<PAGE>   1

                       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 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 333-15595-03

                              MEDFORD CLINIC, P.C.
                   FORMERLY "PHYSICIAN PARTNERS MEDFORD, P.C."

             (Exact name of registrant as specified in its charter)

         Oregon                                        93-1221063
     -------------                                   -------------------
(State or other jurisdiction of                      (I.R.S. Employer
incorporation or organization)                       Identification No.)


555 Black Oak Drive
Medford, Oregon                                           97054
---------------------------------------              -------------------
(Address of Principal Executive Offices)             (Zip Code)

Registrant's telephone number, including area code:

                                 (541) 734-3601

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

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


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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                              YES [ X ]    NO [ ]

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

The number of shares of the Registrant's Common Stock outstanding as of March
30, 1998 was 60.

                       DOCUMENTS INCORPORATED BY REFERENCE

None.


<PAGE>   2

<TABLE>
<CAPTION>
                                TABLE OF CONTENTS


                                                                                                     PAGE

                                               PART I
<S>        <C>                                                                                       <C>

Item 1:    Business                                                                                    3
Item 2:    Properties                                                                                  8
Item 3:    Legal Proceedings                                                                           8
Item 4:    Submission of Matters to a Vote of Security Holders                                         8

                                               PART II

Item 5:    Market for Registrant's Common Equity and Related Stockholder Matters                       9
Item 6:    Selected Financial Data                                                                     9
Item 7:    Management's Discussion and Analysis of Financial Condition and Results of Operations      10
Item 8:    Financial Statements and Supplementary Data
Item 9:    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure       15

                                              PART III

Item 10:   Directors and Executive Officers of the Registrant                                         15
Item 11:   Executive Compensation                                                                     16
Item 12:   Security Ownership of Certain Beneficial Owners and Management                             17
Item 13:   Certain Relationships and Related Transactions                                             17

                                               PART IV

Item 14:   Exhibits, Financial Statement Schedules, and Reports on Form 8-K                           18
</TABLE>


                                       2
<PAGE>   3

                                               PART I

ITEM 1: BUSINESS

OVERVIEW

The Medford Clinic, P.C. ("Medford" or "Company"), an Oregon Professional
corporation, is a multi-specialty medical clinic which emphasizes internal
medicine and family medicine. Medford was founded in 1997 pursuant to certain
reorganization and merger transactions ("Transactions") contemplated by the
Amended and Restated Agreement and Plan of Reorganization and Merger (the
"Reorganization and Merger Agreement") among Medford Clinic P.C. ("Old
Medford"), HealthFirst Medical Group, P.C. ("Old HealthFirst"), The Corvallis
Clinic P.C. ("Old Corvallis"), and, together with Old Corvallis and Old
HealthFirst, referred to herein, collectively as "Old PCs", and Physician
Partners, Inc. ("PPI"). Old Medford was founded in 1946.

This transaction, which was consummated on February 1, 1997, resulted in a
separation of operations of the Old PCs between medical professional services
activities (i.e., providers of medical services) and the physician practice
management activities of the business. The professional services activities were
spun off into newly formed professional corporations (New PCs). Medford is one
of the New PCs. The physician practice management business, along with
substantially all of the assets and liabilities of the New PCs, i.e., cash,
receivables, inventories, prepaids, property, plant and equipment, other assets,
payables, accruals, debt, and certain contractual commitments were transferred
to PPI. The New PCs are responsible for providing medical services and the
related costs for provider compensation and benefits. The assets transferred to
the New PCs, which had zero carrying value, include the employment agreements
between each Company and its providers, certain provider contracts under which
the New PCs will be receiving fee-for-service compensation and patient medical
records.

An integral part of the reorganization is a 40-year management agreement
("Management Agreement") whereby PPI provides physician practice management
services to the New PCs. Services to be provided include management and
administrative services, capital resources, facilities, equipment and supplies.
Other benefits of the Merger include a greater access to capital, economies of
scale provided by the consolidated operations of the Old PCs, and shared
strengths of management expertise. As consideration, PPI is entitled to (a)
reimbursement of all managerial costs and expenses (Manager's Expenses) incurred
by PPI and (b) a management fee equal to 16% of (i) net revenues relating to
services provided by the New PCs less (ii) Manager's Expenses.

The management structure between PPI and Medford enables Medford to retain
significant control over its own operation and strategic direction.
Specifically, Medford retains its own physician board of directors. The function
of the physician board includes:

        (i)     determining and managing physician compensation methodologies;

        (ii)    employing and reviewing (with the assistance of PPI's Chief
                Medical Officer) the performance of its Medical Director and
                compensation for and appointment of physician managers;

        (iii)   dealing with individual physician quality and behavioral issues;

        (iv)    approving all growth and acquisitions by being the only body
                which can approve employment of physicians of the Company; and

        (v)     appointing three members to the Joint Management Board of
                Directors and designating its Medical Director as an ex officio
                member.

Subject to the rights of the Company's physician board, the business of Medford
is governed by the Joint Management Board. The Joint Management Board is
designed to represent equally the clinical and physician perspective and the
management and business perspective. The Joint Management Board consists of six
members, with three members appointed by Medford (physician members of the
Medford Board) and three members appointed by PPI (one of whom must be a local
PPI group practice administrator). The Medical Director of Medford serves as a
seventh ex officio, non-voting member of the Joint Management Board. The Joint
Management Board provides local expertise and develops and approves all
submissions to PPI regarding Medford's growth, annual budgets, payor relations,
local strategic initiatives and capital improvements.


                                       3
<PAGE>   4

GENERAL

Medford is a multi-specialty group providing professional health care services
on both a prepaid and fee-for-service basis. PPI contracts directly with health
plans and preferred provider organizations ("PPOs") to provide medical services
to enrollees who have selected Medford physicians as their primary care provider
on behalf of Medford. Through contracts with various health plans, Medford
physicians were responsible for the health care of approximately 26,000 health
plan members as of December 31, 1997.

Medford has grown through a combination of acquisitions of medical practices
that complement its services and recruitment of individual associate physicians
in need of practice areas. In order for Medford to provide its patients with the
necessary specialty services, Medford contracts with providers of such
specialties that Medford physicians do not practice.

In 1993, Old Medford acquired all of the interest in Rogue Valley Medical Center
("RVMC") in an entity called Rogue Valley Dialysis Center ("RVDC"), a joint
venture that was organized by Old Medford and RVMC in 1987. The joint venture
with RVMC was terminated effective July 1, 1993, and Old Medford acquired RVMC's
share of the assets in the joint venture. Medford currently operates the RVDC
center under the name Rogue Valley Dialysis Services ("RVDS"). After the Merger,
PPI succeeded to financial liabilities associated with the acquisition of the
RVDS center.

Medford also operates another dialysis center under the name "Redwood Dialysis
Center" and manages dialysis units and provides dialysis services at three local
hospitals (Providence Medford Medical Center and RVMC in Medford, Oregon, and
Merle West Medical Center in Klamath Falls, Oregon.)

In addition, Medford is the sole member of Medford Clinic Foundation, an Oregon
nonprofit corporation (the "Foundation"). The Foundation was organized in 1979.
In February 1980, the Foundation obtained from the Internal Revenue Service a
determination of federal tax-exempt status as a Section 501(c)(3) organization
which is not a private foundation. The Foundation generally engages in raising
funds that are distributed to individuals or entities whose grant proposals are
approved. All grants must be used for worthy purposes that benefit the Medford
community.

Under capitated contracts, Medford is paid a fixed fee per covered life on a
monthly basis throughout the contract period. Under such agreements, the Company
is responsible for providing or arranging for the provision of covered benefits
to the applicable health maintenance organization ("HMO") member. Medford
provides services on a prepaid basis to PacificCare, Secure Horizons and Oregon
Health Plan patients. Enrollment is categorized as "commercial" for enrollees
under the age of 65 whose health coverage is generally sponsored by employers or
"senior" for retired patients. Higher capitation rates are generally received
from senior patients because their medical needs are generally greater and
consequently the cost of covered care is higher. In the years ending 1995, 1996
and 1997, $5.0 million, $7.0 million and $9.9 million, respectively, of net
patient revenues came from prepaid or capitated patients.

While Medford obtains a significant and growing portion of its revenues from
managed care programs, its main source of income is the result of a more
traditional form of business. Medford is a Medicare provider and receives
fee-for-service payments from a significant percentage of patients and
traditional indemnity insurers. In the years ending 1995, 1996 and 1997, $33.9
million, $33.4 million and $37.2 million, respectively, of net patient revenues
came from PPOs, other contractual relationships, individuals or private
insurance carriers (fee-for-service).

