreement") with four financial
institutions. Permitted Borrowings, as defined in the Credit Agreement,
generally include acquisitions and capital expenditures. Borrowings under this
agreement bear interest at either LIBOR plus 2.50%, 2.75% or 3.0%, or prime rate
plus 1.0%, 1.25% or 1.50%, as defined in the agreement. At December 31, 1996,
the Company had borrowed the maximum of $55.0 million under the Credit
Agreement. At June 30, 1997, the outstanding obligations under this agreement
were paid in full in conjunction with the execution of the Credit Agreement
described above.

      In December 1996, the Company issued $75.0 million of convertible
subordinated debentures, which resulted in net proceeds to the Company of
approximately $73.0 million. The notes bear interest at 6.50%, payable
semiannually, and are convertible into shares of the Company's stock at $25.95
per share. The debentures are redeemable by the Company after December 20, 1999.
Upon the occurrence of a Repurchase Event, as defined in the debentures, each
holder has the right to require repayment of the debentures at 100% of the
principal amount plus accrued interest. In January 1997, the underwriters
exercised their overallotment option and purchased an additional $5.5 million of
the debentures with identical terms.

      The increase in long-term debt from $263.5 million at December 31, 1996 to
$334.0 million at December 31, 1997 resulted primarily from approximately $227.6
million in borrowings net of repayments under the Credit Agreement, $5.5 million
in subordinated debentures overallotment issuance and issuance of long-term
debt in connection with acquisitions net of repayments of acquisition debt of
approximately $172.4 million. At December 31, 1997, long-term debt exceeded
stockholders' equity.

      The Company believes that its cash on hand and anticipated cash flows from
its operations will be sufficient to meet the Company's operating capital needs
into the second quarter of 1998. The Company intends to seek financing to
support planned expansion through financing alternatives including private and
public offerings of debt and equity-related securities. There can be no
assurance that the Company will be able to obtain such financing or that it will
be able to issue debt or equity-related securities on terms satisfactory to it.
To the extent that additional financing is not available, the Company will delay
certain potential acquisitions or certain geographic expansion or may seek
alternate sources of financing.

RISKS ASSOCIATED WITH YEAR 2000

      The Company recognizes the need to ensure its operations will not be
adversely impacted by the inability of the Company's information systems to
process data having dates on or after January 1, 2000 (the "Year 2000" issues).
Processing errors due to software failures arising from calculations using the
Year 2000 date are a recognized risk. The Company is addressing the risk, with
respect to the availability and integrity of its financial systems and the
reliability of its operating systems, and is in the process of communicating
with suppliers, customers, financial institutions and others with whom it
conducts business transactions to assess whether they are Year 2000 compliant.
The Company does not believe that it will incur a material financial impact from
the risk, or from assessing the risk, arising from the Year 2000 issues.
However, there can be no guarantee that the Company's initial assessment of the
financial impact of this risk will be accurate; actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences, include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties.

                                       25
<PAGE>   26
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                  FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                                    DECEMBER 31,
                                                                                             ---------------------------
                                                                                                1996              1997
                                                                                             ---------         ---------
<S>                                                                                          <C>               <C>
                                                                                                (in thousands, except
                                                                                                      share data)

                                        ASSETS
Current assets:
  Cash and cash equivalents                                                                  $  29,486         $  16,143
  Marketable securities                                                                         40,000                --
  Accounts receivable -- net of allowance for uncollectible accounts of
      $63,739 and $99,367 at December 31, 1996 and 1997, respectively                          107,463           211,736
  Accounts receivable - other                                                                   31,006            41,608
  Notes receivable from affiliate                                                                1,328                --
  Income taxes receivable                                                                           --             5,320
  Prepaid expenses                                                                               8,528             7,593
  Capitation deposit                                                                            15,410                --
  Deferred income tax asset                                                                      3,479               514
                                                                                             ---------         ---------
              Total current assets                                                             236,700           282,914
Property and equipment - net                                                                    57,209            59,933
Restricted cash and deposits                                                                       489               500
Goodwill and intangibles -- net of accumulated amortization of $10,397 and $30,018 at
      December 31, 1996 and 1997, respectively                                                 324,006           464,264
Deferred income tax asset                                                                        3,190             9,470
Other assets                                                                                    17,228            14,078
                                                                                             ---------         ---------
              Total                                                                          $ 638,822         $ 831,159
                                                                                             =========         =========
                         LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable and accrued expenses                                                      $  70,857         $  76,254
  Claims payable, including incurred but not reported claims                                   110,523           150,256
  Accrued payroll and related liabilities                                                        4,534            11,942
  Income taxes payable                                                                           2,294                --
  Other current liabilities                                                                     15,350            24,856
  Accrued liability for professional liability claims, current portion                           1,298               700
  Long-term debt, current portion                                                               73,063            11,154
                                                                                             ---------         ---------
              Total current liabilities                                                        277,919           275,162
Long-term debt, net of current portion                                                         190,454           322,873
Accrued liability for professional liability claims, net of current portion                      4,217             2,800
Other long-term liabilities                                                                      5,030            48,051
                                                                                             ---------         ---------
              Total liabilities                                                                477,620           648,886

Minority interests                                                                                 915                --

Stockholders' equity:
  Preferred stock, $.001 par value per share, 2,000,000 shares authorized,
      no shares outstanding                                                                         --                --
  Common stock, $.002 par value, 98,000,000 shares authorized, 39,025,000
      and 42,801,000 shares issued and outstanding at December 31, 1996
      and 1997, respectively                                                                        78                86
  Additional paid-in capital                                                                   265,851           299,600
  Stock payable                                                                                    535               573
  Due from stockholder                                                                            (450)             (427)
  Accumulated deficit                                                                         (105,727)         (117,559)
                                                                                             ---------         ---------
             Total stockholders' equity                                                        160,287           182,273
                                                                                             ---------         ---------
             Total                                                                           $ 638,822         $ 831,159
                                                                                             =========         =========
</TABLE>

                See notes to consolidated financial statements.


                                       26
<PAGE>   27
                  FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                                YEARS ENDED DECEMBER 31,
                                                                ------------------------------------------------------
                                                                    1995                 1996                  1997
                                                                ------------         ------------         ------------
<S>                                                             <C>                  <C>                  <C>
                                                                    (in thousands, except share and per share data)


Managed care revenue                                            $    199,780         $    469,079         $    919,974
Fee-for-service revenue, net of contractual deductions               105,060              144,990              171,424
Management services revenue                                           16,022               29,103               29,151
Other operating revenue                                               19,960               35,290               45,791
                                                                ------------         ------------         ------------

Operating revenue                                                    340,822              678,462            1,166,340

Medical services expense                                             235,889              519,409              841,936
                                                                ------------         ------------         ------------
                                                                     104,933              159,053              324,404

General and administrative expense                                   103,873              173,567              240,734
Depreciation and amortization expense                                  7,158               15,408               27,789
Merger, restructuring and other unusual charges (Note 8)               1,590               52,572               55,005
                                                                ------------         ------------         ------------

Income (loss) from operations                                         (7,688)             (82,494)                 876

Other income (expense):
  Interest and other income                                            1,698                2,876                7,744
  Interest expense                                                    (2,824)              (6,723)             (21,411)
                                                                ------------         ------------         ------------
              Total other expense                                     (1,126)              (3,847)             (13,667)
                                                                ------------         ------------         ------------
  Loss before minority interests and income taxes                     (8,814)             (86,341)             (12,791)
  Minority interests' share in net loss                                  683                  866                  122
  Income tax benefit (expense)                                        (1,692)              (1,276)                 891
                                                                ============         ============         ============
  Net loss                                                      $     (9,823)        $    (86,751)        $    (11,778)
                                                                ============         ============         ============

  Net loss per share - basic and dilutive                       $       (.43)        $      (2.66)        $       (.29)
                                                                ============         ============         ============

Weighted average shares outstanding - basic and dilutive          22,817,097           32,639,412           40,402,267
                                                                ============         ============         ============
</TABLE>

                 See notes to consolidated financial statements.


                                       27
<PAGE>   28
                 FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
                                 (in thousands)


<TABLE>
<CAPTION>
                                                                                         (STOCK
                                                                                      SUBSCRIPTIONS
                                                                        ADDITIONAL      RECEIVABLE)/
                                                       COMMON            PAID-IN-          STOCK          DUE TO (FROM)
                                                        STOCK            CAPITAL          PAYABLE          STOCKHOLDER
                                                    ------------      ------------    --------------      ------------
<S>                                                 <C>               <C>             <C>                 <C>
Balances, January 1, 1995                           $         47      $     47,447      $        (14)     $        (26)
  Common stock issued through
     public offering for cash, net of
     costs                                                    11            94,929                --                --
  Common stock issued in exchange for
     cash in private placement, net of costs                   4            17,297                --                --
  Common stock issued in
     connection with acquisitions                             --            13,890                --                --
  Common stock payable issued in
     connection with acquisitions                             --                --               567                --
  Net loss for the year                                       --                --                --                --
  Other                                                       (1)              622                14              (450)
                                                    ------------      ------------      ------------      ------------
Balances, December 31, 1995                                   61           174,185               567              (476)
  Stock options and warrants
     exercised                                                 1            10,306                --                --
  Common stock and stock payable issued
     in connection with acquisitions                           3            52,200                42                --
  Common stock issued in exchange for
     cash in private placement, net of costs                   4            25,842                --                --
  Common stock issued in connection
     with conversion of debt                                   1             3,499                --                --
  Net loss for the year                                       --                --                --                --
  Other                                                        8              (181)              (74)               26
                                                    ------------      ------------      ------------      ------------
Balances, December 31, 1996                                   78           265,851               535              (450)
  Stock options and warrants
     exercised                                                 2             8,175                --                --
  Common stock and stock payable issued
     in connection with acquisitions                           4            18,906               461                --
  Common stock issued in exchange for
     cash in private placement, net of costs                   1             2,635                --                --
  Tax benefit from exercise of options                        --             3,588                --                --
  Net loss for the year                                       --                --                --                --
  Other                                                        1               445              (423)               23
                                                    ------------      ------------      ------------      ------------
Balances, December 31, 1997                         $         86      $    299,600      $        573      $       (427)
                                                    ============      ============      ============      ============
</TABLE>

<TABLE>
<CAPTION>


                                                     ACCUMULATED        DEFERRED
                                                      EARNINGS/       COMPENSATION
                                                      (DEFICIT)       STOCK OPTIONS        TOTAL
                                                    ------------      -------------     ------------
<S>                                                 <C>               <C>               <C>
Balances, January 1, 1995                           $     (9,722)     $       (447)     $     37,285
  Common stock issued through
     public offering for cash, net of
     costs                                                    --                --            94,940
  Common stock issued in exchange for
     cash in private placement, net of costs                  --                --            17,301
  Common stock issued in
     connection with acquisitions                             --                --            13,890
  Common stock payable issued in
     connection with acquisitions                             --                --               567
  Net loss for the year                                   (9,823)               --            (9,823)
  Other                                                      (58)              103               230
                                                    ------------      ------------      ------------
Balances, December 31, 1995                              (19,603)             (344)          154,390
  Stock options and warrants
     exercised                                                --                --            10,307
  Common stock and stock payable issued
     in connection with acquisitions                          --                --            52,245
  Common stock issued in exchange for
     cash in private placement, net of costs                  --                --            25,846
  Common stock issued in connection
     with conversion of debt                                  --                --             3,500
  Net loss for the year                                  (86,751)               --           (86,751)
  Other                                                      627               344               750
                                                    ------------      ------------      ------------
Balances, December 31, 1996                             (105,727)               --           160,287
  Stock options and warrants
     exercised                                                --                --             8,177
  Common stock and stock payable issued
     in connection with acquisitions                          --                --            19,371
  Common stock issued in exchange for
     cash in private placement, net of costs                  --                --             2,636
  Tax benefit from exercise of options                        --                --             3,588
  Net loss for the year                                  (11,778)               --           (11,778)
  Other                                                      (54)               --                (8)
                                                    ------------      ------------      ------------
Balances, December 31, 1997                         $   (117,559)     $         --      $    182,273
                                                    ============      ============      ============
</TABLE>


                 See notes to consolidated financial statements.


                                       28
<PAGE>   29
                  FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                            YEARS ENDED DECEMBER 31,
                                                                    1995              1996              1997
                                                                 ---------         ---------         ---------
<S>                                                              <C>               <C>               <C>
                                                                                 (in thousands)

Cash flows from operating activities:
  Net loss                                                       $  (9,823)        $ (86,751)        $ (11,778)
  Adjustments to reconcile net loss
     to net cash used by operating activities:
    Depreciation and amortization expense                            7,158            15,408            27,789
    Minority interests' share in net loss                             (683)             (866)             (122)
    Impairment of goodwill                                             435            34,201                --
    Other                                                              994               999                --
    Changes in assets and liabilities, net
      of effects of acquisitions:
      Accounts and notes receivable                                (23,600)          (67,528)         (113,542)
      Income taxes receivable/payable                               (1,874)            3,397            (7,615)
      Capitation deposit                                                --           (15,410)           15,410
      Deferred income taxes                                           (814)           (3,395)              273
      Accounts payable and accrued expenses                          5,160            19,605            (9,609)
      Claims payable, including incurred but not reported            3,144            67,983            33,733
        claims
      Accrued liability for professional liability claims             (739)            2,465            (5,253)
      Accrued payroll and related liabilities                          380             2,581             6,181
      Prepaid expenses and other assets                             (2,472)              153             2,371
      Other liabilities                                              1,106               319           (25,102)
                                                                 ---------         ---------         ---------
                      Total adjustments                            (11,805)           59,912           (75,486)
                                                                 ---------         ---------         ---------
    Net cash used by operating activities                          (21,628)          (26,839)          (87,264)
Cash flows from investing activities:
  Purchase of property and equipment                               (11,344)          (16,472)          (17,501)
  Payments for intangible assets                                    (1,690)          (13,342)               --
  Net payments (to) from affiliate                                    (677)             (801)            1,328
  Investment in affiliate                                           (1,995)           (3,000)               --
  Net sale(purchase) of marketable securities                        1,851           (31,771)           40,000
  Acquisitions, net of cash acquired                               (44,332)          (18,694)          (15,949)
  Other                                                             (1,732)            2,299                 7
                                                                 ---------         ---------         ---------
    Net cash provided (used) by investing activities               (59,919)          (81,781)            7,885
                                                                 ---------         ---------         ---------
Cash flows from financing activities:
  Net proceeds from issuance of common stock                       112,241            25,903             2,636
  Redemption of common stock                                           (18)               --              (104)
  Net proceeds from issuance of convertible subordinated
    notes payable                                                       --            73,125             5,536
  Proceeds from exercise of stock options and warrants                 156            10,575             8,177
  Proceeds from issuance of notes payable                           13,515            59,978             8,176
  Net borrowings under bank credit facilities                        7,815                --           227,570
  Payments on long-term debt                                       (19,754)          (73,841)         (186,051)
  Other                                                                 17              (120)               96
                                                                 ---------         ---------         ---------
    Net cash provided by financing activities                      113,972            95,620            66,036
                                                                 ---------         ---------         ---------
Net increase (decrease) in cash and cash equivalents                32,425           (13,000)          (13,343)
Cash and cash equivalents, beginning of year                        10,061            42,486            29,486
                                                                 ---------         ---------         ---------
Cash and cash equivalents, end of year                           $  42,486         $  29,486         $  16,143
                                                                 =========         =========         =========

Supplemental cash flow information:
  Cash paid for interest                                         $   2,182         $   4,425         $  20,675
  Cash paid for income taxes                                         6,197             1,053             3,718
  Equipment acquired under capital leases                              477             2,130               557
  Effects of acquisitions:
    Fair value of assets acquired                                $ 117,684         $ 340,707         $ 149,669
    Liabilities assumed                                            (59,462)         (269,768)         (114,349)
    Common stock issued in connection with acquisitions            (13,890)          (52,245)          (19,371)
                                                                 ---------         ---------         ---------
    Net cash paid for acquisitions                               $  44,332         $  18,694         $  15,949
                                                                 =========         =========         =========
</TABLE>


                 See notes to consolidated financial statements.


                                       29
<PAGE>   30
                  FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

GENERAL

      FPA Medical Management, Inc. ("FPA"), a Delaware corporation incorporated
in 1994, is a national physician practice management company, which, through its
network of primary care physicians, affiliated professional corporations
("Professional Corporations") and subsidiaries, contracts with health
maintenance organizations ("HMOs") and other prepaid health insurance plans
(collectively, "Payors") to provide and manage physician and related health care
services to enrollees who select FPA Network primary care physicians. FPA also
provides contract management and support services to hospital emergency and
radiology departments, correctional health care facilities and rural health
urgent care clinics.

BASIS OF PRESENTATION

      The mergers of FPA with each of Sterling Healthcare Group, Inc.
("Sterling"), AHI Healthcare Systems, Inc. ("AHI") , HealthCap, Inc.
("HealthCap"), Axminster Medical Group, Inc. ("Axminster"), Health Partners,
Inc. ("Health Partners") and Cornerstone Physicians Corporation ("Cornerstone")
have been accounted for as poolings of interests and, accordingly, the
consolidated financial statements include the results of FPA, Sterling, AHI,
HealthCap, Axminster, Health Partners and Cornerstone for all periods presented.
Information concerning common stock and per share data has been restated on an
equivalent share basis. The consolidated financial statements present the
financial position and results of operations of FPA and the predecessor
entities, including the accounts of FPA subsidiaries and certain Professional
Corporations (collectively, the "Company").

CASH AND CASH EQUIVALENTS

      Cash equivalents are defined as highly liquid financial instruments with
maturities of three months or less when acquired. A substantial portion of the
Company's cash and cash equivalents are deposited in two financial institutions.
The Company monitors financial conditions of each financial institution and does
not believe that the deposits are subject to a significant degree of risk.

MARKETABLE SECURITIES

      Marketable securities consist of corporate debt securities and
certificates of deposit. Such securities have been classified as available for
sale in accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". The estimated fair value of the Company's marketable
securities is based on quoted market prices, which approximate cost, and
therefore no unrealized gains or losses have been recorded in the accompanying
consolidated financial statements. Marketable securities at December 31, 1996
consisted of Eurodollar certificates of deposit.

CAPITATION DEPOSITS

      Capitation deposits represent funds on deposit from a significant Payor in
Florida. In accordance with the Payor contract, 60% of the capitation revenue
earned each month was retained by the Payor for payment of claims. An accrual
was included in claims payable, including incurred but not reported claims in
the accompanying consolidated balance sheet for the estimated amount of claims
payable related to this Payor contract. The Company was entitled to all of the
interest earned on this account. The contract required a minimum balance in this
account.


                                       30
<PAGE>   31
PROPERTY AND EQUIPMENT

      Property and equipment are recorded at cost, less accumulated depreciation
and amortization. Depreciation and amortization are computed on a straight-line
basis over the estimated useful lives of the assets, generally three to seven
years and thirty years for buildings. Leasehold improvements are amortized over
the lesser of the estimated useful term or the remaining life of the related
lease. If management concludes that the carrying value will not be recovered, an
impairment write-down is recorded to reduce the asset to its estimated fair
value. The Company periodically assesses its ability to recover the carrying
value of its long-lived assets.

RESTRICTED CASH AND DEPOSITS

      The Company records as restricted cash funds escrowed for payment of
claims, for future acquisitions, and other funds contractually required to be
segregated from the Company's operating cash.

GOODWILL AND INTANGIBLE ASSETS

      The Company has classified as goodwill the excess of the purchase price
over the fair value of the net assets of entities acquired. Intangible assets
consist primarily of value assigned to managed care contracts and noncompete
agreements recorded in connection with certain acquisitions. Goodwill and
intangibles are amortized on a straight-line basis over the estimated periods of
future benefit of 5 to 40 years. At each balance sheet date, the Company reviews
the carrying value of the goodwill and intangibles to determine if facts and
circumstances suggest that they may be impaired or that the amortization period
may need to be changed. The Company considers external factors, as well as
internal factors, relating to each acquired business, including hospital and
physician contract changes, local market developments, changes in third party
payments, national health care trends, and other publicly available information.
If these external and internal factors indicate that the goodwill will not be
recoverable, as determined based upon undiscounted cash flows before interest
charges of the business acquired over the remaining amortization period, the
carrying value of the goodwill or intangibles will be reduced. The Company does
not believe there currently are any indicators that would require an adjustment
to the carrying value of the goodwill or intangibles or their remaining useful
lives.

REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE

      Fee-for-service revenue is reported on the accrual basis, net of estimated
third-party contractual deductions. Further adjustments are recorded to reflect
amounts estimated to be uncollectible based upon individual contract experience.
The allowance considered necessary to cover contractual deductions and
uncollectible accounts is based on an analysis of current and past due accounts,
collection experience in relation to amounts billed and other relevant
information. Accounts receivable represents amounts due from third-party payors
including Medicare and Medicaid, patients and others for services rendered.
Accounts receivable - other represents amounts due from third party payors
related to claims reimbursements, management services receivables, subsidy
receivables and amounts advanced to non-affiliated professional corporations.

      For emergency department receivables, the concentration of credit risk
relating to accounts and subsidy receivables is limited by the number and
geographic dispersion of hospital emergency departments managed by the Company,
as well as by the large number of patients and Payors, including various
governmental agencies, in the states in which the Company operates.

      In 1995, 1996 and 1997, revenues from governmental agencies made up
approximately 31.7%, 39.0% and 36.9%, respectively, of operating revenue.

MANAGED CARE BUSINESS

      The Company currently manages the provision of prepaid managed health care
services for networks of primary care physicians in numerous states. The FPA
Network consists of FPA, its subsidiaries, the Professional Corporations and
various independent practitioners.


                                       31
<PAGE>   32
      The Professional Corporations and certain subsidiaries contract with
Payors to provide for the delivery of health care services on a capitation basis
(i.e., a fixed payment per enrollee per month). Through administrative services
agreements, the Professional Corporations assign payments from Payors to the
Company in return for management services, specialty medical care claims
administration and payment, and other services.

      FPA has a controlling financial interest in the Professional Corporations
(except as described below with respect to certain Health Partners affiliated
professional corporations and independent practice associations ("IPAs")) for
all periods presented, other than by means of owning the majority of the voting
stock of the Professional Corporations. FPA and its subsidiaries are unable to
own a majority interest in the Professional Corporations in states which
prohibit the corporate practice of medicine. The Professional Corporations have
as shareholders and directors certain physicians who are employees of FPA or one
of its subsidiaries. Each shareholder/director has entered into a succession
agreement which requires such shareholder/director to sell to a designee of FPA
such shareholder/director's shares of stock for a nominal amount if such
shareholder/director is terminated from employment with FPA. This ensures
unilateral and perpetual control over the Professional Corporations by FPA. Due
to a parent-subsidiary relationship under generally accepted accounting
principles, FPA has consolidated the financial statements of the Professional
Corporations (except as described below). FPA believes that consolidation of the
financial statements of these Professional Corporations is necessary to present
fairly the financial position and results of operations of the Company.
All significant inter-entity transactions have been eliminated in consolidation.

      As part of the Health Partners merger, the Company acquired certain
affiliated medical corporations and independent practice associations in which
it does not have a controlling financial interest. Accordingly, the Company
recognizes only the net revenue of such entities in which it does not exercise
control as management services revenue in the consolidated financial statements.

      Capitation payments from Payors are paid monthly and are recognized as
revenue during the period in which enrollees are entitled to receive services.
Contracts with Payors have terms of one to 30 years, with automatic renewal
periods and are generally terminable with prior notice (generally between 30 and
180 days).

      The Company has two types of managed care Payor contracts: contracts for
both inpatient and outpatient services ("global capitation" contracts) and those
limited to covered primary and specialty medical care ("professional capitation"
contracts). Under global capitation contracts, which accounted for approximately
12.1%, 28.9% and 38.8% of managed care business operating revenue in 1995, 1996
and 1997, respectively, the Company receives a fixed monthly amount per enrollee
for which the Company is financially responsible to provide the enrollee with
necessary covered inpatient and outpatient care. Under professional capitation
contracts, the Company receives a fixed monthly amount per enrollee for which
the Company is financially responsible to provide the enrollees with all
necessary covered primary and specialty medical care. Revenue under professional
capitation contracts represented 76.6%, 57.7% and 52.4% of managed care business
operating revenue in 1995, 1996 and 1997, respectively. Additionally, under
professional capitation contracts, the Company is generally a party to shared
risk arrangements with Payors which generally reward the Company for the
efficient utilization of hospital inpatient services. Under these shared risk
arrangements, the Company shares any surplus or, in some cases, deficit of
inpatient cost in relation to amounts pre-established in the Payor contract.
Estimates of shared risk amounts to be received or paid by the Company are
recorded based on estimates of hospital utilization costs. Differences between
actual settlements and amounts estimated as receivable (or payable) relating to
the shared risk arrangements are recorded at the time of settlement, which can
be as much as six to eighteen months following the respective shared risk
contract year end. The Company does not believe that the final settlements of
these shared risk arrangements will differ materially from the estimated amounts
recorded in the financial statements.

      Fee-for-service revenue is recorded by the Professional Corporations and
certain subsidiaries for the performance of medical services. Such revenues are
presented net of contractual deductions and represented 3.3%, 5.6% and 4.5% for
1995, 1996 and 1997, respectively, of managed care business operating revenue.

      Management services revenue is based on several different types of
arrangements including contracted sharing of revenue and profits, cost plus
either a percentage of revenue or a fixed dollar amount, or revenue minus
expenses. The ranges of management fees receivable are (i) 5% to 14% percent of
revenue as defined in the administrative services agreements; (ii) cost plus $.4
million to cost plus $1 million or cost plus 8% of revenue as defined in the
administrative services agreements, or (iii) revenue minus expenses. Management
services revenue represented 7.1%, 5.4%, and 2.9% of managed care business
operating revenue in 1995, 1996 and 1997, respectively.


                                       32
<PAGE>   33
EMERGENCY DEPARTMENT BUSINESS

      Through the emergency department business, the Company provides contract
management and support services primarily for hospital emergency departments. As
of December 31, 1997, the Company provided management services on a contract
basis to 143 emergency departments, one radiology department, three correctional
health care facilities and three health urgent care clinics located in 24
states. As of December 31, 1997, the Company contracted with approximately 1,700
physicians who provide certain medical services to approximately 1.6 million
patients pursuant to these contracts. Contractual arrangements with hospitals
are primarily fee-for-service whereby hospitals agree to authorize the Company
and its contracted health care professionals to bill and collect for the
professional component of the charges for medical services rendered by the
Company's contracted health care professionals.

      Through the emergency department business, the Company generates
fee-for-service revenues, net of contractual deductions, representing 84.4%,
83.7% and 80.0% of the emergency department business operating revenues in 1995,
1996 and 1997, respectively. In addition, the Company has arrangements with
certain hospitals for monthly subsidy amounts which compensate for patient
revenues not achieving specified levels.

MEDICAL SERVICES EXPENSE

      Through the Professional Corporations and certain subsidiaries, the
Company contracts with various health care providers to provide medical services
to covered enrollees. Primary care physicians are compensated pursuant to
compensation arrangements with the Professional Corporations on either a salary
or capitation basis. The costs of referrals to specialty care physicians are
paid on either a fee-for-service or capitation basis. Under global capitation
contracts, the Company contracts for inpatient services which are paid on a
fee-for-service or per diem basis.

      The Company purchases stop-loss insurance protection which provides
thresholds or "attachment points", generally $100,000 for inpatient services, at
which substantially all financial exposure for inpatient service of an enrollee
beyond such threshold is contractually shifted to the insurer up to a specified
level (generally $1 million), at which point the risk of loss returns to the
Company. In California only, the stop-loss insurance protection threshold is
$125,000 for inpatient services. The Company does not purchase stop-loss
insurance protection for outpatient services.

INCOME TAXES

      The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting For Income Taxes," which requires the use of the liability method
for deferred income taxes (see Note 9).

EARNINGS PER COMMON SHARE

      Net income (loss) per common share is computed based on the weighted
average number of shares and dilutive share equivalents (options and warrants)
outstanding, giving retroactive effect to all stock splits and dividends.

      The Company accounts for earnings per common share in accordance with SFAS
No. 128, "Earnings per Share," which specifies the computation, presentation and
disclosure requirements for earnings per share for entities with publicly held
common stock.

STOCK-BASED COMPENSATION

      SFAS No. 123 requires expanded disclosure of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Corporations are permitted, however, to continue to apply Accounting Principles
Board ("APB") Opinion No. 25, which recognizes compensation cost based on the
intrinsic value of the equity instrument awarded. The Company has


                                       33
<PAGE>   34
continued to apply APB Opinion No. 25 to its stock-based compensation awards to
employees and has disclosed the required pro forma effect on net loss and net
loss per share (See Note 6).

PROFESSIONAL LIABILITY COVERAGE

      The Company maintains professional liability coverage for the Company and
its employee and independent contractor physicians on a claims-made basis. The
Company records an estimate of its liabilities for medical malpractice. Such
liabilities are not discounted.

ACCOUNTING ESTIMATES

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

RECLASSIFICATIONS

      Certain reclassifications have been made to prior years' financial
statements to conform to current year classifications.