The following table indicates the percentage of payor mix of the Company's
aggregate net clinic revenue earned by Medford:


                                       4
<PAGE>   5

<TABLE>
<CAPTION>
PAYOR                                       1995        1996         1997
-----                                       ----        ----         ----
<S>                                         <C>          <C>          <C>
Fee-For-Service:
     Commercial and Private                 58%          55%          51%
     Medicare                               27%          27%          26%
     Medicaid                                2%           1%           2%
Prepaid (1)                                 13%          17%          21%
</TABLE>

(1) Includes enrollees under Commercial, Medicare and Medicaid programs


SERVICES

Medford offers a wide range of primary and specialty physician care and
ancillary services through an organized physician group. Approximately 40% of
the Company's physicians are primary care providers and approximately 60%
practice various medical and surgical specialties. The primary care physicians
are those concentrating in family practice, general internal medicine, and
pediatrics. Medford also provides services, such as hemodialysis and
chemotherapy, through local hospitals. At certain locations, Medford operates
centers for ambulatory surgery, urgent care, cancer management, hemodialysis and
allergy treatment.

The following professional services are offered by Medford:

          Allergy and Asthma                     Obstetrics
          Cardiology                             Oncology and Hematology
          Dermatology                            Orthopedics
          Endocrinlogy                           Otolaryngology
          Family Practice                        Pediatrics
          Gastroenterology                       Podiatry
          Gynecology                             Rheumatology
          Infectious Disease                     Surgery- General and Vascular
          Internal Medicine                      Urgent Care
          Nephrology                             Urology



Furthermore, Medford has numerous provider arrangements in the community so that
it can offer additional services to patients covered under capitated contracts.
In addition to medical services, Medford offers a number of ancillary services
within its offices such as radiology, pharmacy, and laboratory. Medford also
provides clinical dialysis services through its Rogue Valley Dialysis Services
division.


BUSINESS STRATEGY

Medford believes that group practice offers the best means of promoting and
maintaining the highest standard of medical care. Medford's strategy is to
position itself in a competitive network as the healthcare industry develops.
Medford's relationship with PPI enhances its capacity to provide a high quality
of clinical care and to compete economically in both managed care and
fee-for-service markets.

To increase revenue, Medford has been working with PPI to recruit additional
physicians and merge other physician groups in the area into their clinic. PPI
is working with Medford on initiatives to reduce the Manager's Expenses of
Medford (which are paid by PPI and reimbursed by Medford) through regional
purchasing and insurance contracts, and through the consolidation of various
services.


                                       5
<PAGE>   6


GOVERNMENT REGULATION

Medford is subject to federal and state laws regulating the relationships among
providers of health care services, physicians and other clinicians. These laws
include the fraud and abuse provisions of the Medicare and Medicaid statutes,
which prohibit the solicitation, payment, receipt or offering of any direct or
indirect remuneration for the referral of Medicare or Medicaid patients or for
the recommending, leasing, arranging, ordering or purchasing of Medicare or
Medicaid covered services. Other laws impose significant penalties for false or
improper billings for physician services and impose restrictions on physician
referrals for designated health services to entities with which they have
financial relationships. Violations of those laws may result in substantial
civil or criminal penalties for individuals or entities, including large civil
money penalties and exclusion from participation in the Medicare and Medicaid
programs. Significant laws applicable to the health care industry generally are
described in more detail below.

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

Physician Self-Referral Law
Significant prohibitions against physician self-referrals for services covered
by Medicare and Medicaid programs were enacted, subject to certain exceptions,
by Congress in the Omnibus Budget Reconciliation Act of 1993. These
prohibitions, commonly known as Stark II, amended prior physician self-referral
legislation known as Stark I (which applied only to clinical laboratory
referrals) by enlarging the list of services and investment interests to which
the self-referral prohibitions apply. Effective January 1, 1995, Stark II
prohibits a physician, or a member of his or her immediate family, from making
referrals for certain "Designated Health Services" to entities in which the
physician has an ownership or investment interest, or with which the physician
has a compensation arrangement. In addition to the conduct directly prohibited
by the law, the statute also prohibits schemes that are designed to obtain
referrals indirectly that cannot be made directly. The penalties for violating
the law include (i) a refund of any Medicare or Medicaid payments for services
that resulted from an unlawful referral, (ii) civil fines, and (iii) exclusion
from the Medicare and Medicaid programs. "Designated Health Services" include,
among other things, clinical laboratory services, radiology and other
diagnostic services, radiation therapy services, durable medical equipment,
prosthetics, outpatient prescription drugs, home health services and inpatient
and outpatient hospital services. Stark II prohibitions include referrals
within the physician's own group practice (unless the practice satisfies the
"in-office ancillary services" exception) and referrals in connection with
physicians' employment arrangements (unless the arrangement satisfies the
"in-office ancillary services" or "employment" exceptions). In addition, Stark
II applies to indirect financial arrangements. To the extent physicians managed
by the Company are determined to have an indirect financial relationship with
physicians in separate practices which are managed by the Company, absent a
Stark II exception, referrals for Designated Health Services between physicians
in different practices could be prohibited. Stark II also prohibits billing the
Medicare or Medicaid programs for services rendered in conjunction with
prohibited referrals. Noncompliance with, or violation of, Stark II can result
in exclusion from the Medicare and Medicaid programs and civil penalties. The
Company believes that its operations and those of PPI and other New PCs as
presently conducted do not pose a material risk of liability under Stark II,
primarily because PPI does not currently provide "Designated Health Services."
Nevertheless, there can be no assurance that Stark II will not be interpreted
or hereafter amended in a manner that has a material adverse effect on the
Company's or PPI's operations as presently conducted.

In this regard, on January 9, 1998, the Health Care Financial Administration
published proposed regulations interpreting the scope and refining the
application of the Stark II law. These regulations provide, in the case of
Designated Health Services provided by a "group practice," that the
overhead expenses and income from such group practice must be distributed
according to methods that indicate that the practice is a unified business and
not based on each satellite office operating as if it were a separate
enterprise. Only "group practices" as defined by Stark II can utilize the
general exception under the law for "in-office ancillary services." There can
be no assurance that the distribution methodology of the Company and other New
PCs will meet the unified business requirement or that each of the Company and
other New PCs otherwise will be deemed to be a "group practice" if challenged.
A determination that sharing of overhead expenses and income by the Company and
other New PCs does not comply with Stark II or failure to satisfy any other
criteria necessary to qualify for the "in-office ancillary services" exception
to the Stark II prohibition would preclude physcian owners of the Company from
referring Medicare/Medicaid patients to the Company for Designated Health
Services, and could have a material adverse effect on the Company or PPI.

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

Medicare/Medicaid Reimbursement
State and federal civil and criminal statutes impose substantial penalties,
including civil and criminal fines and imprisonment, upon health care providers
who fraudulently or wrongfully bill governmental or other third-party payors for
health care services. The federal law prohibiting false billings allows a
private person to bring a civil action in the name of the United States
government for violations of its provisions. While management of Medford has
attempted to comply with billing requirements, there is no assurance that the
Company will not be challenged or scrutinized by governmental authorities.
Moreover, Medicare and other reimbursement rules


                                       6
<PAGE>   7

impact the fee structure of medical billing. To the extent Medford's billing
arrangements may need to be modified to comply with existing or modified
regulations, there could be a material adverse financial effect on the Company.

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

Proposed Legislation
In addition to current federal regulations, the Clinton Administration and
several members of Congress have proposed legislation for comprehensive reforms
affecting the payment for and availability of health care services. Aspects of
certain such health care proposals, such as reductions in Medicare and Medicaid
payments and additional prohibitions on direct or indirect physician ownership
of facilities to which they refer patients, if adopted, could have a significant
impact on the health care industry. There can be no assurance as to the ultimate
content, timing or effect of any health care reform legislation, nor is it
possible at this time to estimate the impact of potential legislation on the
industry.


COMPETITION

The health care industry is highly competitive. The industry is also subject to
continuing changes in the services that are provided and how providers are
selected and paid.

Medford operates in the southern Oregon region and northern California and
generally provides outpatient services to 30-40% of the outpatient services
market. The significant health care competitors in this market are almost
exclusively within the community of Medford. Major competitors include the
ASANTE Health System, which is comprised of one hospital in the city of Medford,
two hospitals in the city of Grants Pass, multiple subsidiaries related to
ancillary and support services, and a physician practice known as the Southern
Oregon Health Trust.

A significant amount of competition comes from local hospitals. Medford competes
directly with the Southern Oregon Health Trust for primary care services in the
region. The Southern Oregon Health Trust is managed as a department of the Rogue
Valley Medical Center in Medford. Although there is increased competition with
the Trust, Medford's primary care base continues to grow in direct response to
increasing patient demand. The existence of Southern Oregon Health Trust has
apparently not inhibited Medford's growth. Providence Medical Center and a local
independent practice association ("IPA") by the name of PrimeCare also compete
with the Company. Providence Medical Center owns and operates a primary care
medical group and the IPA is composed primarily of specialists.