2.    BUSINESS COMBINATIONS

      The following acquisitions were accounted for as poolings of interests:

      On October 31, 1996, FPA and Sterling consummated a business combination
(the "Sterling Merger"). Pursuant to the Sterling Merger, 8,097,781 shares of
FPA common stock were issued in exchange for all the outstanding shares of
Sterling capital stock.

      On March 17, 1997, FPA and AHI consummated a business combination (the
"AHI Merger"). Pursuant to the AHI Merger, 5,797,968 shares of FPA common stock
were issued in exchange for all the outstanding shares of AHI capital stock.

      On June 30, 1997, FPA and HealthCap consummated a business combination
(the "HealthCap Merger") . Pursuant to the HealthCap Merger, 1,940,960 shares of
FPA common stock were issued in exchange for all the outstanding shares of
HealthCap capital stock.

      On September 30, 1997, FPA and Axminster consummated a business
combination (the "Axminster Merger"). Pursuant to the Axminster Merger, 482,372
shares of FPA common stock were issued in exchange for all the outstanding
shares of Axminster capital stock.

      On October 13, 1997, FPA and Health Partners consummated a business
combination (the "Health Partners Merger"). Pursuant to the Health Partners
Merger, 5,227,273 shares of FPA common stock were issued in exchange for all the
outstanding shares of capital stock of Health Partners.

      On November 26, 1997, FPA and Cornerstone consummated a business
combination (the "Cornerstone Merger"). Pursuant to the Cornerstone Merger,
1,416,804 shares of FPA common stock were issued in exchange for all the
outstanding shares of capital stock of Cornerstone.


                                       34
<PAGE>   35
      In recording business combinations, the Company's prior period financial
statements have been restated to reflect the foregoing poolings of interests.
The results of operations for the separate entities, up to the date of the
respective merger, are presented in the following table:


<TABLE>
<CAPTION>
                                    1995                1996               1997
                                -----------         -----------         -----------
<S>                             <C>                 <C>                 <C>
                                                    (in thousands)
      OPERATING REVENUE
FPA                             $    52,692         $   339,569         $   982,296
Sterling                            115,660             100,750                  --
AHI                                 114,283             118,786              31,380
HealthCap                            10,658              27,226              20,571
Axminster                            15,187              16,322              11,413
Health Partners                      31,976              74,569             115,831
Cornerstone                             366               1,240               4,849
                                -----------         -----------         -----------
                                $   340,822         $   678,462         $ 1,166,340
                                ===========         ===========         ===========

      NET INCOME (LOSS):
FPA                             $     1,003         $   (19,158)        $    10,375
Sterling                              2,832               3,442                  --
AHI                                  (3,101)            (54,268)             (4,682)
HealthCap                            (1,890)             (3,814)             (3,590)
Axminster                                20                 (11)              2,407
Health Partners                      (7,171)             (9,471)            (11,355)
Cornerstone                          (1,516)             (3,471)             (4,933)
                                -----------         -----------         -----------
                                $    (9,823)        $   (86,751)        $   (11,778)
                                ===========         ===========         ===========
</TABLE>

      The following is a summary of material acquisitions consummated during
1996 and 1997 by the Company, its subsidiaries or one of the Professional
Corporations. Such acquisitions were accounted for using the purchase method of
accounting. Goodwill totaling approximately $385 million was recorded (inclusive
of approximately $106 million of goodwill recorded in 1997 subsequent to
independent valuations of assets acquired and liabilities assumed in connection
with acquisitions consummated during 1996). Goodwill is amortized over periods
ranging from 25 to 30 years. In connection with these acquisitions, the Company
issued common stock valued at approximately $87.7 million, notes payable of
$169.8 million, paid cash of $29.7 million and $4.3 million in other
consideration.

      VIP, IPA, A Professional Corporation                     January     1996
      Foundation Health IPA                                    January     1996
      Century Family Medical Group, IPA                        January     1996
      Century Family Medical Group, Inc.                       January     1996
      Chabot Medical Group IPA                                 January     1996
      Physicians First, Inc.                                   June        1996
      Family First Pharmacy, Inc.                              June        1996
      FPA Family Pharmacy, Inc.                                June        1996
      Physicians Medical Group of Florida, Inc.                June        1996
      FHC IPA, Inc.                                            July        1996
      Intergroup IPA, P. C.                                    July        1996
      Foundation Health Medical Services                       December    1996
      Foundation Health Medical Group, Inc.                    December    1996
      FHMG/TDMC Medical Group, A Professional Corporation      December    1996
      Thomas Davis Medical Centers, P. C.                      December    1996
      Emergency Medical Care, Incorporated.                    September   1997
      Carolina HealthCare Group, Inc.                          October     1997


                                       35
<PAGE>   36
3.    PROPERTY AND EQUIPMENT

      Property and equipment consists of the following at December 31 (in
thousands):

<TABLE>
<CAPTION>
                                                        1996             1997
                                                      --------         --------

<S>                                                   <C>              <C>
Land, buildings and leasehold improvements            $ 14,475         $ 14,314
Furniture, fixtures and equipment                       57,498           69,139
Vehicles                                                   312              389
                                                      --------         --------
  Total                                                 72,285           83,842
Accumulated depreciation and amortization              (15,076)         (23,909)
                                                      --------         --------
Property and equipment, net                           $ 57,209         $ 59,933
                                                      ========         ========
</TABLE>

4.    DEBT

CONVERTIBLE SUBORDINATED DEBENTURES

      In December 1996, the Company issued $75.0 million of convertible
subordinated debentures due December 2001, which resulted in net proceeds to the
Company of approximately $73.1 million. The notes bear interest at 6.5%, with
interest payable semiannually, and are convertible into FPA common stock at
$25.95 per share. The debentures are redeemable by the Company after December
20, 1999. Upon the occurrence of a Repurchase Event, as defined in the
debenture, each holder has the right to require repayment of the debentures at
100% of the principal amount plus accrued interest. In January 1997, upon
exercise of the overallotment option granted to the initial purchasers, the
Company issued $5.5 million of additional convertible subordinated debentures
with the same terms for net proceeds of $5.5 million.

NOTES PAYABLE

      The following is a summary of long-term debt at December 31 (in
thousands):

<TABLE>
<CAPTION>
                                                                                                         1996            1997
                                                                                                       --------        --------

<S>                                                                                                    <C>             <C>
Notes payable, interest ranging from 7% to 10.25% , principal due through December 2000                $ 12,211        $  7,024
Convertible debentures payable, interest at 6.5% , principal due December 2001                           75,000          80,535
Term Loan with a financial institution, interest at LIBOR (7.625%, including
  applicable basis points at December 31, 1997), principal due September 2001                                --          99,750
Revolving Line of Credit with a financial institution, interest at LIBOR (7.75%, including
  applicable  basis points at December 31, 1997), principal due September 2001                               --         107,820
Note payable to a financial institution, interest at 9.0%, principal due September 2001                      --          20,000
Notes payable to former stockholders of Sterling, interest at rates ranging from 5% to 5.54%                759              --
Note payable, interest at LIBOR (6.5%, including applicable basis points at December 31, 1997),
  payable in six quarterly installments through March 1999                                                   --           5,000
Notes payable to financial institutions, interest at 5.5%, due October 1997                              55,000              --
Note payable, interest at LIBOR, 59 payments of principal and interest
  due commencing February 1999 through December 2003                                                     97,759              --
Notes payable, interest at 6.02%, principal due January 2006                                             20,175          10,222
Other                                                                                                     2,613           3,676
                                                                                                       --------        --------
  Total                                                                                                 263,517         334,027
Less current portion                                                                                     73,063          11,154
                                                                                                       --------        --------
Long term debt, net of current portion                                                                 $190,454        $322,873
                                                                                                       ========        ========
</TABLE>


                                       36
<PAGE>   37
      At December 31, 1997, scheduled future payments on long-term debt are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                              NOTES PAYABLE          CAPITAL
                                                                AND OTHER            LEASES
                                                             --------------     ---------------
<S>                                                          <C>                <C>
1998                                                         $        9,680     $         1,708
1999                                                                  5,498                 976
2000                                                                 11,688                 210
2001                                                                298,296                  50
2002                                                                  1,433                  58
Thereafter                                                            4,821                  --
                                                             --------------     ---------------
                                                             $      331,416               3,002
                                                             ==============
Amount representing interest on capital leases                                             (391)
                                                                                ----------------
Present value of net minimum capital lease payments                                       2,611
Notes payable and other                                                                 331,416
                                                                                ---------------
Total                                                                           $       334,027
                                                                                ===============
</TABLE>

CREDIT AGREEMENT

      On January 29, 1996, the Company entered into a credit, security,
guarantee and pledge agreement (the "1996 Credit Agreement") with four financial
institutions. Permitted Borrowings, as defined in the 1996 Credit Agreement,
generally include those for acquisitions and capital expenditures. Borrowings
bear interest at rates ranging from either LIBOR plus 2.5%, 2.75% or 3.0% or
prime rate plus 1.0%, 1.25%, or 1.5%, as defined in the 1996 Credit Agreement.
At December 31, 1996, the Company had borrowed the maximum of $55.0 million
under the Credit Agreement. At June 30, 1997, the outstanding obligation under
this agreement was paid in full in conjunction with the execution of a new
credit agreement on June 30, 1997.

      On June 30, 1997, the Company entered into a credit agreement for a $175
million three-year revolving line of credit ("Line of Credit") and a $100
million four and one-quarter year term loan ("Term Loan") (collectively, the
"Credit Agreement"). A maximum of $155 million and $30 million of the proceeds
of the Line of Credit can be used to refinance debt and to secure the Company's
capitation deposits, respectively. The remaining proceeds of the Line of Credit
can be used for working capital. The proceeds of the Term Loan may be used to
refinance debt. The borrowings bear interest based on the prime rate plus 50-75
basis points or the Interbank Eurodollar rate plus 150-175 basis points, as
defined in the Credit Agreement. The Credit Agreement contains customary terms,
events of default and covenants (including financial covenants) which, among
other things, limit payment of cash dividends, the consummation of certain
acquisitions and the incurrence of additional debt. The obligations of the
Company under the Credit Agreement are collateralized by the assets of the
Company and the capital stock and assets of its subsidiaries and the
Professional Corporations. The Credit Agreement was further amended effective
January 9, 1998, to increase the Line of Credit to $215 million. At December 31,
1997, the Company had $127.8 million outstanding on the Line of Credit and $99.8
million outstanding under the Term Loan. In lieu of a capitation deposit, two
letters of credit in the amount of $27.5 million and a $2.5 million,
respectively, have been established. At December 31, 1997, no amounts have been
drawn against either letter.

      On December 9, 1997, the Company entered into an interest rate cap
transaction to effectively limit the base LIBOR rate on the Term Loan to
7.5%. The interest rate cap is effective from December 9, 1997 through the
maturity date of the Term Loan (September 30, 2001). The consideration granted
to the financial institution providing the interest rate cap was an option to
swap the Company's floating base LIBOR rate to a fixed rate of 6.07% at June 30,
1999, through the maturity date of the Term Loan.

5.    COMMITMENTS AND CONTINGENCIES

LEGAL

      The Company is party to certain legal actions arising in the ordinary
course of business including the following lawsuit involving AHI, a subsidiary
of the Company. AHI is a defendant in a purported class action securities
lawsuit entitled In re AHI Healthcare Systems, Inc. Securities Litigation filed
in the United States District Court for the Central District of California,
Western Division. The suit was initially filed against AHI, certain of its
officers and directors, and its underwriters on December 20, 1995 prior to the
merger of AHI with the Company. The suit asserts that AHI artificially inflated
the price of its stock by, among other things, misleading securities analysts
and by failing to disclose in its initial public offering prospectus alleged
difficulties with the acquisition of Lakewood Health Plan, Inc. and with two of
AHI's payor contracts with FHP, Inc. The plaintiffs seek unspecified damages on
behalf of the stockholders who purchased AHI's common stock between September
28, 1995 and December 19, 1995. On January 17, 1997 the district court (a)
granted AHI's motion for partial summary judgment and dismissed the class
plaintiffs' claims concerning the alleged misrepresentations regarding AHI's
intended use of initial public offering proceeds and AHI's relationship with
FHP, Inc. but (b) denied summary judgment on the claims relating to the proposed
acquisition of Lakewood Health Plan, Inc. As a result, only those claims
relating to Lakewood Health Plan and AHI's alleged liability for the public
statements of securities analysts following AHI remain in the suit. FPA intends
to vigorously defend this lawsuit and does not expect that the outcome of this
lawsuit will have a material adverse effect on its financial condition or
results of operations.

      Management of the Company does not believe any legal actions, including
the AHI lawsuit discussed above, will have a material adverse effect on the
Company's financial condition or results of operations. The Company maintains
professional liability, errors and omissions and directors and officers
liability insurance in amounts it deems appropriate.


                                       37
<PAGE>   38
OPERATING LEASES

      The Company is party to certain facilities and equipment leases which
terminate at various dates through 2005. Future minimum lease payments required
under all operating leases are as follows (in thousands):

<TABLE>
<S>                             <C>
       1998                     $ 27,939
       1999                       23,640
       2000                       20,084
       2001                       13,946
       2002                       11,676
       Thereafter                 24,169
                                --------
       Total                    $121,454
                                ========
</TABLE>

      For 1995, 1996 and 1997, total expense under these non-cancelable
operating leases was $9.3 million, $16.8 million and $28.2 million,
respectively.

6.    STOCKHOLDERS' EQUITY

      The accompanying consolidated financial statements and notes retroactively
reflect all stock splits, and a one-for-one common stock dividend distributed
April 3, 1995 to stockholders of record on March 1, 1995. All share, per share
and stock option data have been restated to reflect the stock splits and
dividend.

      In 1995, a director of a subsidiary purchased 32,000 shares of common
stock for $450,000 by delivery of a note which is payable in monthly
installments commencing January 1996 through May 2002. The note is
collateralized by the purchased shares and is included in Due from Stockholder
in the accompanying consolidated balance sheet. In addition, the Company granted
this director 42,675 stock options exercisable in installments over a seven-year
period at $14.06 per share.

STOCK OPTION PLANS

      Under the Company's Amended Omnibus Stock Option Plan (the "Omnibus
Plan"), options granted may be either incentive stock options or nonqualified
stock options, which expire no later than 10 years from the date of grant.
Options generally vest over three to five years. The Company has reserved
8,500,000 shares of common stock for the granting of options under the Omnibus
Plan. During the years ended December 31, 1995, 1996 and 1997, the Company
granted nonqualified stock options to purchase 709,072, 4,391,384 and 1,617,680
shares, respectively, of the Company's common stock at prices equal to the fair
market value of the stock on the date of grant. As of December 31, 1996 and
1997, the total number of options outstanding under the Omnibus Plan were
5,725,120 and 6,586,776, respectively. In 1997, the stockholders of the Company
approved an amendment to the Omnibus Plan which increased the number of shares
available for the grant of options from 6,500,000 to 8,500,000.

      Under the Company's 1994 Physician Stock Option Plan (the "Physician
Plan"), options granted are nonqualified stock options, which expire no later
than 10 years from the date of grant. Options generally vest over two to five
years. The Company has reserved 1,500,000 shares of common stock for the
granting of options under the Physician Plan. During the years ended December
31, 1995, 1996 and 1997, the Company granted nonqualified stock options to
purchase 477,460, 184,292 and 600,971 shares, respectively, of the Company's
common stock at prices equal to the fair market value of the stock on the date
of grant. As of December 31, 1996 and 1997, the total number of options
outstanding under the Physician Plan were 637,427 and 1,170,707, respectively.

      Under the Company's 1995 Non-employee Directors Nonqualified Stock Option
Plan (the "1995 Directors Plan"), options granted are nonqualified stock
options, which expire no later than 10 years from the date of grant. Options
vest on the first anniversary of the date of grant. The Company has reserved
200,000 shares of common stock for the granting of options under the 1995
Directors Plan. During the years ended December 31, 1995, 1996 and 1997, the
Company granted nonqualified stock options to purchase 17,500, 12,500 and 74,000
shares, respectively, of the Company's common stock at prices equal to the fair
market value of the stock on the date of grant. As of December 31, 1996 and
1997, the total number of options outstanding under the 1995 Directors Plan were
25,000 and 89,000, respectively. In 1997, the stockholders of


                                       38
<PAGE>   39
the Company approved amendments to the 1995 Directors Plan which increased the
number of shares of common stock to 15,000 that may be purchased pursuant to the
automatic grant of options and which increased the annual grant to non-employee
directors.

      During the year ended December 31, 1997, in connection with the HealthCap
Merger, the Company assumed certain incentive stock options and nonqualified
stock outstanding under stock option plans maintained by HealthCap, Inc. (the
"HealthCap Plans"). As of December 31, 1997, the total number of options
outstanding under the HealthCap Plans was 112,236. No further options are
available for grant pursuant to the HealthCap Plans. Options expire no later
than ten years from the date of grant.


                                       39
<PAGE>   40
     Stock option transactions and prices are summarized as follows:

<TABLE>
<CAPTION>                                                                                          HEALTHCAP
                                                                                   1995            MANAGEMENT
                                                                               NON-EMPLOYEE        GROUP, INC.
                                                                                DIRECTORS           QUALITY
                                                                               NONQUALIFIED        CONSULTANT      HEALTHCAP INC.
                                         OMNIBUS STOCK     1994 PHYSICIAN      STOCK OPTION       STOCK OPTION      1994 STOCK
                                          OPTION PLAN        OPTION PLAN           PLAN               PLAN          OPTION PLAN
                                         -------------     --------------      ------------       ------------     --------------
<S>                                      <C>                <C>                   <C>                <C>                <C>
Shares under option:
Outstanding at January 1, 1995                855,254                 --                 --                 --                 --
  Granted                                     709,072            477,460             17,500                 --                 --
  Exercised                                        --                 --                 --                 --                 --
  Canceled                                    (13,692)               (25)                --                 --                 --
                                         ------------       ------------       ------------       ------------       ------------
Outstanding at December 31, 1995            1,550,634            477,435             17,500                 --                 --
  Granted                                   4,391,384            184,292             12,500                 --                 --
  Exercised                                  (181,421)           (14,200)            (5,000)                --                 --
  Canceled                                    (35,477)           (10,100)                --                 --                 --
                                         ------------       ------------       ------------       ------------       ------------
Outstanding at December 31, 1996            5,725,120            637,427             25,000               --                 --
  Grants assumed in HealthCap merger               --                 --                 --             66,369            340,887
  Granted                                   1,617,680            600,971             74,000                 --                 --
  Exercised                                  (686,114)           (51,697)           (10,000)            (7,448)          (280,796)
  Canceled                                    (69,910)           (15,994)                --             (6,776)                --
                                         ------------       ------------       ------------       ------------       ------------
Outstanding at December 31, 1997            6,586,776          1,170,707             89,000             52,145             60,091
                                         ============       ============       ============       ============       ============
Average option price per share:
  At December 31, 1995                   $       6.27       $       7.02       $       8.40                N/A                N/A
  At December 31, 1996                   $      13.75       $       9.33       $      13.51                N/A                N/A
  At December 31, 1997                   $      16.05       $      18.09       $      21.61       $       7.97       $       4.96
Options exercisable:
  At December 31, 1995                        215,332             31,500                 --                 --                 --
  At December 31, 1996                      1,705,560            146,689             12,500                 --                 --
  At December 31, 1997                      2,070,447            300,414             15,000             13,715             60,091
</TABLE>


                                       40






<PAGE>   41
      The Company applies APB Opinion 25 "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its stock option plans.
Accordingly, no compensation cost has been recognized in the Company's
consolidated financial statements. However, had compensation cost been
determined consistent with SFAS No. 123, the Company's pro forma net income
(loss) and net income (loss) per share would have been as follows (in thousands,
except for per share data):

<TABLE>
<CAPTION>
                                  1995            1996           1997
                                ---------       ---------     ----------
<S>                             <C>            <C>            <C>
Net Income (loss)
 As reported                    $ (9,823)      $(86,751)      $(11,778)
 Pro forma                       (11,790)       (92,910)       (26,979)

Net income (loss) per share
 As reported                    $   (.43)      $  (2.66)      $   (.29)
 Pro forma                          (.52)         (2.85)          (.67)
</TABLE>

      The average fair value of options granted during 1995, 1996 and 1997 was
$3.22, $8.63, and $8.60, respectively, per share. Fair value is estimated based
on the Black Scholes option-pricing model with the following weighted average
assumptions:

<TABLE>
<CAPTION>
                                  1995            1996           1997
                                ---------       ---------     ----------
<S>                             <C>            <C>            <C>
Risk free interest rate              5.7%            5.7%         5.4%
Dividend yield                       0.0%            0.0%         0.0%
Expected life                    3 years         3 years      4 years
Expected volatility                  .48             .48          .50
</TABLE>


      The following table summarizes information about the Company's incentive
and nonqualified stock options outstanding at December 31, 1997:

<TABLE>
<CAPTION>
                                           WEIGHTED            WEIGHTED                          WEIGHTED
      RANGE OF                             AVERAGE             AVERAGE                            AVERAGE
      EXERCISE            NUMBER           REMAINING        EXERCISE PRICE       NUMBER        EXERCISE PRICE
       PRICES          OUTSTANDING     CONTRACTUAL LIFE      (OUTSTANDING)     EXERCISABLE     (EXERCISABLE)
------------------     -----------     ----------------     --------------     -----------     --------------
<S>                    <C>             <C>                  <C>                <C>             <C>

$ 0.3000-$ 10.8125      2,175,421             7.40             $  7.6725          1,032,443     $   6.5421
$ 10.8750-$17.3750      1,757,668             7.21               14.6813            897,403        13.3876
$17.5000-$19.7500       2,208,882             9.05               19.1659            170,992        19.0415
$19.8750-$35.1875       1,816,748             8.60               24.5857            358,829        22.2205
                        ---------            -----             ---------         ----------      ---------
$ 0.3000-$35.1875       7,958,719             8.09              $16.2711          2,459,667       $12.1959
                        =========            =====              ========          =========       ========
</TABLE>

7.    RELATED PARTY TRANSACTIONS

      In Texas, the Company leases its main facility, certain leasehold
improvements, and certain medical and office equipment from a related party of a
Texas subsidiary pursuant to a noncancelable operating lease agreement expiring
November 8, 2005. The agreement provides for monthly payments of $58,654,
subject to certain increases based on the consumer price index. The lease also
contains certain provisions that may, at the option of the lease holder, require
FPA to acquire the facility at its fair market value.

      Effective October 1, 1996, a Professional Corporation and FPA acquired
substantially all of the assets and assumed certain liabilities of Family
Practice Associates of San Diego, an Osteopathic Corporation ("FPASD"), owned by
certain officers of the Company. The purchase price was supported by an
independent valuation and approved by a committee of the independent directors
of the Company.

      The Company currently leases from the presidents and other physicians of
certain Health Partners subsidiaries have entered into lease agreements whereby
medical space and/or medical equipment is leased to certain Health Partners
subsidiaries at fair market value and terms ranging from one to fifteen years.
Annual rental payments were approximately $475,000, $1,275,000 and $1,463,000 in
1995, 1996 and 1997, respectively.

8.    MERGER, RESTRUCTURING AND OTHER UNUSUAL CHARGES

      In 1995, the Company recorded merger, restructuring and other unusual
charges of $1.6 million. This amount includes a $434,000 charge for impairment
of goodwill, a $773,000 charge for the loss on disposition of businesses and
$375,000 relating to the bankruptcy of one of its hospital clients. In 1995, the
Company sold six and closed two primary care clinics (seven in Florida and one
in Texas). The goodwill impairment and loss on sale are directly related to the
sale and closure


                                       41
<PAGE>   42
of the primary care clinics. These clinics accounted for approximately $2.1
million in revenue and generated an operating loss (including the unusual items)
of $3.7 million during 1995.

      In 1996, the Company recorded merger, restructuring and other unusual
charges of $52.6 million. This amount is comprised of (i) costs related to the
Sterling Merger in the amount of $16.8 million comprised of investment bankers'
fees, attorneys' fees, accountants' fees, legal fees, and severance and
compensation required to be paid as part of the Merger, (ii) write-offs of
goodwill and other assets in the amount of $33.5 million related to terminated
emergency room contracts and an unprofitable acquisition in Arizona, and (iii)
restructuring charges in the amount of $2.3 million primarily related to
severance for terminated employees.

      In 1997, the Company recorded merger, restructuring and other unusual
charges of $55.0 million. This amount relates to the AHI, HealthCap, Axminster
and Health Partners mergers, collectively, and is comprised of investment
bankers' fees, attorneys' fees, accountants' fees, wind-down costs, and
severance and compensation paid as part of the mergers.

9.    INCOME TAXES

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

<TABLE>
<CAPTION>
                                 1995            1996            1997
                               -------         -------         -------
<S>                            <C>             <C>             <C>
Federal expense (benefit):
  Current                      $ 2,191         $ 5,273         $   575
  Deferred                        (755)         (4,622)         (2,583)

State expense (benefit):
  Current                          556           1,825           1,849
  Deferred                        (300)         (1,200)           (732)
                               =======         =======         =======
    Total                      $ 1,692         $ 1,276         $  (891)
                               =======         =======         =======
</TABLE>

      The reconciliation of the provision based on the federal statutory income
tax rate to the Company's income tax provision is as follows:

<TABLE>
<CAPTION>
                                                         1995            1996            1997
                                                       ------          ------          ------
<S>                                                    <C>             <C>             <C>

Tax expense (benefit) at federal statutory rate         (34.0)%         (35.0)%         (35.0)%
State taxes, net of federal income tax benefit            1.1%           (1.0)%           9.6%
Nondeductible goodwill amortization                       7.5%            8.1%           (5.4%)
Nondeductible acquisition costs                           0.0%            4.0%           21.5%
Valuation allowance                                      44.3%           23.7%            0.0%
Other                                                     1.9%            1.7%            2.2%
                                                       ======          ======          ======
                                                         20.8%            1.5%           (7.1%)
                                                       ======          ======          ======
</TABLE>


                                       42
<PAGE>   43
      Deferred income taxes arise from temporary differences between financial
reporting and tax reporting bases of assets and liabilities, and operating loss
and tax credit carryforwards for tax purposes. The components of the deferred
income tax assets and liabilities are as follows (in thousands):


<TABLE>
<CAPTION>
                                                             1996             1997
                                                           --------         --------
<S>                                                        <C>              <C>
Deferred tax assets:
Net operating losses                                       $ 18,416         $ 28,058
Management fees                                               4,351            4,351
Accrued liability for professional liability claims             595            2,946
Goodwill                                                      4,435              853
Geographic expansion costs                                       --              702
Deferred compensation                                           194              197
Allowance for uncollectible accounts                          2,750               --
Other                                                         1,257              566
                                                           --------         --------
   Total deferred tax assets:                              $ 31,998         $ 37,673
                                                           --------         --------
Deferred tax liabilities:
Allowance for uncollectible accounts                       $     --         $ (1,552)
Depreciation and amortization                                  (643)          (1,270)
State income tax                                               (384)            (957)
Geographic expansion costs                                     (392)              --
                                                           --------         --------
   Total deferred tax liabilities:                         $ (1,419)        $ (3,779)
                                                           --------         --------
Valuation allowance:                                        (23,910)         (23,910)
                                                           --------         --------
   Net deferred tax assets:                                $  6,669         $  9,984
                                                           ========         ========
</TABLE>

10.   SEGMENT INFORMATION

      FPA manages the provision of prepaid managed health care services for
networks of primary care physicians ("Managed Care Business"). Sterling is
engaged in the business of providing contract management and support services
primarily to hospital-based emergency departments ("Emergency Department
Business"). The activities relating to the Managed Care Business segment and the
Emergency Department Business segment are included in the following table (in
thousands):

<TABLE>
<CAPTION>
                                                          EMERGENCY
                                     MANAGED CARE         DEPARTMENT
                                       BUSINESS            BUSINESS          CONSOLIDATED
                                     ------------        -----------         ------------
<S>                                  <C>                 <C>                 <C>
YEAR ENDED DECEMBER 31, 1997
Operating revenues                   $ 1,009,314         $   157,026         $ 1,166,340
Operating income (loss)                  (10,434)             11,310                 876
Assets employed at year-end              748,352              82,807             831,159
Depreciation and amortization             24,023               3,766              27,789
Capital expenditures                      16,781                 720              17,501

YEAR ENDED DECEMBER 31,1996
Operating revenues                   $   541,701         $   136,761         $   678,462
Operating loss                           (76,340)             (6,154)            (82,494)
Assets employed at year-end              560,922              77,900             638,822
Depreciation and amortization             12,204               3,204              15,408
Capital expenditures                      15,822                 650              16,472

YEAR ENDED DECEMBER 31,1995
Operating revenues                   $   225,162         $   115,660         $   340,822
Operating income (loss)                  (14,190)              6,502              (7,688)
Assets employed at year-end              187,153              78,608             265,761
Depreciation and amortization              4,888               2,270               7,158
Capital expenditures                       9,710               1,634              11,344
</TABLE>


                                       43
<PAGE>   44
11.   MAJOR PAYORS

      For the years ended December 31, 1995, 1996 and 1997, revenue related to
Payor contracts with FHP/PacifiCare Health Systems, Inc. accounted for
approximately 21.8%, 13.3% and 10.3%, respectively, of the Company's operating
revenue. For the years ended December 31, 1996 and 1997, revenue related to
Payor contracts with PCA Humana accounted for approximately 13.3% and 15.0%,
respectively, of operating revenue. For the year ended December 31, 1997,
revenue related to Payor contracts with Foundation and Oxford Health Plans
accounted for approximately 17.3% and 13.2%, respectively, of operating revenue.
As of December 31, 1997, approximately 27.5%, 12.9%, 11.2% and 9.3% of the
Company's membership is pursuant to Payor contracts with Foundation, PCA Humana,
FHP/PacifiCare Health Systems, Inc. and Oxford Health Plans, respectively. A
significant modification to or termination of such agreements could have a
material adverse effect on FPA's results of operations and financial condition.