There can be no assurance that the Company will be able to compete effectively,
that additional competitors will not enter the market, or that such competition
will not make it more difficult for the Company to maintain its current
financial condition.

EMPLOYEES

Provider Employees
As of December 31, 1997, the Company employed 66 full-time and 2 part-time
physicians. Medford physicians initially serve one-year associate employment
contracts. These contracts offer a specified


                                       7
<PAGE>   8

guaranteed salary and an incentive bonus. At the end of the associate year, the
physician becomes eligible to become a shareholder. A rigorous peer review is
completed prior to the offering of shareholder status. The transition must be
approved by both the individual physician and a 70% vote of the shareholders. In
addition, the Company employs 7 nurse practitioners.

Non-Provider Employees
According to the terms of the Reorganization and Merger Agreement, all
non-provider staff is employed by PPI.

The Company considers its relations with its employees to be excellent.


INSURANCE

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


ITEM 2: PROPERTIES

All assets and liabilities of Old Medford (other than physician-related assets)
were transferred to PPI pursuant to the Reorganization and Merger Agreement. PPI
is, therefore, responsible for all lease payments on real properties that
Medford occupies. Medford then reimburses PPI for all manager's expenses
incurred on its behalf.

The Company's main executive office is located at 555 Black Oak Drive in
Medford, Oregon and is approximately 60,000 square feet in size. This building
occupies the main administrative and clinical facilities. In addition, two other
properties are leased for the use of general and administrative purposes. The
Company believes these arrangements and the additional locations discussed below
are adequate for its current uses and anticipated growth.

Currently, the Company occupies clinics in seven locations in the Medford,
Oregon area. Two other properties occupied by the Company, the Redwood Dialysis
Center and the Rogue Valley Dialysis Center facilities, are owned by PPI.


ITEM 3: LEGAL PROCEEDINGS

Medford is engaged in the defense of lawsuits arising in the ordinary course and
conduct of its business. Medford believes that such actions will not have a
material effect on its business.


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

None.


                                       8
<PAGE>   9


                                     PART II

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

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


ITEM 6: SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
(Thousands of dollars)
                                              1993         1994         1995         1996         1997
<S>                                           <C>          <C>           <C>          <C>           <C>
                                            --------     --------     --------     --------     --------
STATEMENT OF OPERATIONS DATA:
REVENUES:
 Fee-For-Service, net                       $ 22,805     $ 29,920     $ 33,951     $ 33,445     $ 37,167
 Prepaid Health Care                             269        2,407        5,015        6,996        9,886
                                            --------     --------     --------     --------     --------
 Total Net Revenues                           23,074       32,327       38,966       40,441       47,053
 Less Provider Compensation and Benefits      (7,009)      (9,248)     (11,239)     (12,202)     (11,157)
                                            --------     --------     --------     --------     --------
 Net Revenue less Provider Compensation
   and Benefits                               16,065       23,079       27,727       28,239       35,896

 Total Operating Expenses                     15,805       22,457       26,277       30,198       35,995
 Operating Income (Loss)                         260          622        1,450       (1,959)         (99)
 Other Non-Operating Income (Expenses)          (132)        (297)        (390)        (321)          53
                                            --------     --------     --------     --------     --------
 Income (Loss) Before Taxes                      128          325        1,060       (2,280)         (46)
                                            --------     --------     --------     --------     --------
 Income Tax Expense (Benefit)                     44          133          408         (913)          --
                                            --------     --------     --------     --------     --------
 Net Income (Loss)                          $     84     $    192     $    652     $ (1,367)    $    (46)
                                            ========     ========     ========     ========     ========
BALANCE SHEET DATA:
 Working capital (deficit)                     2,511        2,838        3,053         (368)           1
 Total assets                                 10,969       14,534       15,245       13,641            1
 Long term debt, net                           3,128        5,459        4,932        3,924           --
 Shareholders' equity                          2,322        2,514        3,166          842            1
</TABLE>


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<PAGE>   10

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


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


OVERVIEW

Medford, an Oregon professional service corporation, is a primary-care based,
multi-specialty medical clinic. Medford was founded in 1997 pursuant to certain
reorganization and merger transactions (the "Transactions") contemplated by the
Amended and Restated Agreement and Plan of Reorganization and Merger (the
"Reorganization and Merger Agreement") among Old Medford, HealthFirst Medical
Group, P.C. ("Old HealthFirst"), The Corvallis Clinic, P.C. ("Old Corvallis,")
and, together with Old Medford and Old HealthFirst, referred to herein,
collectively as "Old PCs", and Physician Partners, Inc. ("PPI"). Old Medford was
formed in 1946. Pursuant to the terms of the Reorganization and Merger
Agreement, each Old PC affected (a) a reorganization (the "New PC
Reorganization") of its corporate structure by (i) incorporating a wholly-owned
professional corporation subsidiary (a "New PC"), (ii) transferring to the New
PC certain assets and liabilities (including physician employment agreements)
relating to the provider professional services business, (iii) making a pro rata
distribution to its shareholders of all of the capital stock of the New PC, (iv)
converting such Old PC from a professional corporation to a business corporation
and (v) entering into a 40 year management agreement (the "Management
Agreement") with PPI and (b) a merger (the "Merger") with and into PPI,
resulting in consolidation of the operations (other than the provider
professional services businesses) of the Old PCs.

Medford currently consists of 75 professional providers who offer a wide range
of primary and specialty care services. In addition, Medford offers ancillary
services such as radiology, pharmacy, and laboratory. Medford also provides
clinical dialysis services through its Rogue Valley Dialysis Services division.
Medford's operations are located in Southern Oregon.

Medford believes that group practice offers the best means of promoting and
maintaining the highest standard of medical care. Medford's strategy is to
position itself in a competitive network as the healthcare industry develops.
Medford's relationship with PPI enhances its capacity to provide a high quality
of clinical care and to compete economically in both managed care and
fee-for-service markets.

To increase revenue, Medford is working with PPI to recruit additional
physicians and merge other physician groups in the area into their clinic. PPI
is working with Medford on initiatives to reduce the Manager's Expenses of
Medford and increase revenues.

In 1997, PPI began modifying the computer system programming at Medford to
process transactions in the year 2000. Anticipated spending for this
modification will be expensed as incurred and is not expected to have a
significant impact on Medford's ongoing results of operations.
                                       10
<PAGE>   11


RESULTS OF OPERATIONS

The following table shows the percentage of net revenue represented by various
expense categories reflected in the Company's Statement of Operations. The
following table represents twelve months ended December 31, 1995, 1996 and 1997.

<TABLE>
<CAPTION>
                                                       December 31,
                                              1995          1996          1997
<S>                                             <C>           <C>           <C>
                                            --------      --------      --------
Net Revenues, less Provider Compensation       100.0%        100.0%        100.0%

Operating Expenses:
    Clinic salaries, wages and benefits         42.7%         47.9%         42.0%
    Purchased medical services                   8.2%         14.8%         13.7%
    Medical and office supplies                 20.1%         20.9%         17.9%
    General and administrative expenses         12.4%         11.9%         10.7%
    Lease and rent expense                       4.2%          4.2%          3.9%
    Provision for uncollectible accounts         3.1%          3.8%          3.8%
    Depreciation and amortization                4.1%          3.4%          3.1%
    Management fee                                --            --           5.2%
                                            --------      --------      --------
       Total operating expenses                 94.8%        106.9%        100.3%
                                            --------      --------      --------
       Operating income                          5.2%         (6.9%)        (0.3%)

Other Income (Expense)
    Other income                                  --            --           0.9%
    Interest income                              0.3%          0.4%          0.2%
    Interest expense                            (1.7%)        (1.5%)        (0.9%)
                                            --------      --------      --------
       Net income (loss) before income           3.8%         (8.0%)        (0.1%)
       taxes
                                            --------      --------      --------
    Income tax expense (benefit)                 1.5%         (3.2%)          --
                                            ========      ========      ========
Net income (loss)                                2.3%         (4.8%)        (0.1%)
                                            ========      ========      ========
</TABLE>


Twelve Months ended December 31, 1997 Compared to Twelve Months Ended December
31, 1996

Net Revenues less Provider Compensation increased $7.7 million or 27.3% to $35.9
million in the twelve months ended December 31, 1997 from $28.2 million in the
twelve months ended December 31, 1996. Net Revenues less Provider Compensation
consists of Fee-for-Service revenue net of contractual discounts and Prepaid
Healthcare revenues less Provider Compensation and Benefits. Net Fee-for-Service
revenues increased $3.8 million or 11.4% to $37.2 million in 1997 compared to
$33.4 million in 1996. Prepaid Healthcare revenues increased $2.9 million or
41.4% to $9.9 million in the twelve months ended December 31, 1997 compared to
$7.0 million in 1996. Net Fee-for-Service revenues increased as a result of the
addition of several providers in late 1996 who became fully productive in 1997.
The increase in Prepaid Healthcare revenues is due to increases in capitation
rates, specifically in the Oregon Health Plan. Management has negotiated
additional capitation rate increases in the 1998 managed care contracts.