12.   LICENSURE

      The application of FPA Medical Management of California, Inc. (formerly,
Family and Senior Care, Inc.), a wholly-owned subsidiary of FPA, for a
restricted health care service plan license was approved by the California
Department of Corporations on December 5, 1996. Following that date, all of the
Company's managed care activity in the State of California occurred in this
subsidiary.

13.   BENEFIT PLANS

DEFINED CONTRIBUTION PLANS

      Effective January 1, 1997, the Company adopted the Amended and Restated
FPA Medical Management, Inc. 401(k) Savings Plan (the "Plan"). The Plan is
intended to be qualified under Sections 401(a) and 401(k) of the Internal
Revenue Code (the "Code"). The Plan requires the attainment of the age of 21 and
a minimum of 30 days employment to become a participant in the Plan. Service for
a predecessor employer will be considered for participation requirements in the
Plan for employees employed through acquisition activities. Certain of the
entities that were acquired or merged into the Company during 1997 also had
various employee retirement plans that were either terminated prior to the
acquisition or merger or that will or have been incorporated into the Company's
Plan. Participants may contribute up to 15% of their annual compensation to the
Plan on a pre-tax basis. Generally, the Company does not make matching
contributions to the Plan.

DEFERRED COMPENSATION PLANS

      The Company maintains several deferred compensation retirement plans
pursuant to which certain members of management may defer payment from one
percent to 100% of their compensation. At December 31, 1997, the Company was
liable for approximately $2.4 million under a frozen plan assumed in connection
with a 1996 acquisition. In connection with such acquisition, the Company has
implemented a new deferred compensation plan with a liability of $2.3 million at
December 31, 1997. The Company also has implemented a deferred compensation plan
for certain senior level executives, which has a liability of approximately
$10,000 at December 31, 1997.

14.   SUBSEQUENT EVENTS

      Subsequent to December 31, 1997, the Company acquired Avanti Health
Systems of Texas, Inc., Physicians Quality Care, Ltd., Associates in Managed
Care, Ltd., Emergency Treatment Associates, Inc., J.T.M.S.O., Inc., Temple
Jackson, P.L.L.C. and San Antonio Network of Physicians for total consideration
consisting of 1.8 million shares of FPA common stock valued at approximately
$35.2 million and $6.8 million cash. These transactions will be accounted for as
purchases.

      The Company has entered into an Agreement and Plan of Merger dated
February 10, 1998 between the Company and Meridian Medical Group, Inc.
("Meridian"). Meridian provided physician services through approximately 65
physicians to approximately 70,000 enrollees in the Atlanta, Georgia area as of
December 31, 1997. Consummation of the merger is subject to certain closing
conditions, including Meridian shareholder approval and other customary
conditions.




                                       44
<PAGE>   45
      On March 20, 1998, the Company acquired Orange Coast Managed Care
Services, Inc. ("OCMCS") and St. Joseph Hospital Corporation ("SJMC") in a
stock-for-stock transaction in which up to 2,828,680 shares of the Company's
common stock will be issued in exchange for all the outstanding shares of
capital stock and options of SJMC and OCMCS (except for certain outstanding
shares of OCMCS which were cancelled without consideration in connection with
the merger). OCMS provides administrative management services to SJMC's IPA and
medical group physicians in Orange County, California.

      The acquisition of SJMC will be accounted for as a pooling of interests,
and, accordingly, prior period operating results of FPA will be restated to
reflect this transaction. The acquisition of OCMCS, valued at approximately $26
million, will be accounted for as a purchase, and, accordingly, the operating
results will be included in the Company's consolidated financial statements from
the date of acquisition. As such, the excess of the purchase price over the
estimated fair value of the acquired net assets, which approximates $16 million,
will be recorded as goodwill. The following unaudited pro forma financial data
summarizes the combined operating results of the Company, SJMC and OCMCS as if
the mergers had occurred at the beginning of the periods presented.

<TABLE>
<CAPTION>
                                    YEARS ENDED DECEMBER 31,
                        -------------------------------------------------
                            1995             1996                1997
                        -----------       -----------         -----------
<S>                     <C>               <C>                 <C>
                              (in thousands, except per share data)

Revenues                  $ 411,538       $   769,913         $ 1,258,023
Net loss                    (10,105)          (99,023)             (9,264)
Net loss per share             (.39)            (2.79)              (0.21)
</TABLE>

      The amounts are based upon certain assumptions and estimates, and do not
reflect any benefit of economies which might be achieved from combined
operations. The pro forma data is for informational purposes only and may not be
indicative of the results of future combined operations of FPA.

      The Company is in the process of determining the appropriate values to be
assigned to the assets acquired and liabilities assumed in connection with the
acquisitions described above. Accordingly, any estimated assigned values are
subject to revision upon completion of an independent valuation which may result
in an adjustment to goodwill.


                                       45
<PAGE>   46
INDEPENDENT AUDITORS' REPORT

To the Stockholders of FPA Medical Management, Inc.:

We have audited the consolidated balance sheets of FPA Medical Management, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the two years in the period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The 1996 consolidated financial statements give retroactive effect
to the 1997 mergers of FPA Medical Management, Inc. with AHI Healthcare
Systems, Inc., HealthCap, Inc., Axminister Medical Group, Inc., Health
Partners, Inc., and Cornerstone Physicians Corporation, which have been
accounted for as poolings of interests as described in Note 1 to the
consolidated financial statements. We did not audit the financial statements of
Health Partners, Inc. for the year ended December 31, 1996, which statements
reflect total assets and revenues of $47,669,000 and $74,822,000, respectively,
of the related 1996 consolidated totals. These statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to amounts included for Health Partners, Inc. for 1996, is based solely
on the report of the other auditors.

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

In our opinion, based on our audits and the report of other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of FPA Medical Management, Inc. and subsidiaries as of
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the two years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.

We previously audited and reported on the consolidated statements of
operations, changes in stockholders' equity and cash flows of FPA Medical
Management, Inc. for the years ended December 31, 1995, prior to their
restatement for the poolings of interests with Sterling Healthcare Group, Inc.
in 1996, and AHI Healthcare Systems, Inc. and Health Partners, Inc. in 1997, as
described in Note 1 to the consolidated financial statements. Separate
financial statements of Sterling Healthcare Group, Inc., AHI Healthcare
Systems, Inc., and Health Partners, Inc. included in the 1995 restated
consolidated financial statements were audited and reported on separately by
other auditors; such separate financial statements reflect total revenues of
the respective entities for the year ended December 31, 1995 of $115,660,000,
$114,284,000 and $32,141,000. We also audited the combination of the
accompanying consolidated statements of operations, changes in stockholders'
equity and cash flows for the year ended December 31, 1995, after restatement
for the 1996 and 1997 poolings of interests; in our opinion, such consolidated
statements have been properly combined on the basis described in Note 1 to the
consolidated financial statements.


/s/ DELOITTE & TOUCHE LLP

San Diego, California
March 20, 1998


                                       46
<PAGE>   47
REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors
Sterling Healthcare Group, Inc.
Coral Gables, Florida

We have audited the consolidated statements of operations, changes in
stockholders' equity, and cash flows of Sterling Healthcare Group, Inc. for the
year ended December 31, 1995. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Sterling Healthcare Group, Inc. for the year ended December 31, 1995 in
conformity with generally accepted accounting principles.

/s/ COOPERS & LYBRAND LLP

Miami, Florida
March 15, 1996



                                       47
<PAGE>   48
                          INDEPENDENT AUDITORS' REPORT


To the Stockholders and Board of Directors of
Health Partners, Inc.:

     We have audited the accompanying consolidated statements of financial
position of Health Partners, Inc. and Subsidiaries as of December 31, 1996 and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the years in the two-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Health
Partners, Inc. and Subsidiaries as of December 31, 1996 and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.

/s/ KPMG Peat Marwick LLP
White Plains, New York
February 28, 1997

                                       48
<PAGE>   49
                         REPORT OF INDEPENDENT AUDITORS

Stockholders and Board of Directors
AHI HealthCare Systems, Inc.

We have audited the consolidated statements of operations, stockholders' equity
and cash flows of AHI HealthCare Systems, Inc. for the year ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations of AHI HealthCare
System, Inc. and its cash flows for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.

                                                     ERNST & YOUNG LLP


Los Angeles, California
February 22, 1996



                                       49
<PAGE>   50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

      NOT APPLICABLE

                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      Effective March 25, 1998, Seth Flam resigned as President and Chief
Executive Officer of the Company and Stephen Dresnick was elected President and
Chief Executive Officer of the Company. Steven Lash is now Executive Vice
President of the Company and Douglas Kerner is Vice President, Treasurer and
Acting Chief Financial Officer. See "Employment Agreement" for additional
information regarding these arrangements. The following table sets forth certain
information about the directors and executive officers of the Company:


<TABLE>
<CAPTION>
             NAME           AGE                    POSITION WITH THE COMPANY
             ----           ---         -------------------------------------------------------------
<S>                         <C>         <C>
Stephen J. Dresnick         48          President and Chief Executive Officer, Director
Sol Lizerbram               50          Chairman of the Board, Director
Herbert A. Wertheim         58          Vice Chairman of the Board, Director
Kevin Ellis                 41          Executive Vice President, Chief Medical Officer, Director
Howard Hassman              41          Executive Vice President - Corporate Development, Director
Steven M. Lash              43          Executive Vice President
James A. Lebovitz           40          Executive Vice President, General Counsel and Secretary
Sheldon Derezin             50          Director
Michael P. Morris           51          Vice President, Finance and Chief Accounting Officer
Douglas E. Kerner           40          Vice President, Treasurer and Acting Chief Financial Officer
</TABLE>


      Stephen Dresnick, M.D., has been President and Chief Executive Officer of
the Company since March 1998 and was Vice Chairman of the Board of Directors of
the Company from October 1996 until March 1998. Dr. Dresnick has been President
of Sterling Healthcare Group, Inc. since 1987. Dr. Dresnick is a director of
Embassy Acquisition Corp. and Technical Chemicals & Products, Inc. Dr. Dresnick
has been a director of the Company since 1996.

      Sol Lizerbram, D.O., has been Chairman of the Board of Directors of the
Company since 1986 and was President from 1986 through October 31, 1996. Dr.
Lizerbram has been a director of the Company since 1986.

      Herbert A. Wertheim, O.D., has been Vice Chairman of the Board of
Directors of the Company since March 1998. Dr. Wertheim has been the Chairman
and Chief Executive Officer of Brain Power Incorporated, a manufacturer of
optical instruments and chemicals, since 1971. Dr. Wertheim is a director of
Bacou USA, Inc., and trustee, Florida International University. Dr. Wertheim has
been a director of the Company since 1996.

      Kevin Ellis, D.O., has been Executive Vice President, Chief Medical
Officer of the Company since April 1995. Prior thereto, Dr. Ellis served as
Chief Operating Officer of the Company from 1988 until April 1995. Dr. Ellis has
been a director of the Company since 1986.

      Howard Hassman, D.O., has been Executive Vice President, Corporate
Development of the Company since September 1994. Prior thereto, Dr. Hassman
served as Chief Financial Officer of the Company from 1986 until September 1994.
Dr. Hassman has been a director of the Company since 1986.

      Steven M. Lash has been Executive Vice President of the Company since
March 1998 and was Executive Vice President and Chief Financial Officer of the
Company from September 1994 until March 1998. Mr. Lash was Executive Vice
President for Institutional Care at Sharp Healthcare, a health care system
providing medical services throughout San Diego, California, from April 1993 to
September 1994. Prior thereto, Mr. Lash was Senior Vice President of Business
Affairs and Chief Financial Officer of San Diego Hospital Association, doing
business as Sharp Healthcare, from 1981 to April 1993.

      James A. Lebovitz has been Executive Vice President, General Counsel and
Secretary of the Company since March 1998 and was Senior Vice President,
General Counsel and Secretary of the Company from March 1996 until March 1998.
Prior thereto, Mr. Lebovitz was a partner in the law firm of Ballard Spahr
Andrews & Ingersoll, LLP, Philadelphia, Pennsylvania from 1991 until March 1996.



                                       50
<PAGE>   51

      Sheldon Derezin has been managing partner of Derezin Breier & Company, a
public accounting firm, since 1982. Mr. Derezin has been a director of the
Company since 1995.

      Michael P. Morris has been Vice President, Finance and Chief Accounting
Officer of the Company since September 1997 and was Corporate Controller of the
Company from March 1997 through September 1997. Prior thereto, Mr. Morris was
Chief Financial Officer of Nugget Market, Inc., a private holding company, from
May 1994 through February 1997 and Controller from April 1991 through April
1994. Prior thereto, Mr. Morris was a partner in the public accounting firm KPMG
Peat Marwick LLP.

      Douglas E. Kerner has been Vice President, Treasurer and Acting Chief
Financial Officer of the Company since March 1998 and was Vice President,
Treasurer from February 1998 to March 1998. Prior thereto, Mr. Kerner was Vice
President and Treasurer of Total Petroleum (North America) Ltd., from 1994
through 1997, Marketing Controller from 1993 though 1994, Director of Tax and
Internal Audit from 1992 to 1993 and Director of Tax from 1991 to 1992.

      CLASSIFIED BOARD OF DIRECTORS. The Company's Board of Directors is
classified into three classes. Directors are elected, by a plurality of the
votes of the shares of the Company's common stock present or represented at each
annual meeting and constituting a quorum, at each annual meeting of stockholders
and serve until the third annual meeting of stockholders following their
election and until their successors are elected and qualified or until their
earlier removal or resignation. Dr. Ellis and Dr. Wertheim have terms expiring
in 1998; Dr. Hassman, Dr. Dresnick and Mr. Derezin have terms expiring in 1999;
and Dr. Lizerbram has a term expiring in 2000.

      COMMITTEES OF THE BOARD OF DIRECTORS. The Company has an Audit Committee,
a Compensation Committee and a Nominating Committee.

      The Audit Committee, comprising Mr. Derezin (Chairman) and Dr. Wertheim,
reviews, with the Company's independent auditors, the scope and results of such
auditors' engagement, the adequacy of the Company's management information
systems and internal accounting controls.

      The Compensation Committee, comprising Dr. Wertheim (Chairman) and Mr.
Derezin, reviews and approves the compensation of the Company's executive
officers and administers the Company's stock option plans.

      The Nominating Committee, comprising Drs. Dresnick (Chairman), Lizerbram,
Ellis and Wertheim, will consider written recommendations from stockholders for
nominees for election to the Board of Directors, provided that such
recommendations, together with (i) such information regarding each nominee as
would be required to be included in a proxy statement filed pursuant to the
Securities Exchange Act of 1934, (ii) a description of all arrangements or
understandings among the recommending stockholder and each nominee and any other
person with respect to such nomination and (iii) the consent of each nominee to
serve as a director of the Company if so elected, are received by the Secretary
of the Company by, in the case of an annual meeting of stockholders, not later
than the date specified in the most recent proxy statement of the Company as the
date by which stockholder proposals for consideration at the next annual meeting
of stockholders must be received and, in the case of special meetings of
stockholders, not later than the tenth day after the giving of notice of such
meeting.

      COMPENSATION OF DIRECTORS. Non-employee directors currently receive $1,000
per Board of Directors or committee meeting attended. The Company also
reimburses directors for expenses incurred in connection with attendance at
meetings of the Board of Directors and committees.


                                       51
<PAGE>   52
\      In addition, under the Company's 1995 Non-Employee Directors'
Non-Qualified Stock Option Plan (the "1995 Directors' Plan"), non-employee
directors receive an annual grant of options to purchase 15,000 shares of the
Company's common stock at a price equal to the fair market value of the common
stock on the date the option is granted (following each annual meeting of
stockholders). Each option generally expires upon the earlier of twelve months
after the optionee ceases to be a director of the Company or ten years after the
date of grant. The purpose of the 1995 Directors' Plan is to attract and retain
independent directors and to strengthen the mutuality of interests between such
directors and the Company's stockholders

      COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934.
Section 16(a) of the Securities Exchange Act of 1934 requires the directors,
certain officers of FPA and beneficial owners of more than ten percent of FPA
common stock to file reports of securities ownership and changes in such
ownership with the Securities and Exchange Commission. Based solely upon a
review of the copies of such forms furnished to FPA and the representations made
by such persons to FPA, FPA believes that during the last fiscal year its
directors, officers and ten percent beneficial owners complied with all
reporting requirements under Section 16(a) of the Securities Exchange Act of
1934.


                                       52
<PAGE>   53
ITEM 11. EXECUTIVE COMPENSATION

      The following table sets forth certain information regarding compensation
from FPA which was awarded to, earned by, or paid to FPA's Chief Executive
Officer and the four other most highly compensated executive officers during the
years ended December 31, 1995, 1996 and 1997.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                ANNUAL COMPENSATION
                                             --------------------------
                                                                                    LONG TERM
                                                                               COMPENSATION AWARDS
                                                                               -------------------
                                                                                       SHARES              ALL OTHER
  NAME AND PRINCIPAL POSITION                                                        UNDERLYING           COMPENSATION
                                   YEAR         SALARY            BONUS           OPTIONS/SARS (#)             (1)
-------------------------------------------------------------------------------------------------------------------------
<S>                                <C>       <C>             <C>               <C>                       <C>

Seth Flam, President and           1995      $   300,000              --                60,000           $      3,608
  Chief Executive Officer(2)       1996          237,646(3)  $ 1,133,123               671,000                  1,204
                                   1997          446,978(4)      665,522               200,250                  9,549

Sol Lizerbram, Chairman of         1995          189,750              --                60,000                 16,397
  the Board of Directors (5)       1996          237,646(6)    1,133,123               671,000                 14,474
                                   1997          446,978(7)      665,522               200,250                 16,900

Stephen Dresnick,                  1995          325,000         234,542                    --
  Vice Chairman of the Board of    1996          325,000(9)    1,819,180               722,502(10)            481,250
  Directors, President,            1997          325,000       1,487,500                75,000                 34,809
  Sterling
  Healthcare Group, Inc.(8)

Steven Lash, Executive             1995          205,000          50,000                20,000                  2,933
  Vice President and Chief         1996          215,417(12)   1,084,584               437,250                113,125
  Financial Officer(11)            1997          361,705(13)     500,795               100,000                  6,626

Howard Hassman,                    1995          174,750              --                60,000                  6,566
  Executive Vice President --      1996          201,604(14)   1,052,251               303,000                  7,026
  Corporate Development            1997          271,417(15)     403,584                   250                  9,726
</TABLE>


----------

(1)   Includes shares of FPA Common Stock received by Mr. Lash in 1996 valued at
      $106,500. Includes life and disability insurance premiums paid by FPA
      on behalf of each such officer.

(2)   Dr. Flam was elected President effective November 1, 1996. Dr. Flam
      resigned as President and Chief Executive Officer of the Company as of
      March 25, 1998.

(3)   Includes deferred compensation of $66,548.

(4)   Includes $9,500 deferred pursuant to FPA's 401(k) Savings Plan.

(5)   Dr. Lizerbram served as President until November 1, 1996.

(6)   Includes deferred compensation of $66,548.

(7)   Includes $9,500 deferred pursuant to FPA's 401(k) Savings Plan.

(8)   Dr. Dresnick became President and Chief Executive Officer of the Company
      as of March 25, 1998.

(9)   Includes deferred compensation of $37,500.

(10)  Includes 572,502 options granted by FPA after completion of the merger
      with Sterling to replace options previously granted to Dr. Dresnick by
      Sterling.

(11)  Mr. Lash served as Executive Vice President and Chief Financial Officer
      until March 1998 at which time he became Executive Vice President of the
      Company.

(12)  Includes deferred compensation of $47,584.

(13)  Includes $9,500 deferred pursuant to FPA's 401(k) Savings Plan.

(14)  Includes deferred compensation of $32,965.

(15)  Includes $9,500 deferred pursuant to FPA's 401(k) Savings Plan.


                                       53
<PAGE>   54
      STOCK OPTION GRANTS. The following table sets forth information concerning
stock options granted to the named executive officers in 1997.


                            OPTION GRANTS DURING 1997
<TABLE>
<CAPTION>
                                                               INDIVIDUAL GRANTS
                        -------------------------------------------------------------------------------------------------
                                                                                                POTENTIAL REALIZABLE
                          SHARES             % OF TOTAL                                       VALUE AT ASSUMED ANNUAL
                        UNDERLYING            OPTIONS/                                          RATES OF STOCK PRICE
                         OPTIONS/               SARS           EXERCISE                            APPRECIATION FOR
                           SARS              GRANTED TO         OR BASE                             OPTION TERM(3)
                          GRANTED            EMPLOYEES          PRICE        EXPIRATION      ----------------------------
      NAME                (#)(1)            DURING YEAR       ($/SH)(2)         DATE            5%($)            10%($)
      ----              ----------          -----------       ---------      ----------      ----------        ----------
<S>                     <C>                 <C>               <C>            <C>             <C>               <C>
Seth Flam                      250(A)               .01       $    20.25         1/20/07     $    3,184        $    8,068
                           200,000(B)              8.85            19.75         5/30/07      2,484,134         6,295,283

Sol Lizerbram                  250(A)               .01            20.25         1/20/07          3,184             8,068
                           200,000(B)              8.85            19.75         5/30/07      2,484,134         6,295,283

Stephen Dresnick            75,000(A)              3.32          23.5625         7/23/07      1,111,375         2,816,442

Steven Lash                100,000(B)              4.42            19.75         5/30/07      1,242,067         3,147,641

Howard Hassman                 250(A)               .01            20.25         1/20/07          3,184             8,068
</TABLE>

----------

(1)   (A) Grant vests in equal amounts over a three year period. (B) Grant vests
      in equal amounts over a five year period based on attainment of certain
      agreed upon performance targets.

(2)   The option exercise price may be paid in shares of FPA's common stock, in
      cash, or in any other form of valid consideration or a combination of any
      of the foregoing, as determined by the Compensation Committee of FPA's
      Board in its discretion.

(3)   The potential realizable value portion of the foregoing table illustrates
      the value that might be realized should the granted options be exercised
      immediately prior to their expiration date and assumes that the respective
      rates of appreciation on FPA's common stock compound annually until such
      exercise. These figures make no allowance for any reduction of potential
      value which may be caused because of the termination of the options
      following termination of employment, nontransferability or vesting over
      periods of up to five years.


                                       54
<PAGE>   55
      STOCK OPTION EXERCISES IN 1997 AND STOCK OPTION VALUES. The following
tables set forth information concerning the number of stock options granted
during 1997 and the value of unexercised options to purchase FPA's common stock
held by the named executive officers at December 31, 1997.

             OPTION EXERCISES DURING 1997 AND YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                             NUMBER OF SHARES UNDERLYING
                      SHARES ACQUIRED ON                       UNEXERCISED OPTIONS/SARS          VALUE OF UNEXERCISED IN-THE-MONEY
                           EXERCISE       VALUE REALIZED             AT YEAR END                      OPTION/SARS AT YEAR END
                      ------------------------------------------------------------------------------------------------------------
        NAME                                                EXERCISABLE       UNEXERCISABLE        EXERCISABLE       UNEXERCISABLE
----------------------                                      ----------------------------------------------------------------------
<S>                   <C>                 <C>               <C>               <C>                  <C>               <C>

Seth Flam                          --                --         118,500             862,750         $  853,438        $1,747,938
Sol Lizerbram                      --                --         118,500             862,750            853,438         1,747,938
Stephen Dresnick                   --                --         587,502             210,000          2,922,394                --
Steven Lash                    79,000        $1,478,094         192,170             555,354          2,152,671         1,692,037
Howard Hassman                 49,000           972,937          42,500             321,750            205,000         1,269,938
</TABLE>

----------

(1)   The closing price for the common stock as reported on the NASDAQ National
      Market on December 31, 1997 was $18.875. Value is calculated on the basis
      of the difference, if any, between the option exercise price and $18.875,
      multiplied by the number of shares of the FPA's common stock issuable upon
      exercise of the option.

     EMPLOYMENT AGREEMENTS. FPA has entered into an employment agreement with
Dr. Lizerbram as Chairman of the Board of Directors effective as of October 1,
1996, as amended as of March 25, 1998 (such agreement, as amended, is referred
to herein as the "Lizerbram Employment Agreement"). Pursuant to the Lizerbram
Employment Agreement, Dr. Lizerbram shall receive base salary of $1,112,500 for
services rendered from March 25, 1998 until March 25, 1999. The Lizerbram
Employment Agreement terminates on September 30, 2001, except that on September
30, 2000 and on each subsequent anniversary thereof, the term shall be extended
for a one-year period, unless no later than six months prior to such date,
either FPA or Dr. Lizerbram has provided notice that it does not wish to extend
the Lizerbram Employment Agreement. Notwithstanding the preceding sentence, the
term of the Lizerbram Employment Agreement shall not be extended beyond
September 30, 2003 without the prior consent of both FPA and Dr. Lizerbram. If
the Lizerbram Employment Agreement is not extended as of September 30, 2003, Dr.
Lizerbram shall be entitled to severance benefits as described below; provided,
further, that if Dr. Lizerbram's employment is terminated for any reason
(including cause) between March 25, 1998 and March 31, 1999, (a) Dr. Lizerbram
shall resign his position as Chairman and director of the Company, (b) the
Lizerbram Employment Agreement shall be terminated, (c) FPA shall make a lump
sum payment equal to $1,112,500 minus aggregate payments made between March 25,
1998 and the date of termination to Dr. Lizerbram and, (d) in the event Dr.
Lizerbram executes a release, he shall be entitled to severance benefits as
described below (including the acceleration of vesting of all of Dr. Lizerbram's
options) and shall serve as a consultant for a period of eight (8) months after
the termination date. Dr. Lizerbram shall receive $1,000,000 as compensation for
such consulting services. Upon termination of the Lizerbram Employment
Agreement, Dr. Lizerbram shall be entitled to severance payments of $3,337,500
payable in equal monthly payments over 36 months. If a change of control, as
defined in the Lizerbram Employment Agreement, occurs within six months after
the termination of Dr. Lizerbram's employment, Dr. Lizerbram shall receive in
lieu of the severance payment described above, a lump sum equal to approximately
three times the previous year's salary and bonus and shall be entitled to
certain gross-up payments. Upon termination of employment, Dr. Lizerbram shall
not compete with FPA for a period of 18 months. The Lizerbram Employment
Agreement also provides Dr. Lizerbram with professional fees, vacation and term
life, medical, disability and liability insurance.

     FPA has entered into an employment agreement with Mr. Lash as Executive
Vice President effective as of October 1, 1996, as amended as of March 25, 1998
(such agreement, as amended, is referred to herein as the "Lash Employment
Agreement"). Pursuant to the Lash Employment Agreement, Mr. Lash receives annual
base salary of $345,000 and a maximum annual bonus of up to 150% of base salary
based on pre-established performance targets for each year and certain
subjective determinations. The Lash Employment Agreement terminates on September
30, 2001, except that on September 30, 2000 and on each subsequent anniversary
thereof, the term shall be extended for a one-year period, unless no later than
six months prior to such date, either FPA or Mr. Lash has provided notice that
it does not wish to extend the Lash Employment Agreement. Notwithstanding the
preceding sentence, the term of the Lash Employment Agreement shall not be
extended beyond September 30, 2003 without the prior consent of both FPA and Mr.
Lash. If the Lash Employment Agreement is not extended as of September 30, 2003,
Mr. Lash shall be entitled to severance benefits as described below; provided,
further, that if Mr. Lash's employment is terminated for any reason (including
cause) between March 25, 1998 and September 15, 1999, (a) Mr. Lash shall resign
his position as Executive Vice President of the Company, (b) the Lash Employment
Agreement shall be terminated and, (c) in the event Mr. Lash executes a release,



                                       55
<PAGE>   56
he shall be entitled to severance benefits as described below (including the
acceleration of vesting of all of Mr. Lash's options) and shall serve as a
consultant for a period of eight (8) months after the termination date. Mr. Lash
shall receive $1,000,000 as compensation for such consulting services. Upon
termination of the Lash Employment Agreement, Mr. Lash shall be entitled to
severance payments of $2,587,500 payable in equal monthly payments over 36
months. If a change of control, as defined in the Lash Employment Agreement,
occurs within six months after the termination of Mr. Lash's employment, Mr.
Lash shall receive in lieu of the severance payment described above, a lump sum
equal to approximately three times the previous year's salary and bonus and
shall be entitled to certain gross-up payments. Upon termination of employment,
Mr. Lash shall not compete with FPA so long as Mr. Lash is receiving the
payments described above. The Lash Employment Agreement also provides Mr. Lash
with a car allowance, professional fees, vacation and term life, medical,
disability and liability insurance.