Provider Compensation and Benefits
Provider Compensation and Benefits decreased $1.0 million or 8.2% to $11.2
million in 1997 from $12.2 million in 1996. This decrease was in part due to the
introduction of the Management Fee paid to PPI and also the result of the
discipline of the Management Agreement which does not allow the Company to over
distribute provider compensation, putting the Company in a loss position.

Operating Expenses
The operating expenses of Medford represent the costs incurred by PPI and
reimbursed by the Company per the terms of the Management Agreement.


                                       11
<PAGE>   12

As a percentage of Net Revenues less Provider Compensation, total operating
expenses decreased 6.6% in 1997 compared to 1996. Clinic Salaries, Wages and
Benefits, which includes the salaries of all non-provider personnel, increased
$1.6 million to $15.1 million in 1997 from $13.5 million in 1996. The increase
was attributable to the addition of personnel to support the addition of ten new
providers in late 1996. As a percentage of Net Revenue less Provider
Compensation, Clinic Salaries, Wages and Benefits decreased to 42.0% in 1997
from 47.9% in 1996. This decrease is primarily due to the implementation of an
administrative plan to reduce personnel cost per provider.

Purchased Medical Services which include professional and diagnostic services
performed by third parties, increased $0.7 million or 16.7% to $4.9 million in
the twelve months ended December 31, 1997 from $4.2 million in 1996. The
increase is attributable to an expansion of contracted covered services for
certain plans and a full twelve months of participation in certain plans. As a
percentage of Net Revenue less Provider Compensation and Benefits, Purchased
Medical Services decreased to 13.7% in 1997 from 14.8% in 1996. This decrease is
due to increases in Prepaid Healthcare Revenues and an improvement in the
management of Purchased Medical Services.

Medical and Office Supplies which include pharmaceuticals, medical supplies,
office supplies and diagnostic supplies, decreased 3.0% as a percentage of Net
Revenues less Provider Compensation from 20.9% in 1996 to 17.9% in 1997. The
decrease is due to improved purchasing contracts negotiated by management.

General and Administrative expenses decreased 1.2% as a percentage of Net
Revenues less Provider Compensation to 10.7% in 1997 from 11.9% in 1996. The
decrease is attributable to various consulting projects completed during 1997.

A management fee of $1.9 million for the twelve months ended December 31, 1997
was paid to PPI in accordance with the Management Agreement. As Medford's
results improve, the management fee will increase in direct relation. There was
no such management fee in 1996 as the Management Agreement was not effective
until February 1, 1997.

Other Income and Expenses
In 1997, other income included a one-time transition payment of $0.3 million
from PPI.

Twelve Months Ended December 31, 1996 Compared to Twelve Months Ended December
31, 1995

Net Revenues less Provider Compensation increased $0.5 million or 1.8% to $28.2
million in the twelve months ended December 31, 1996 from $27.7 million in the
twelve months ended December 31, 1995. Net Revenues less Provider Compensation
consists of both Fee-for-Service revenue net of contractual discounts and
Prepaid Healthcare revenues less Provider Compensation and Benefits. Net
Fee-for-Service revenues decreased $0.5 million or 1.5% to $33.4 million in the
twelve months ended December 31, 1996 compared to $33.9 million in the twelve
months ended December 31, 1995. Prepaid Healthcare revenues increased $2.0
million or 40.0% to $7.0 million in the twelve months ended December 31, 1996
compared to $5.0 million in 1995. The decrease in Net Fee-for-Service revenues
is mainly attributable to three fewer providers in 1996 compared to 1995. This
decrease was partially offset by an increase in provider productivity. The
increase in Prepaid Healthcare revenue correlates with an increase in the number
of capitated lives and expansion of contracted services over the year ended
December 31, 1996 compared to 1995.

Provider Compensation and Benefits
Provider Compensation and Benefits increased $1.0 million or 8.9% to $12.2
million in the twelve months ended December 31, 1996 from $11.2 million in 1995.
The increase is due to the addition of ten providers in late 1996.

Operating Expenses
Total operating expenses, as a percentage of Net Revenue less Provider
Compensation increased 12.1% to 106.9% in the twelve months ended December 31,
1996 compared to 94.8% in the twelve months ended December 31, 1995. Clinic
Salaries, Wages and Benefits increased $1.7 million or 14.4% to $13.5 million in
the twelve months ended December 31, 1996 from $11.8 million in 1995. As a
percentage of Net Revenues


                                       12
<PAGE>   13

less Provider Compensation, Clinic Salaries, Wages and Benefits increased to
47.9% in 1996 from 42.7% in 1995. The increase was attributable to the addition
of staff which was required to support increased provider productivity, a
planned 7% increase in salaries and benefits, and a staff bonus.

Purchased Medical Services which include professional and diagnostic services
performed by third parties, increased $1.9 million or 82.6% to $4.2 million in
the twelve months ended December 31, 1996 from $2.3 million in 1995. As a
percentage of Net Revenue less Provider Compensation and Benefits, Purchased
Medical Services increased to 14.8% in 1996 from 8.2% in 1995. This growth is
attributable to an increase in prepaid health care revenue and contractual
changes with regard to services covered. The majority of these newly covered
services were purchased from outside providers.


LIQUIDITY AND CAPITAL RESOURCES

As a result of the Transactions, PPI succeeded to the ownership of substantially
all assets and liabilities and PPI assumed all financing activities relating to
the working capital needs of Medford. Per the Management Agreement, PPI will
purchase the necessary capital equipment to support Medford's operations.


                                       13
<PAGE>   14
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                             MEDFORD CLINIC, P.C.

                             FINANCIAL STATEMENTS
                             AS OF DECEMBER 31, 1996 AND 1997
                             TOGETHER WITH AUDITORS' REPORT

<PAGE>   15

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Board of Directors of
Medford Clinic, P.C.:

We have audited the accompanying balance sheets of Medford Clinic, P.C. (an
Oregon professional service corporation) as of December 31, 1996 and 1997, and
the related statements of operations, cash flows and stockholders' equity for
each of the years in the three-year period ended December 31, 1997. These
financial statements are the responsibility of Medford's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Medford Clinic, P.C. as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.


                                          ARTHUR ANDERSEN LLP


Portland, Oregon,
  February 13, 1998


<PAGE>   16

                              MEDFORD CLINIC, P.C.

                BALANCE SHEETS - AS OF DECEMBER 31, 1996 AND 1997

                 (All dollar amounts are expressed in thousands)


                                     ASSETS

<TABLE>
<CAPTION>
                                                                                         1996     1997
                                                                                         ----     ----
<S>                                                                                     <C>       <C>
CURRENT ASSETS:
  Cash and cash equivalents                                                             $   201   $  1
  Patient accounts receivable, net of allowances for contractual discounts
    and uncollectible accounts of $3,430 at December 31, 1996                             6,124      -
  Healthcare receivables                                                                    487      -
  Inventories of drugs and supplies                                                         203      -
  Prepaid expenses and deposits                                                             304      -
  Restricted investments                                                                    250      -
                                                                                        -------   ----
          Total current assets                                                            7,569      1
                                                                                        -------   ----
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $5,303 at
  December 31, 1996                                                                       5,701      -
                                                                                        -------   ----
LONG-TERM DEFERRED TAX ASSET                                                                 77      -
                                                                                        -------   ----
OTHER ASSETS:
  Restricted investments                                                                    250      -
  Other                                                                                      44      -
                                                                                        -------   ----
          Total other assets                                                                294      -
                                                                                        -------   ----
          Total assets                                                                  $13,641   $  1
                                                                                        =======   ====

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Current portion of long-term debt                                                     $ 1,004   $  -
  Drafts payable                                                                            530      -
  Accounts payable                                                                        1,306      -
  Income taxes payable                                                                        5      -
  Accrued healthcare costs                                                                1,027      -
  Accrued compensation and related expenses                                               2,497      -
  Current deferred tax liability                                                          1,568      -
          Total current liabilities                                                     -------   ----
                                                                                          7,937      -
LONG-TERM DEBT, net of current portion                                                  -------   ----
                                                                                          3,924      -
DEFERRED COMPENSATION AND OTHER LONG-TERM LIABILITIES                                   -------   ----
                                                                                            938      -
COMMITMENTS AND CONTINGENCIES                                                           -------   ----

STOCKHOLDERS' EQUITY:
  Common stock-
    $10 stated value; 500 shares authorized; 57 and 0 shares outstanding at
      December 31, 1996 and 1997,respectively                                                 1      -
    No par value; 500 shares authorized, 0 and 61 shares outstanding
      at December 31, 1996 and 1997, respectively                                             -      1
  Additional paid-in capital                                                                  1      -
  Retained earnings                                                                         840      -
                                                                                        -------   ----
          Total stockholders' equity                                                        842      1
                                                                                        -------   ----
          Total liabilities and stockholders' equity                                    $13,641   $  1
                                                                                        =======   ====

</TABLE>

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


<PAGE>   17

                              MEDFORD CLINIC, P.C.