     FPA has entered into an employment agreement with Dr. Hassman as Executive
Vice President-Corporate Development effective as of October 1, 1996 (the
"Hassman Employment Agreement"). Pursuant to the Hassman Employment Agreement,
Dr. Hassman receives an annual base salary of $270,000 and a maximum annual
bonus of up to 150% of base salary based on pre-established performance targets
for each year and certain subjective determinations. The Hassman Employment
Agreement terminates on September 30, 2001, except that on September 30, 2000
and on each subsequent anniversary thereof, the term shall be extended for a
one-year period, unless no later than six months prior to such date, either
party has provided notice that it does not wish to extend the agreement. The
Hassman Employment Agreement generally provides that if Dr. Hassman is
terminated other than for cause, Dr. Hassman is entitled to full salary plus
bonus and benefits for 36 months after termination. In the event of a change of
control, as defined in the Hassman Employment Agreement, Dr. Hassman is entitled
to a lump sum payment equal to approximately three times the previous year's
base salary and bonus. The Hassman Employment Agreement also provides Dr.
Hassman with a car allowance, professional fees, vacation and term life,
medical, disability and liability insurance. The Hassman Employment Agreement
contains a covenant not to compete during employment and for six months
thereafter if Dr. Hassman is terminated for cause by FPA.

     Effective as of March 25, 1998, Dr. Dresnick was elected President and
Chief Executive Officer of the Company. FPA has an amended employment agreement
with Dr. Dresnick (the "Dresnick Employment Agreement"), effective as of October
31, 1996, pursuant to which Dr. Dresnick receives an annual base salary of
$325,000, which salary is subject to annual increases, and an annual bonus
calculated as a percentage of base salary based on pre-established performance
targets of FPA and Sterling. Upon termination of the Dresnick Employment
Agreement for reasons other than cause or Dr. Dresnick's voluntary termination
or upon a change of control, Dr. Dresnick is entitled to full salary plus bonus
based on the two prior fiscal years payable in a lump sum at the time of
termination. The Dresnick Employment Agreement provides Dr. Dresnick with
specified periodic lump sum payments, a car allowance, vacation and medical
insurance and contains a covenant not to compete during employment and for two
years thereafter.


                                       56



<PAGE>   57
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The following table sets forth certain information regarding the
beneficial ownership of shares of common stock as of March 17, 1998 by (i) each
person known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of common stock, (ii) each of the Company's directors who
owns shares of common stock, (iii) each executive officer named in the table
under the caption "Executive Compensation" and (iv) all directors and executive
officers of the Company as a group.

<TABLE>
<CAPTION>
                                                      SHARES OF COMMON            PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER (1)                    STOCK             BENEFICIALLY OWNED
----------------------------------------              ----------------        ------------------
<S>                                                   <C>                     <C>

Sol Lizerbram (2)                                           430,097                    *
Seth Flam (3)                                               455,669                    1.05%
Kevin Ellis (4)                                             452,084                    1.04%
Howard Hassman (5)                                          353,858                    *
Stephen Dresnick (6)                                      1,884,569                    4.29%
Sheldon Derezin (7)                                          42,000                    *
Steven Lash (8)                                             250,788                    *
Herbert Wertheim (9)                                        222,394                    *

All directors and executive officers
  as a group (11 persons) (10)                            4,132,459                    9.23%
</TABLE>

----------

*     Less than 1%.

(1)   Unless otherwise indicated, the address of each of the persons named above
      is in care of FPA at 3636 Nobel Drive, Suite 200, San Diego, California
      92122. A person is deemed to be the beneficial owner of securities that
      can be acquired by such person within 60 days of March 17, 1998 upon the
      exercise of options or warrants. Each beneficial owner's number of shares
      is determined by assuming that options or warrants that are held by such
      person (but not those held by any other person) and that are exercisable
      within 60 days of March 17, 1998 have been exercised. The total
      outstanding shares used to calculate each beneficial owner's percentage
      includes such options and warrants. Unless otherwise noted, FPA believes
      that all persons named in the table have sole voting and investment power
      with respect to all shares of FPA common stock beneficially owned by them.

(2)   Shares attributable to Dr. Lizerbram are held by the Lizerbram Family
      Trust, of which Dr. Lizerbram is Trustee and together with his wife, the
      sole beneficiaries. Includes options to acquire 143,584 shares of FPA
      common stock within 60 days of March 17, 1998.

(3)   Shares attributable to Dr. Flam are held by Dr. Flam as trustee of the
      Flam Family Trust dated January 24, 1995, as sole shareholder of corporate
      managing partner of F S & J, L.P. and J & J Flam, L.P., record holders.
      Includes options to acquire 143,584 shares of FPA common stock within 60
      days of March 17, 1998. Dr. Flam resigned as President and Chief Executive
      Officer of the Company as of March 25, 1998.

(4)   Includes options to acquire 81,584 shares of FPA common stock within 60
      days of March 17, 1998

(5)   Shares attributable to Dr. Hassman are held by Hassman, L.P., a limited
      partnership of which Clinical Partners Medical Group, P.C. is the General
      Partner, of which Dr. Hassman is the sole shareholder. Includes options to
      acquire 57,584 shares of FPA common stock within 60 days of March 17,
      1998.

(6)   Shares attributable to Dr. Dresnick are held by several corporations and
      limited partnerships in which Dr. Dresnick or a corporation owned by him
      is the sole stockholder and limited and general partners. Includes options
      to acquire 587,502 shares of FPA common stock within 60 days of March 17,
      1998.

(7)   Includes options to acquire 23,500 shares of FPA common stock within 60
      days of March 17, 1998

(8)   Includes options to acquire 227,788 shares of FPA common stock within 60
      days of March 17, 1998

(9)   Includes options to acquire 162,101 shares of FPA common stock within 60
      days of March 17, 1998

(10)  Includes options to acquire shares of FPA common stock within 60 days of
      March 17, 1998 as follows: Dr. Lizerbram, 143,584; Dr. Flam, 143,584; Dr.
      Ellis, 81,584; Dr. Hassman, 57,584; Dr. Dresnick, 587,502; Mr. Derezin,
      23,500; Mr. Lash, 227,788; Dr. Wertheim, 162,101; and all directors and
      executive officers as a group, 1,466,227.


                                       57
<PAGE>   58
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      NONE.

                                     PART IV

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

      (a)   Documents filed as part of this Report:

            (1)   Financial Statements:

                  Report of Independent Public Accountants

                  Consolidated Balance Sheets, December 31, 1996 and 1997

                  Consolidated Statements of Operations for the Years Ended
                  December 31, 1995, 1996 and 1997

                  Consolidated Statements of Stockholders' Equity (Deficit) for
                  the Years Ended December 31, 1995, 1996 and 1997

                  Consolidated Statements of Cash Flows for the Years Ended
                  December 31, 1995, 1996 and 1997

                  Notes to Consolidated Financial Statements

            (2)   Financial Statement Schedules:

      All schedules have been omitted because they are inapplicable, not
required, or the information is included elsewhere in the consolidated Financial
Statements or Notes thereto.

      (3)   Exhibits:

Exhibit
Number      Description
------      -----------

3.1         Certificate of Incorporation.*

3.2         Bylaws.*

3.3         Certificate of Amendment of Certificate of Incorporation filed
            October 20, 1994 (incorporated by reference to FPA's Annual Report
            on Form 10-K for the year ended December 31, 1994 at Exhibit No.
            3.3).

4.1         Specimen of common stock Certificate.*

4.2         Form of Warrant.*

4.3         Indenture dated as of December 18, 1996, by and between FPA and the
            Trustee for the 6.5% Convertible Subordinated Debentures
            (incorporated by reference to FPA's Current Report on Form 8-K dated
            December 18, 1996).

4.4         Registration Rights Agreement dated December 13, 1996 by and among
            FPA and the Initial Purchasers of the 6.5% Convertible Subordinated
            Debentures (incorporated by reference to FPA's Current Report on
            Form 8-K dated December 18, 1996).

4.5         Form of Rule 144A Restricted Global Debenture (incorporated by
            reference to FPA's Current Report on Form 8-K dated December 18,
            1996).


                                       58
<PAGE>   59
Exhibit
Number      Description
------      -----------
4.6         Form of Regulation S Global Debenture (incorporated by reference to
            FPA's Current Report on Form 8-K dated December 18, 1996).

4.7         Registration Rights Agreement dated June 30, 1997 by and among FPA
            and certain stockholders of HealthCap, Inc. (incorporated by
            reference to Registration Statement No. 333-31351 at Exhibit No.
            4.7).

4.8         Form of Registration Rights Agreement by and among FPA and certain
            holders of Health Partners, Inc. common stock and Preferred Stock
            (incorporated by reference to Registration Statement No. 333-32687
            at Exhibit No. 4.8).

4.9         Registration Rights Agreement dated September 2, 1997 by and among
            FPA and the shareholders of Emergency Medical Care Incorporated
            (incorporated by reference to Registration Statement No. 333-32687
            at Exhibit No. 4.9).

4.10        Registration Rights Agreement dated November 26, 1996 by and among
            FPA and the shareholders of Cornerstone Physicians Corporation
            (incorporated by reference to Registration Statement No. 333-41989
            at Exhibit No. 4.10).

4.11        Registration Rights Agreement dated November 19, 1997 by and between
            FPA and Avanti Corporate Health Systems, Inc. (incorporated by
            reference to Registration Statement No. 333-41989 at Exhibit No.
            4.11).

4.12        Registration Rights Agreement dated January 1,1998 by and among FPA
            and the shareholders of Physicians Quality Care, Ltd. and Associates
            in Managed Care, Ltd.

4.13        Registration Rights Agreement dated February 17, 1998 by and among
            FPA, John G. Keene, Robert W. Strauss and Marc V. Weiner.

4.14        Registration Rights Agreement dated February 27, 1998 by and between
            FPA and Richard E. Thorner.

10.1        IPA Medicare Partial Risk Services Agreement between Pacificare of
            California and Family Practice Associates of San Diego, Inc.
            ("FPASD") dated January 1, 1993, including an amendment thereto
            effective the date thereof and an amendment thereto date effective
            January 1, 1994.* **

10.2        [Reserved]

10.3        Medical Services Organization Agreement dated January 21, 1995
            between FPANJ and Medigroup, Inc. (HMO Blue).* **

10.4        Pacificare IPA Commercial Services Agreement with FPASD dated May 1,
            1995.* **

10.5        Amendment to IPA Medicare Partial Risk Services Agreement between
            Pacificare of California and FPASD dated April 1995.* **

10.6        [Reserved]

10.7        Form of Primary Care Physician Agreement/California.* **

10.8        Form of Specialty Care Physician Agreement/California.* **

10.9        Form of Administrative Services Agreement between FPA and a
            Professional Corporation.*

10.10       Form of Administrative Services Agreement between FPA and a
            Professional Corporation.*

10.11       Form of Succession Agreement.*

10.12       Employment Agreement between FPA and Dr. Sol Lizerbram effective as
            of October 1, 1996 (incorporated by reference to Registration
            Statement No. 333-32687 at Exhibit No. 10.12). Amendment to
            Employment Agreement between FPA and Dr. Sol Lizerbram dated as of
            March 25, 1998.+

10.13       Employment Agreement between FPA and Dr. Seth Flam effective as of
            October 1, 1996


                                       59
<PAGE>   60
Exhibit
Number      Description
------      -----------
            (incorporated by reference to Registration Statement No. 333-32687
            at Exhibit No. 10.13). Consulting and Settlement Agreement between
            FPA and Seth Flam dated as of March 25, 1998.+

10.14       Employment Agreement between FPA and Dr. Howard Hassman effective as
            of October 1, 1996 (incorporated by reference to Registration
            Statement No. 333-32687 at Exhibit No. 10.14).+

10.15       Employment Agreement between FPA and Dr. Kevin Ellis effective as of
            October 1, 1996 (incorporated by reference to Registration Statement
            No. 333-32687 at Exhibit No. 10.15).+

10.16       Amended and Restated Employment Agreement between FPA and Steven M.
            Lash effective October 1, 1996 (incorporated by reference to
            Registration Statement No. 333-32687 at Exhibit No. 10.16).
            Amendment to Employment Agreement between FPA and Steven M. Lash
            dated as of March 25, 1998.+

10.17       Employment Agreement between FPA and Robert J. Burg effective
            December 1, 1994 (incorporated by reference to FPA's Annual Report
            on Form 10-K for the year ended December 31, 1994 at Exhibit No.
            10.27).+

10.18       Employment Agreement between FPA and James A. Lebovitz effective as
            of February 1, 1997 (incorporated by reference to Registration
            Statement No. 333-32687 at Exhibit 10.18).+

10.19       FPA Amended Omnibus Stock Option Plan (incorporated by reference to
            Registration Statement No. 333-34027 at Exhibit 99).+

10.20       Amended and Restated Employment Contract between Sterling Healthcare
            Group, Inc. ("Sterling") and Stephen J. Dresnick, M.D. ("Dresnick"),
            dated July 15, 1994, Amendment No. 1 to Amended and Restated
            Employment Contract between Sterling and Dresnick entered into as of
            October 31, 1998 and Amendment No. 2 to Amended and Restated
            Employment Contract between Sterling and Dresnick entered into as of
            July 1997 (incorporated by reference to Registration Statement
            No. 333-32687 at Exhibit 10.20).+

10.21       [Reserved]

10.22       [Reserved]

10.23       [Reserved]

10.24       401(k) Salary Savings Plan effective January 1, 1994 (incorporated
            by reference to Registration Statement No. 333-79714 at Exhibit
            10.20). +

10.25       1995 Directors Stock Option Plan. *+

10.26       1994 Physicians Stock Option Plan. *+

10.27       Credit, Security, Guarantee and Pledge Agreement dated as of January
            29, 1996 among FPA and its subsidiaries and certain guarantors and
            the lenders named therein and Banque Paribas, as amended March 15,
            1996 (incorporated by reference to Registrant's Annual Report on
            Form 10-K for the fiscal year ended December 31, 1995).

10.28       Agreement and Plan of Merger among FPA, FPA Acquisition Corporation
            and AHI Healthcare Systems, Inc. made November 8, 1996, as amended
            by Amendment No. 1 to Agreement and Plan of Merger, dated as of
            February 5, 1997 (incorporated by reference to Registration
            Statement No. 333-21721 at Exhibit No. 2).

10.29       Form of Indemnification Agreement.*

10.30       Stock and Note Purchase Agreement among, inter alia, FPA and
            Foundation Health Corporation dated as of June 28, 1996
            (incorporated by reference to FPA's Current Report on Form 8-K dated
            June 21, 1996).

10.31       Agreement and Plan of Merger dated June 5, 1997 by and among FPA,
            FPA Acquisition Corp. and HealthCap, Inc. (incorporated by reference
            to Registration Statement No. 333-31351 at Exhibit No. 10.31).

10.32       Credit Agreement dated June 30, 1997 by and among FPA, BankBoston,
            N.A., Lehman


                                       60
<PAGE>   61
Exhibit
Number      Description
------      -----------
            Commercial Paper, Inc. and the lenders parties thereto (incorporated
            by reference to Registration Statement No. 333-31351 at Exhibit No.
            10.32).

10.33       HealthCap Management Group, Inc. 1994 Stock Option Plan
            (incorporated by reference to Registration Statement No. 333-31341
            at Exhibit No. 99.1).+

10.34       HealthCap Management Group, Inc. Quality Consultant Stock Option
            Plan (incorporated by reference to Registration Statement No.
            333-31341 at Exhibit No. 99.2).+

10.34       Agreement and Plan of Merger dated as of January 21, 1998, as
            amended as of January 28, 1998, by and among FPA, FPA Medical
            Management of California, Inc., Orange Coast Managed Care Services,
            Inc. and St. Joseph Medical Corporation (incorporated by reference
            to Registration Statement No. 333-46013 at Exhibit No. 2).

10.35       Agreement and Plan of Merger dated as of February 10, 1998, by and
            between FPA and Meridian Meridian Medical Group, Inc. (incorporated
            by reference to Registration Statement No. 333-46153 at Exhibit No.
            2).

21          Subsidiaries of FPA.

23.1        Consent of Deloitte & Touche LLP.

23.2        Consent of Coopers & Lybrand L.L.P.

23.3        Consent of KPMG Peat Marwick LLP.

23.4        Consent of Ernst & Young LLP.

24          Power of Attorney (included on signature page).

----------

*     Incorporated by reference to the exhibit to FPA's Registration Statement
      on Form S-1, Reg. No. 33-97456, at the exhibit number set forth opposite
      such exhibit's description above.

**    Registrant has requested confidential treatment from the Securities and
      Exchange Commission for portions of this exhibit, which confidential
      portions have been filed separately.

+     Constitutes a management contract or compensatory plan to be filed as an
      Exhibit to this Report pursuant to Item 14(c) of Form 10-K.

      (b)   Reports on Form 8-K. FPA filed the following current Reports on Form
8-K during the quarter ended December 31, 1997 and through March 27, 1998:

                       DATE OF REPORT                       ITEMS REPORTED
                       --------------                       --------------

                      December 10, 1997                   Item 5. Other Events
                                                          (Restated Financial
                                                              Statements)


                                       61
<PAGE>   62
                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, FPA Medical Management, Inc. has duly caused this Report
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of San Diego, State of California, on March 30, 1998.

                                       FPA MEDICAL MANAGEMENT, INC.
                                       (Registrant)


                                       By: /s/ STEPHEN J. DRESNICK
                                          -------------------------------------
                                                    Stephen J. Dresnick
                                                         President

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of FPA in the
capacities indicated on March 30, 1998.

      KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below in so signing also makes, constitutes and appoints Stephen J. Dresnick and
James A. Lebovitz, and each of them, as true and lawful attorneys-in-fact and
agents with full power of substitution and resubstitution for him and in his
name, place and stead, in any and all capacities to execute and cause to be
filed with the Securities and Exchange Commission any and all amendments to this
Report, with exhibits thereto and other documents in connection therewith,
granting unto said attorneys-in-fact full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully as to all intents and purposes as he might or could do in
person, and hereby ratifies and confirms all that said attorneys-in-fact and
agents or their or his substitute or substitutes may lawfully do or cause to be
done by virtue hereof.

<TABLE>
<CAPTION>
            SIGNATURE                              TITLE
            ---------                              -----
<S>                                     <C>


/s/    STEPHEN J. DRESNICK              President, Chief Executive Officer and Director
---------------------------------       (Principal Executive Officer)
       Stephen J. Dresnick


/s/       SOL LIZERBRAM                 Director and Chairman of the Board of
---------------------------------       Directors
          Sol Lizerbram


/s/     DOUGLAS E. KERNER               Vice President, Treasurer and Acting  Chief
---------------------------------       Financial Officer (Principal Financial Officer)
        Douglas E. Kerner


/s/      SHELDON DEREZIN                Director
---------------------------------
         Sheldon Derezin


                                        Director
---------------------------------
           Kevin Ellis


                                        Director
---------------------------------
          Howard Hassman


/s/    HERBERT A. WERTHEIM              Director and Vice Chairman of the Board
---------------------------------       of Directors
       Herbert A. Wertheim


/s/     MICHAEL P. MORRIS               Vice President, Finance and Chief
---------------------------------       Accounting Officer (Principal
        Michael P. Morris               Accounting Officer)
</TABLE>


                                       62
<PAGE>   63
Exhibit
Number      Description
------      -----------

3.1         Certificate of Incorporation.*

3.2         Bylaws.*

3.3         Certificate of Amendment of Certificate of Incorporation filed
            October 20, 1994 (incorporated by reference to FPA's Annual Report
            on Form 10-K for the year ended December 31, 1994 at Exhibit No.
            3.3).

4.1         Specimen of common stock Certificate.*

4.2         Form of Warrant.*

4.3         Indenture dated as of December 18, 1996, by and between FPA and the
            Trustee for the 6.5% Convertible Subordinated Debentures
            (incorporated by reference to FPA's Current Report on Form 8-K dated
            December 18, 1996).

4.4         Registration Rights Agreement dated December 13, 1996 by and among
            FPA and the Initial Purchasers of the 6.5% Convertible Subordinated
            Debentures (incorporated by reference to FPA's Current Report on
            Form 8-K dated December 18, 1996).

4.5         Form of Rule 144A Restricted Global Debenture (incorporated by
            reference to FPA's Current Report on Form 8-K dated December 18,
            1996).

4.6         Form of Regulation S Global Debenture (incorporated by reference to
            FPA's Current Report on Form 8-K dated December 18, 1996).

4.7         Registration Rights Agreement dated June 30, 1997 by and among FPA
            and certain stockholders of HealthCap, Inc. (incorporated by
            reference to Registration Statement No. 333-31351 at Exhibit No.
            4.7).

4.8         Form of Registration Rights Agreement by and among FPA and certain
            holders of Health Partners, Inc. common stock and Preferred Stock
            (incorporated by reference to Registration Statement No. 333-32687
            at Exhibit No. 4.8).

4.9         Registration Rights Agreement dated September 2, 1997 by and among
            FPA and the shareholders of Emergency Medical Care Incorporated
            (incorporated by reference to Registration Statement No. 333-32687
            at Exhibit No. 4.9).

4.10        Registration Rights Agreement dated November 26, 1996 by and among
            FPA and the shareholders of Cornerstone Physicians Corporation
            (incorporated by reference to Registration Statement No. 333-41989
            at Exhibit No. 4.10).

4.11        Registration Rights Agreement dated November 19, 1997 by and between
            FPA and Avanti Corporate Health Systems, Inc. (incorporated by
            reference to Registration Statement No. 333-41989 at Exhibit No.
            4.11).

4.12        Registration Rights Agreement dated January 1,1998 by and among FPA
            and the shareholders of Physicians Quality Care, Ltd. and Associates
            in Managed Care, Ltd.

4.13        Registration Rights Agreement dated February 17, 1998 by and among
            FPA, John G. Keene, Robert W. Strauss and Marc V. Weiner.

4.14        Registration Rights Agreement dated February 27, 1998 by and between
            FPA and Richard E. Thorner.

10.1        IPA Medicare Partial Risk Services Agreement between Pacificare of
            California and Family Practice Associates of San Diego, Inc.
            ("FPASD") dated January 1, 1993, including an amendment thereto
            effective the date thereof and an amendment thereto date effective
            January 1, 1994.* **


                                       63
<PAGE>   64
Exhibit
Number      Description
------      -----------
10.2        [Reserved]

10.3        Medical Services Organization Agreement dated January 21, 1995
            between FPANJ and Medigroup, Inc. (HMO Blue).* **

10.4        Pacificare IPA Commercial Services Agreement with FPASD dated May 1,
            1995.* **

10.5        Amendment to IPA Medicare Partial Risk Services Agreement between
            Pacificare of California and FPASD dated April 1995.* **

10.6        [Reserved]

10.7        Form of Primary Care Physician Agreement/California.* **

10.8        Form of Specialty Care Physician Agreement/California.* **

10.9        Form of Administrative Services Agreement between FPA and a
            Professional Corporation.*

10.10       Form of Administrative Services Agreement between FPA and a
            Professional Corporation.*

10.11       Form of Succession Agreement.*

10.12       Employment Agreement between FPA and Dr. Sol Lizerbram effective as
            of October 1, 1996 (incorporated by reference to Registration
            Statement No. 333-32687 at Exhibit No. 10.12). Amendment to
            Employment Agreement between FPA and Dr. Sol Lizerbram dated as of
            March 25, 1998.+

10.13       Employment Agreement between FPA and Dr. Seth Flam effective as of
            October 1, 1996 (incorporated by reference to Registration Statement
            No. 333-32687 at Exhibit No. 10.13). Consulting and Settlement
            Agreement between FPA and Seth Flam dated as of March 25, 1998.+

10.14       Employment Agreement between FPA and Dr. Howard Hassman effective as
            of October 1, 1996 (incorporated by reference to Registration
            Statement No. 333-32687 at Exhibit No. 10.14).+

10.15       Employment Agreement between FPA and Dr. Kevin Ellis effective as of
            October 1, 1996 (incorporated by reference to Registration Statement
            No. 333-32687 at Exhibit No. 10.15).+

10.16       Amended and Restated Employment Agreement between FPA and Steven M.
            Lash effective October 1, 1996 (incorporated by reference to
            Registration Statement No. 333-32687 at Exhibit No. 10.16).
            Amendment to Employment Agreement between FPA and Steven M. Lash
            dated as of March 25, 1998.+

10.17       Employment Agreement between FPA and Robert J. Burg effective
            December 1, 1994 (incorporated by reference to FPA's Annual Report
            on Form 10-K for the year ended December 31, 1994 at Exhibit No.
            10.27).+

10.18       Employment Agreement between FPA and James A. Lebovitz effective as
            of February 1, 1997 (incorporated by reference to Registration
            Statement No. 333-32687 at Exhibit 10.18).+

10.19       FPA Amended Omnibus Stock Option Plan (incorporated by reference to
            Registration Statement No. 333-34027 at Exhibit 99).+

10.20       Amended and Restated Employment Contract between Sterling Healthcare
            Group, Inc. ("Sterling") and Stephen J. Dresnick, M.D. ("Dresnick"),
            dated July 15, 1994, Amendment No. 1 to Amended and Restated
            Employment Contract between Sterling and Dresnick entered into as of
            October 31, 1998 and Amendment No. 2 to Amended and Restated
            Employment Contract between Sterling and Dresnick entered into as of
            July 1997 (incorporated by reference to Registration Statement
            No. 333-32687 at Exhibit 10.20).+

10.21       [Reserved]

10.22       [Reserved]

10.23       [Reserved]

10.24       401(k) Salary Savings Plan effective January 1, 1994 (incorporated
            by reference to Registration Statement No. 333-79714 at Exhibit
            10.20). +


                                       64
<PAGE>   65
Exhibit
Number      Description
------      -----------
10.25       1995 Directors Stock Option Plan. *+

10.26       1994 Physicians Stock Option Plan. *+

10.27       Credit, Security, Guarantee and Pledge Agreement dated as of January
            29, 1996 among FPA and its subsidiaries and certain guarantors and
            the lenders named therein and Banque Paribas, as amended March 15,
            1996 (incorporated by reference to Registrant's Annual Report on
            Form 10-K for the fiscal year ended December 31, 1995).

10.28       Agreement and Plan of Merger among FPA, FPA Acquisition Corporation
            and AHI Healthcare Systems, Inc. made November 8, 1996, as amended
            by Amendment No. 1 to Agreement and Plan of Merger, dated as of
            February 5, 1997 (incorporated by reference to Registration
            Statement No. 333-21721 at Exhibit No. 2).

10.29       Form of Indemnification Agreement.*

10.30       Stock and Note Purchase Agreement among, inter alia, FPA and
            Foundation Health Corporation dated as of June 28, 1996
            (incorporated by reference to FPA's Current Report on Form 8-K dated
            June 21, 1996).

10.31       Agreement and Plan of Merger dated June 5, 1997 by and among FPA,
            FPA Acquisition Corp. and HealthCap, Inc. (incorporated by reference
            to Registration Statement No. 333-31351 at Exhibit No. 10.31).

10.32       Credit Agreement dated June 30, 1997 by and among FPA, BankBoston,
            N.A., Lehman Commercial Paper, Inc. and the lenders parties thereto
            (incorporated by reference to Registration Statement No. 333-31351
            at Exhibit No. 10.32).

10.33       HealthCap Management Group, Inc. 1994 Stock Option Plan
            (incorporated by reference to Registration Statement No. 333-31341
            at Exhibit No. 99.1).+

10.34       HealthCap Management Group, Inc. Quality Consultant Stock Option
            Plan (incorporated by reference to Registration Statement No.
            333-31341 at Exhibit No. 99.2).+

10.34       Agreement and Plan of Merger dated as of January 21, 1998, as
            amended as of January 28, 1998, by and among FPA, FPA Medical
            Management of California, Inc., Orange Coast Managed Care Services,
            Inc. and St. Joseph Medical Corporation (incorporated by reference
            to Registration Statement No. 333-46013 at Exhibit No. 2).

10.35       Agreement and Plan of Merger dated as of February 10, 1998, by and
            between FPA and Meridian Meridian Medical Group, Inc. (incorporated
            by reference to Registration Statement No. 333-46153 at Exhibit No.
            2).

21          Subsidiaries of FPA.

23.1        Consent of Deloitte & Touche LLP.

23.2        Consent of Coopers & Lybrand L.L.P.

23.3        Consent of KPMG Peat Marwick LLP.

23.4        Consent of Ernst & Young LLP.

24          Power of Attorney (included on signature page).


                                       65
<PAGE>   66
----------

*     Incorporated by reference to the exhibit to FPA's Registration Statement
      on Form S-1, Reg. No. 33-97456, at the exhibit number set forth opposite
      such exhibit's description above.

**    Registrant has requested confidential treatment from the Securities and
      Exchange Commission for portions of this exhibit, which confidential
      portions have been filed separately.

+     Constitutes a management contract or compensatory plan to be filed as an
      Exhibit to this Report pursuant to Item 14(c) of Form 10-K.


                                       66