                            STATEMENTS OF OPERATIONS

              FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

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



<TABLE>
<CAPTION>
                                                                  1995           1996          1997
                                                                -------         -------       -------
<S>                                                             <C>             <C>           <C>
REVENUES:
  Fee-for-service, net                                          $33,951         $33,445       $37,167
  Prepaid healthcare                                              5,015           6,996         9,886
                                                                -------         -------       -------
          Net revenues                                           38,966          40,441        47,053

  Less- Provider compensation and benefits                       11,239          12,202        11,157
                                                                -------         -------       -------
          Net revenue less provider compensation
            and benefits                                         27,727          28,239        35,896
                                                                -------         -------       -------
OPERATING EXPENSES:
  Clinic salaries, wages and benefits                            11,838          13,543        15,063
  Purchased medical services                                      2,283           4,174         4,920
  Medical and office supplies                                     5,578           5,909         6,431
  General and administrative expenses                             3,446           3,362         3,844
  Provision for uncollectible accounts                              868           1,069         1,349
  Depreciation and amortization                                   1,125             966         1,108
  Rent and lease expense                                          1,139           1,175         1,389
  Management fee                                                      -               -         1,891
                                                                -------         -------       -------
          Total operating expenses                               26,277          30,198        35,995
                                                                -------         -------       -------
          Operating income (loss)                                 1,450          (1,959)          (99)

OTHER INCOME (EXPENSE):
  Interest income                                                    97             104            56
  Interest expense                                                 (487)           (425)         (334)
  Other                                                               -               -           331
                                                                -------         -------       -------
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR
  INCOME TAXES                                                    1,060          (2,280)          (46)

PROVISION (BENEFIT) FOR INCOME TAXES                                408            (913)            -
                                                                -------         -------       -------
NET INCOME (LOSS)                                               $   652         $(1,367)      $   (46)
                                                                =======         =======       =======

EARNINGS PER SHARE                                            $11,642.86    $(24,410.71)    $(807.02)
                                                             ==========     ===========      ========

WEIGHTED AVERAGE SHARES OUTSTANDING                               56             56             57
                                                                  ==             ==             ==
</TABLE>


        The accompanying notes are an integral part of these statements.


<PAGE>   18

                              MEDFORD CLINIC, P.C.


                            STATEMENTS OF CASH FLOWS

              FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

                 (All dollar amounts are expressed in thousands)


<TABLE>
<CAPTION>
                                                                           1995       1996     1997
                                                                          -------     -------  ------
<S>                                                                       <C>         <C>      <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                                       $   652     $(1,367) $  (46)
  Adjustments to reconcile net income (loss) to net cash provided by
    (used in) operating activities-
      Depreciation and amortization                                         1,125         966      98
      Deferred taxes                                                          347        (893)      -
      Changes in operating assets and liabilities:
        Patient accounts receivable, net                                      426         557     (44)
        Healthcare receivables                                                225          41      95
        Inventories of drugs and supplies                                     (62)         87       -
        Prepaid expenses and deposits                                        (235)        198     (33)
        Other assets                                                          (34)         29      18
        Drafts payable                                                          -         530    (529)
        Accounts payable                                                      (56)        887    (181)
        Income taxes payable                                                   25         (20)      -
        Accrued healthcare costs                                              380         541     (13)
        Accrued compensation and related expenses                             129         406     461
        Other liabilities                                                     (14)       (189)      -
        Deferred compensation and other long-term
          liabilities                                                         (27)        339      29
                                                                          -------     -------  ------
          Net cash provided by (used in) operating
            activities                                                      2,881       2,112    (145)
                                                                          -------     -------  ------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property, plant and equipment                                 (865)     (1,324)    (21)
  Purchases of restricted investments                                      (1,207)       (293)      -
  Proceeds from sale of short-term investments                                  -       1,000       -
                                                                          -------     -------  ------
          Net cash used in investing activities                            (2,072)       (617)    (21)
                                                                          -------     -------  ------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from borrowings under line of credit agreement                       -           -     300
  Repayments under line of credit agreement                                  (350)          -       -
  Proceeds from issuance of long-term debt                                    467           -       -
  Principal repayments of long-term debt                                     (743)       (935)    (82)
  Payments for redemption of common stock                                       -         (17)      -
  Proceeds from issuance of common stock                                        -           -       1
  Cash contributed for Physician Partners, Inc. in merger                       -           -    (200)
  Costs incurred related to Physician Partners, Inc.
    transaction                                                                 -        (940)    (53)
                                                                          -------     -------  ------
          Net cash used in financing activities                              (626)     (1,892)    (34)
                                                                          -------     -------  ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                              183        (397)   (200)

CASH AND CASH EQUIVALENTS, beginning of year                                  415         598     201
                                                                          -------     -------  ------
CASH AND CASH EQUIVALENTS, end of year                                    $   598     $   201  $    1
                                                                          =======     =======  ======
</TABLE>


<PAGE>   19

                              MEDFORD CLINIC, P.C.

                      STATEMENTS OF CASH FLOWS (CONTINUED)

              FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

                 (All dollar amounts are expressed in thousands)


<TABLE>
<CAPTION>
                                                                           1995       1996     1997
                                                                           -----      -----    ----
<S>                                                                        <C>        <C>      <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid for interest                                                    $492       $424    $330
  Cash paid for income taxes                                                  36         19       -
</TABLE>

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

  In February 1997, Medford assigned all assets and liabilities to Physician
    Partners, Inc. as part of the reorganization and merger transaction. The
    book value of Medford's assets and liabilities, including $200 cash, at the
    date of the transaction are presented below:

<TABLE>
<S>                                                         <C>
      Current assets                                        $7,300
      Property, plant and equipment                          5,625
      Other long-term assets                                   603
      Current liabilities                                    7,974
      Long-term liabilities                                  4,811
      Contributed equity                                       743
</TABLE>


        The accompanying notes are an integral part of these statements.

<PAGE>   20

                              MEDFORD CLINIC, P.C.


                       STATEMENTS OF STOCKHOLDERS' EQUITY

              FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

                 (All dollar amounts are expressed in thousands)


<TABLE>
<CAPTION>
                                          Common Stock
                                  -----------------------------
                                                     $10 Stated
                                 No Par Value          Value
                                --------------     --------------
                               Number             Number             Additional
                                 of                 of                 Paid-in     Retained
                               Shares    Amount   Shares   Amount      Capital     Earnings     Total
                               ------    ------   ------   ------      -------     --------     -----
<S>                            <C>       <C>      <C>      <C>         <C>         <C>          <C>
BALANCE, December 31,1994           -       $ -       57     $  1        $  1        $ 2,512    $ 2,514
    Issue of common stock           -         -        5        -           -              -          -
    Redemption of common stock      -         -       (6)       -           -              -          -
    Net income                      -         -        -        -           -            652        652
                                   --       ---       --     ----        ----        -------    -------
BALANCE, December 31, 1995          -         -       56        1           1          3,164      3,166

    Redemption of common stock      -         -       (1)       -           -            (17)       (17)

    Issuance of common stock        -         -        2        -           -              -          -

    Costs incurred
      related to
      Physician
      Partners, Inc.
      transaction                   -         -        -        -           -           (940)      (940)

    Net loss                        -         -        -        -           -         (1,367)    (1,367)
                                   --       ---       --     ----        ----        -------    -------
BALANCE, December 31, 1996
                                    -         -       57        1           1            840        842


    Issuance of common
      stock                        61         1        -        -           -              -          1

    Net loss                        -         -        -        -           -            (46)       (46)

    Transfer of
      ownership to
      Physician
      Partners, Inc.               -          -      (57)       (1)        (1)          (794)      (796)
                                   --       ---       --     ----        ----        -------    -------
BALANCE, December 31, 1997         61       $ 1        -     $  -        $  -        $     -    $     1
                                   ==       ===       ==     ====        ====        =======    =======
</TABLE>

        The accompanying notes are an integral part of these statements.


<PAGE>   21

                              MEDFORD CLINIC, P.C.

                          NOTES TO FINANCIAL STATEMENTS


                 (All dollar amounts are expressed in thousands)


1.  BUSINESS AND ORGANIZATION:

The Medford Clinic, PC (Medford), an Oregon professional corporation, was
incorporated on September 18, 1996 under the name Physician Partners Medford,
PC, for the purpose of effecting a reorganization transaction between Physician
Partners, Inc. (PPI) and three Oregon professional corporations (the Founding
Clinics).

This transaction, consummated on February 1, 1997, resulted in a separation of
operations of the three Founding Clinics between medical professional services
activities (i.e., providers of medical services) and the physician practice
management activities of the business. The professional services activities were
spun off into newly formed professional corporations (New PCs). Medford is one
of the New PCs. The physician practice management business, along with
substantially all of the assets and liabilities of the three Founding Clinics,
i.e., cash, receivables, inventories, prepaids, property, plant and equipment,
other assets, payables, accruals, debt, and certain contractual commitments were
transferred to PPI. The New PCs are responsible for providing medical services
and the related costs for provider compensation and benefits. The assets
transferred to the New PCs, which had zero carrying value, include the
employment agreements between each Company and its providers, certain provider
contracts under which the New PCs will be receiving fee-for-service compensation
and patient medical records.

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

Essentially all of the cash remaining in the New PC after the payments to PPI
under the management agreement will fund the compensation and benefits of
providers employed by the New PCs.

Medford consists of approximately 75 professional providers who offer a wide
range of primary and specialty care. In addition, Medford offers ancillary
services such as radiology, pharmacy and laboratory.

Medford also provides clinical dialysis services through its Rogue Valley
Dialysis Center division. Medford's sites are located in Southern Oregon. A
significant change in the demographics of this area may have an adverse impact
on the business.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION:

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



<PAGE>   22



Cash Equivalents

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

Investments

Short-term and restricted investments are readily convertible to cash and have
original maturity dates that exceed three months. They are classified as
held-to-maturity and mature within one year of the financial statement date.
These investments are in commercial paper and the carrying value approximates
the fair value.

Concentration of Credit Risk

Medford extends credit to patients covered by commercial insurance, Medicare and
Medicaid. Medford manages credit risk with the various public and private
insurance providers, as deemed appropriate by management. Allowances for
contractual discounts and uncollectible accounts have been made for potential
losses, where appropriate.

Inventories of Drugs and Supplies

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

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Maintenance, repairs and minor
replacements are expensed as incurred. When properties are retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the
respective accounts and any gain or loss on disposition is recorded as other
income or expense. There were no disposals in 1995, 1996 and 1997.

Depreciation is computed using the straight-line method over the estimated
useful lives of the respective assets. Estimated lives are as follows:

<TABLE>
<S>                                           <C>
Building and building improvements            7-30 years
Furniture and equipment                       5-12 years
</TABLE>

Restricted Investments

Under the agreements with Oregon Health Plan (OMAP) and Oregon Health Management
System (OHMS), Medford is required to maintain $250 in a restricted or
segregated account for each agreement. Medford can use these funds for purchased
medical services only with approval by OMAP or OHMS as appropriate. The
restriction for the OMAP agreement lapsed in 1997.

Accrued Healthcare Costs

Accrued healthcare costs are calculated based on reported claims and an estimate
based on historical data of incurred but not reported claims. These accrued
healthcare cost estimates will vary from actual results and the differences may
be significant.

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, short-term investments,
patient accounts receivable, restricted investments, accounts payable and
accrued liabilities are a reasonable estimate of their fair value based on the
short maturities of these instruments.



<PAGE>   23



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

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

Other Income

Other income includes a $300 one time payment from PPI. The payment was part of
a transition plan developed by PPI to assist Medford in its transition to the
Management Agreement.

Provider Compensation and Benefits

Provider compensation and benefits consists of the direct costs of patient care
providers such as physicians and other allied health professionals. A
substantial portion of these costs are paid to providers who are stockholders.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Reclassifications

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

Financial Statement Presentation

The accompanying financial statements reflect the assets and liabilities
as of December 31, 1996 and results of operations for the years
ended December 31, 1995 and 1996 for the Medford Clinic, P.C. prior to the
reorganization transaction ("Old Medford"). The Statement of Operations and
Cash Flows for the year ended December 31, 1997 include the results of
operations for Old Medford from January 1 to January 31, 1997. The remainder of
the period represents the operations of Medford Clinic, P.C. ("New PC")
subsequent to the effective date of the reorganization transaction, February 1,
1997.

3.  REVENUES:

Medford reports its revenues according to two principal types of payment
methodologies as discussed below:

Prepaid Healthcare

Medford contracts with various Health Maintenance Organizations (HMOs) to
provide care to plan enrollees. These programs provide for a prepaid monthly
fixed capitation payment on a per member basis to Medford by the HMO for plan
enrollees.

The majority of the HMO contracts are delegated professional risk with limited
institutional risk based upon utilization parameters mutually agreed upon by
the hospital health plan and Medford.

Medford has accrued the claims associated with services provided by outside
providers for which Medford is responsible, and an estimate of incurred but not
reported claims is included in accrued healthcare costs in the accompanying
financial statements.


<PAGE>   24

Medford follows the policy of netting prepaid healthcare revenues and purchased
medical services expenses for the institutional portion of capitated agreements.
Liabilities associated with these contracts are included in accrued healthcare
costs in the accompanying financial statements. Medford's revenue associated
with these contracts was $553 and $2,233 for 1996 and 1997, respectively. There
was no revenue associated with these contracts for 1995.

Fee-For-Service

Patient service revenues are recorded in the period in which services are
provided at established rates. Medford has agreements with third-party payors
that provide payments to Medford at amounts different from its established
rates. The difference between charges generated from agreements with third-party
payors and the related payment amounts are reflected as contractual discounts,
as shown below:

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                   -------------------------
                                                   1995       1996       1997
                                                   ----       ----       ----
<S>                                               <C>        <C>        <C>
Fee-for-service, gross                            $43,299    $45,465    $51,699
Contractual discounts                              (9,348)   (12,020)   (14,532)
                                                  -------    -------    -------
Fee-for-service, net                              $33,951    $33,445    $37,167
                                                  =======    =======    =======
</TABLE>

A summary of the most significant fee-for-service arrangements is as follows:

        Medicare

        A significant portion of Medford's services are provided to Medicare
        patients. Payments for Medicare outpatient services which are not
        covered under capitated contracts are based on a prevailing fee
        schedule. Approximately 27%, 27% and 26% of net patient service revenues
        were derived from services provided to fee-for-service Medicare patients
        in 1995, 1996 and 1997, respectively.

        Medicaid

        Payments for Medicaid outpatient services which are not covered under
        capitated contracts are based on a prevailing fee schedule.
        Approximately 2%, 1% and 2% of net patient service revenues were derived
        from services provided to fee-for-service Medicaid patients in 1995,
        1996 and 1997, respectively.

        Other Payors

        Medford has also entered into payment agreements with certain commercial
        insurance carriers and preferred provider organizations. The basis for
        payment to Medford under these agreements includes discounts from
        established charges.

Major Customer

The following customers represented individually more than 10% of Medford's
net revenue as follows:

<TABLE>
<CAPTION>
                                                      Year Ended
                                                     December 31,
                                                  ------------------
                                                 1995    1996    1997
                                                 ----    ----    ----
<S>                                              <C>     <C>     <C>
Blue Cross/Blue Shield of Oregon                  16%     14%     12%
Oregon Health Plan                                 -      12%     16%
</TABLE>


<PAGE>   25

4.  PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment consists of the following as of December 31, 1996:

<TABLE>
<S>                                                          <C>
Land and land improvements                                $   204
Buildings and leasehold improvements                        2,167
Furniture and equipment                                     8,633
                                                          -------
                                                           11,004
Less- Accumulated depreciation                             (5,303)
                                                          -------
                                                          $ 5,701
                                                          =======
</TABLE>

5.  INCOME TAXES:

Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS 109). SFAS 109 requires that Medford follow
the liability method of accounting for deferred income taxes. Differences
between financial reporting and tax basis is primarily due to the use of the
cash method of accounting for income tax purposes. At December 31, 1996, Medford
had approximately $326 and $733 of net operating loss carryforwards for federal
and state income tax purposes, respectively, that expire in the year 2009.

Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of
Medford's deferred tax assets and liabilities are as follows at December 31,
1996:

<TABLE>
<S>                                                                   <C>
Deferred tax assets:
  Cash to accrual adjustments                                        $ 1,655
  Net operating loss and credit carryforwards                            294
  Other                                                                   35
                                                                     -------
          Gross deferred tax assets                                    1,984

Less- Valuation allowance                                               (293)
                                                                     -------
         Net deferred tax asset                                        1,691

Deferred tax liabilities:
  Cash to accrual adjustments                                         (2,946)
  Property related book to tax differences                              (236)
                                                                     -------
          Gross deferred tax liabilities                              (3,182)
                                                                     -------
          Net deferred tax liability                                 $(1,491)
                                                                     =======
</TABLE>


<PAGE>   26

The net deferred tax liability is reflected in the accompanying balance sheet as
follows at December 31, 1996:

<TABLE>
<S>                                                                   <C>
Current deferred tax liability                                        $(1,568)
Long-term deferred tax asset                                               77
                                                                      -------
                                                                      $(1,491)
                                                                      =======
</TABLE>

The provision (benefit) for income taxes is as follows:

<TABLE>
<CAPTION>
                                                         Year Ended
                                                        December 31,
                                                    --------------------
                                                   1995    1996     1997
                                                   ----  - -----  - ----
<S>                                                <C>     <C>      <C>
Current:
  Federal                                          $  -    $   5    $   -
  State                                              61        -        -

Deferred:
  Federal                                           304     (803)       -
  State                                              43     (115)       -
                                                   ----    -----    -----
                                                   $408    $(913)   $   -
                                                   ====    =====    =====
</TABLE>

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

<TABLE>
<CAPTION>
                                                                            Year Ended
                                                                           December 31,
                                                                       --------------------
                                                                      1995   1996      1997
                                                                      ----   -----     ----
<S>                                                                   <C>     <C>      <C>
Federal tax (benefit) at statutory rate                               $371    $(771)   $   -
Add (deduct):
  State income tax (benefit), net of federal benefit                    68     (142)       -
  Other                                                                (31)       -        -
                                                                      ----    -----    -----
Provision (benefit) for income taxes                                  $408    $(913)   $   -
                                                                      ====    =====    =====
</TABLE>

As of December 31, 1997, the net income before provision for income taxes
represents the results of operations for Old Medford from January 1 to January
31, 1997. The valuation reserve against the deferred tax assets was reversed in
an amount equal to the current tax benefit, resulting in no tax benefit being
reflected in the 1997 statement of operations. The operations of the New PC for
the remainder of the period have resulted in no net income and, accordingly, no
current tax expense is necessary.


<PAGE>   27

6. LONG-TERM DEBT:

Long-term debt at December 31, 1996 was as follows:

<TABLE>
<CAPTION>
<S>                                                                                              <C>
Equipment loan with bank, interest at 7.25%, payable in monthly installments of $22,
   maturing April 2000, secured by equipment, furniture and fixtures and accounts
   receivable                                                                                 $   656
Note payable with title company, interest at 7.90%, payable in monthly
   installments of $6, maturing July 1, 2013, secured by equipment and furniture
   and fixtures                                                                                   689
Equipment loan with bank, interest at 7.25%, payable in monthly installments of $26,
   maturing June 1, 2002, secured by equipment, furniture and fixtures and accounts
   receivable                                                                                   1,384
Equipment loan with bank, interest at 7.75%, payable in monthly installments of
   $45, maturing May 1, 1999, secured by equipment and accounts receivable                      1,195
Facilities loan with bank, interest at 9.00%, payable in monthly installments of
   $4, maturing September 30, 1999, secured by equipment, furniture and fixtures
   and accounts receivable                                                                        108
Mortgage with bank, interest at 8.25%, payable in monthly installments of $5
   maturing November 1, 2008, secured by first deed on real property and
   equipment and furniture and fixtures                                                           453
Mortgage with bank, interest at 8.25%, recalculated on a three year basis on a
   predetermined interest rate formula, payable in monthly installments of
   principal plus interest of $2, maturing December 15, 2014, secured by first
   deed on real property and equipment and furniture and fixtures                                 223
Mortgage with bank, interest at 8.25%, recalculated on a three year basis on a
   predetermined interest rate formula, payable in monthly installments of $3,
   maturing December 15, 2001, secured by second deed on real property and
   equipment and furniture and fixtures                                                           220
                                                                                              -------
          Total long-term debt                                                                  4,928
Less- Current portion                                                                          (1,004)
                                                                                              -------
          Long-term debt, net of current portion                                              $ 3,924
                                                                                              =======
</TABLE>

Medford maintained a revolving line-of-credit agreement with a bank providing up
to $500 secured by accounts receivable. The line-of-credit bore interest at the
lender's prime rate (8.5% at December 31, 1997) plus .25%.

At February 1, 1997, the long-term debt was assumed by Physician Partners, Inc.
and the $500 revolving line-of-credit was consolidated into a $7,500
line-of-credit as a result of the reorganization transaction (Note 1).


<PAGE>   28

7.  RETIREMENT PLANS:

Medford has a 401(k) Profit-Sharing Plan (the 401(k) Plan) in which all
employees are eligible to participate subject to certain eligibility criteria.
The 401(k) Plan permits employees to contribute up to 15% of their annual
compensation (not to exceed certain annual limits imposed by the Internal
Revenue Service). Medford may also make discretionary contributions, which are
immediately 100% vested. Medford also has a Money Purchase Pension Plan in which
all employees are eligible to participate subject to certain eligibility
criteria. Medford contributes 5.7% of the employee's eligible earnings up to $63
and 11.4% of eligible earnings in excess of limitations imposed by the Internal
Revenue Service. These contributions are 100% vested upon eligibility.

Medford's contributions for these plans for the years ended December 31, 1995,
1996 and 1997 were $1,529, $1,656 and $0, respectively.

8.  PROFESSIONAL LIABILITY:

At February 1, 1997, Medford's professional liability insurance policy was
consolidated into a Physician Partners, Inc. policy as a result of the
reorganization transaction (Note 1). The consolidated claims-made policy has no
deductible and includes full prior acts coverage. Management believes the
coverage is adequate to cover any potential claims.

9.  COMMITMENTS AND CONTINGENCIES:

Legal Proceedings

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

Compliance with Rules and Regulations

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

10.  EARNINGS PER SHARE:

All share and per share data have been retroactively restated to give effect to
the recapitalization resulting from the transactions.


<PAGE>   29


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

None.


                                    PART III

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

<TABLE>
<CAPTION>
Name                          Age    Title                                     Term
<S>                           <C>    <C>                  <C>                   <C>  <C>
Stephen Schnugg, M.D.         48     Director and         September 18, 1996     to  Present
                                       President
Dan Wayman, M.D.              42     Director and Vice    September 18, 1996     to  Present
                                       President
Peter Adesman, M.D.           43     Director             January 20, 1997       to  Present
Paul Schroeder, M.D.          44     Director             January 20, 1997       to  Present
Bruce VanZee, M.D.            52     Director             September 18, 1996     to  Present
Clark Cullen, M.D.            42     Director             January 19, 1998       to  Present
Todd Winter. M.D.             32     Director             January 19, 1998       to  Present
Daniel Brandenburg, M.D.      43     Prior Director       September 18, 1996     to  January 19, 1998
Bruce Johnson, M.D.           56     Prior Director       September 18, 1996     to  January 19, 1998
</TABLE>


STEPHEN SCHNUGG, M.D. is the President and a Director of Medford. He received a
bachelor's degree at the University of California, Berkeley (1971) and his
medical degree at UCLA School of Medicine (1975). He served his residency in
Internal Medicine at and received a fellowship in Cardiology from Wadsworth VA
Hospital. Prior to joining Medford, Dr. Schnugg was with Cabrillo Cardiology
Medical Group, Inc. in Oxnard, California. Dr. Schnugg is Board Certified by the
Board of Internal Medicine in Internal Medicine (1980) and the Board of Internal
Medicine in Cardiovascular Diseases (1981). Dr. Schnugg has been Chairman of the
Department of Medicine in Oxnard, Chairman of the Ethics Committee and Director
of the Coronary Care Unit at St. John's Regional Medical Center in Oxnard,
California. He is a Fellow of the American College of Cardiology (1981).

DAN WAYMAN, M.D. is a Director and Vice President of Medford. He received his
bachelor's degree from the University of California, Davis (1979) and his
medical degree from the University of Nevada in Reno, Nevada (1986). He served
his residency in Surgery at the University of Nevada from 1986 to 1987. He was a
resident in Surgery at Kaiser San Francisco in San Francisco, California
(1987-1988) as well as a resident in Otolarngology - Head and Neck Surgery at
Kaiser Oakland in California. Dr. Wayman was previously the supervising
paramedic in Reno, Nevada and Staff Emergency Room Physician at Kaiser Vallejo
in Vallejo, California from 1988 to 1991. He is a member of Alpha Omega Alpha
Honor Society, the American Academy of Facial Plastics and Reconstructive
Surgery, the American Academy of Otolaryngology- Head and Neck Surgery and the
American Medical Association. He is Board Certified in General Surgery and
Otolarngology. He co-authored "The Audiologic Manifestations of Ramsy Hunt
Syndrome", The Journal of Laryngology and Otology (February 1990).

PETER ADESMAN, M.D. is a Director of Medford. He received his medical degree
from the University of Illinois at Chicago in 1979. He was a resident in
Internal Medicine at Oregon Health Sciences University from 1980 to 1982 as well
as a resident in Gastroenterology at Oregon Health Sciences University from 1983
to 1985. Dr. Adesman was Board Certified in Internal Medicine in 1982 and in
Gastroenterology in 1985.

PAUL SCHROEDER, M.D. is a Director of Medford. He received his medical degree
from the University of Oregon Health Sciences Center in 1979. He was a resident
in Obstetrics and Gynecology at Stanford University School of Medicine from 1980
to 1983. Dr. Schroeder was Board Certified in Obstetrics and Gynecology in 1985.



                                     15
<PAGE>   30

BRUCE VAN ZEE, M.D. is a Director of Medford and a practicing physician of the
Company who has spent substantial time and energy to achieve physician
involvement in the governance and management of innovative health care
organizations. He received his medical degree magna cum lada at the University
of Oregon in 1970. He is Board Certified in Internal Medicine and Nephrology,
having completed his post graduate education at the University of Rochester. Dr.
Van Zee has served in a variety of medical management roles which include chair
of the department of medicine and president of the medical society in his
community. He has received advanced post-graduate training in physician
management issues and in biomedical ethics.

CLARK CULLEN, M.D. is a Director of Medford. He received his medical degree from
the University of California in San Diego in 1982. He was a resident in Internal
Medicine at Mercy Hospital and Medical Center of San Diego from 1983 to 1985.
Dr. Cullen was Board Certified in Internal Medicine in 1985.

TODD WINTER, M.D. is a Director of Medford. He received his medical degree from
the University of Washington in 1993. He completed an internship and residency
in Internal Medicine at the Medical Center Hospital of Vermont in 1994 and 1996,
respectively. Dr. Winter was Board Certified in Internal Medicine in 1996.

DANIEL BRANDENBURG, M.D. was a Director of Medford. His term as a Director of
Medford ended January 1, 1998. He received his bachelor's degree in 1976 from
Lewis and Clark College and in 1980 a medical degree from Oregon Health Sciences
University. Dr. Brandenburg completed his residency in Internal Medicine at
Providence Medical Center from 1981 to 1983. He is Board Certified by the
National Board of Medical Examiners and the American Board of Internal Medicine.
Prior to joining Medford he was a partner with North Coast Internal Medicine in
Eureka, California. Dr. Brandenburg is a member of the American College of
Physicians and the Jackson County Medical Association. He was the 1986 recipient
of the "Service with Love Award" from the St. Joseph Hospital Staff in Eureka,
California. Dr. Brandenburg is the author of "The Intravenous Marijuana
Syndrome" Western Journal of Medicine (July 1986).

BRUCE JOHNSON, M.D. was a Director of Medford. His term as a Director of Medford
ended January 1, 1998. He received his bachelor's degree from Charleton College
in 1963 and medical degree from the University of Nebraska College of Medicine
in 1967. Dr. Johnson performed his Family Practice residency at San Bernadino
County Hospital in San Bernadino, California. He is Board Certified in Family
Practice. Prior to joining Medford, Dr. Johnson was in private practice and was
a partner with Southern Oregon Family Practice Group. Dr. Johnson presently
serves on the Ashland Community Hospital Board of Directors, the Ashland
Community Hospital Foundation, and is on the Executive Committee for Jackson
County Medical Society. Previously, he was a Director of the Rogue Valley
Physicians Service, Health Masters of Oregon, Oregon Heart Association, and
Prime Care (Southern Oregon Independent Physicians Association). He was past
president of the Jackson County Medical Society as well as past president of
Ashland Community Hospital Medical Staff. Presently, he is a member of the
American Medical Association, the American Academy of Family Practice, the
American Heart Association, the American Geriatrics Society, the Oregon Medical
Association, the Oregon Academy of Family Practice, the Jackson County Medical
Society and the Jackson County Academy of Family Practice.


ITEM 11: EXECUTIVE COMPENSATION


COMPENSATION OF DIRECTORS

Medford Directors are entitled to receive compensation of $375 per month for
serving on the Board of Directors. An additional $200 per month was paid to
Daniel Brandenburg and Dan Wayman for serving on the Executive Committee and an
extra $375 per month was paid to Peter Adesman, Bruce Johnson and Paul Schroeder
for duties as Department Chairmen. Stephen Schnugg also received an additional
$925 per month for serving as President of Medford. Furthermore, Directors are
reimbursed for reasonable and actual out-of-pocket expenses incurred in
connection with duties performed as Directors.

The following table summarizes the compensation received by the Company's Board
of Directors:


                                       16
<PAGE>   31


<TABLE>
<CAPTION>
Name                          1995       1996       1997
----                          -------   -------    -------
<S>                         <C>        <C>        <C>
Stephen Schnugg, M.D.,      $ 9,000    $11,250    $18,000
   President
Dan Wayman, M.D.,             6,900      6,900      6,900
  Vice President
Peter Adesman, M.D               --         --      9,000
Daniel Brandenburg, M.D       6,900      6,900      6,900
Bruce Johnson, M.D            9,000      9,000      9,000
Paul Schroeder, M.D              --         --      9,000
Bruce Van Zee, M.D           18,000     14,625      4,500
</TABLE>


COMPENSATION OF EXECUTIVE OFFICERS

Other then the compensation provided to Dr. Schnugg as President, no
compensation was provided to any executive officer of Medford for their duties
as officers in the years ended 1995, 1996 and 1997. Reimbursements for
reasonable and actual out-of-pocket expenses incurred in connection with their
duties as officers were made.


ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

<TABLE>
<CAPTION>
                                      Shares of Company
                                        Common Stock
MEDFORD                               Beneficially Owned      Percent Outstanding
--------                              ------------------      -------------------
<S>                                   <C>                     <C>
Stephen Schnugg, M.D.                         1                      1.6%
Dan Wayman, M.D.                              1                      1.6%
Peter Adesman, M.D.                           1                      1.6%
Clark Cullen, M.D.                            1                      1.6%
Todd Winter, M.D.                             1                      1.6%
Paul Schroeder, M.D.                          1                      1.6%
Bruce Van Zee                                 1                      1.6%
All directors and executive
officers of the Company as a                  7                      11.7%
group
</TABLE>


ITEM 13:  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.


                                       17
<PAGE>   32
w
                                     PART IV

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


(a)  Financial Statements, Financial Statement Schedules and Exhibits
   (1)  Financial Statements
        The following financial statements of Medford Clinic, PC are included in
        Part II, Item 8 of this report:

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

    (2) Financial Statement Schedules
        None required.

    (3) Exhibits

        2.1*   Amended and Restated Agreement and Plan of Reorganization and
               Merger, dated as of September 19, 1996, as amended on November 4,
               1996, November 29, 1996 and December 31, 1996, among Physician
               Partners, Inc., The Corvallis Clinic, P.C., HealthFirst Medical
               Group, P.C. and Medford Clinic, P.C.
        3.1**  Amended and Restated Articles of Incorporation of Medford Clinic,
               P.C.
        3.2**  Bylaws of Medford Clinic, P.C.
       10.1    Amended and Restated 1997 Stock Option Plan for all Non-Employee
               Providers Affiliated with PPI dated November 12, 1997
       27.1    Financial Data Schedule


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

                                       18
<PAGE>   33
                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                            The Medford Clinic, P.C.
                                            (Registrant)

                                         By /s/ Stephen Schnugg, M.D.
                                            ------------------------------------
                                            Stephen Schnugg, M.D.
                                            President and Director

                                            3/30/98

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

By  /s/ Stephen Schnugg, M.D.            By /s/ Dan Wayman, M.D.
    ---------------------------------       ------------------------------------
    Stephen Schnugg, M.D.                   Dan Wayman, M.D.
    President and Director                  Vice President and Director

    3/30/98                                 3/30/98

By  /s/ Vicki S. Wagner                  By /s/ Peter Adesman, M.D.
    ---------------------------------       ------------------------------------
    Vicki S. Wagner                         Peter Adesman, M.D.
    Chief Financial Officer and             Director
    Controller

    3/30/98                                 3/30/98

By  /s/ Paul Schroeder, M.D.             By /s/ Bruce Van Zee, M.D.
    ---------------------------------       ------------------------------------
    Paul Schroeder, M.D.                    Bruce Van Zee, M.D.
    Director                                Director

    3/30/98                                 3/30/98

By  /s/ Clark Cullen, M.D.               By /s/ Todd Winter, M.D.
    ---------------------------------       ------------------------------------
    Clark Cullen, M.D.                      Todd Winter, M.D.
    Director                                Director

    3/30/98                                 3/30/98