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


                        SECURITIES AND EXCHANGE COMMISSION
                              Washington, D.C.  20549

                                     FORM 10-K
                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                        THE SECURITIES EXCHANGE ACT OF 1934

                    For the fiscal year ended December 31, 1997

                             Commission File Number 0-29172

                            PROMEDCO MANAGEMENT COMPANY
              (Exact name of registrant as specified in its charter)

             Delaware                                      75-2529809
 (State or other jurisdiction of                         (I.R.S. Employer
  incorporation or organization)                       Identification Number)

      801 Cherry Street, Suite 1450
              Fort Worth, Texas                              76102
   (Address of principal executive offices)                (Zip Code)

        Registrant's telephone number, including area code:  (817) 335-5035

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

         Securities registered pursuant to Section 12(g) of the Act:  Common 
                             Stock, $.01 par value

         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  aggregate  market value of the  registrant's  Common Stock held by
non-affiliates  of the  registrant as of March 2, 1998 (computed by reference to
the closing price of such stock on the Nasdaq National Market) was $135,397,378.

         As of March 2, 1998,  there were 12,959,756  shares of the registrant's
Common Stock outstanding.

                   DOCUMENTS INCORPORATED BY REFERENCE

                DOCUMENT                                      WHERE INCORPORATED

Portions of the Registrant's definitive Proxy Statement
 regarding the 1998 Annual Meeting of Stockholders                   Part III

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



<PAGE>



                   PROMEDCO MANAGEMENT COMPANY

                            FORM 10-K


                        Table of Contents
<TABLE>
<CAPTION>

Item                                                                                                           Page


                                                      Part I
<S>      <C>                                                                                                   <C>
 1       Business...........................................................................................     1
 2       Properties.........................................................................................     8
 3       Legal Proceedings..................................................................................     8
 4       Submission of Matters to a Vote of Security Holders................................................     9

                                                      Part II

 5       Market for Registrant's Common Equity and Related Stockholder Matters..............................     9
 6       Selected Financial Data............................................................................    11
 7       Management's Discussion and Analysis of Financial Condition and Results of
         Operations.........................................................................................    12
 8       Financial Statements...............................................................................    20
 9       Changes in and Disagreements With Accountants on Accounting and Financial
         Disclosure.........................................................................................    20

                                                     Part III

10       Directors and Executive Officers of the Registrant.................................................    21
11       Executive Compensation.............................................................................    21
12       Security Ownership of Certain Beneficial Owners and Management.....................................    21
13       Certain Relationships and Related Transactions.....................................................    21

                                                      Part IV

14       Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................    22

</TABLE>


<PAGE>



                                    PART I

Item 1.  Business

General

         ProMedCo   Management  Company  ("ProMedCo"  or  the  "Company")  is  a
physician practice management company that consolidates its affiliated physician
groups into primary-care-driven multi-specialty networks. The Company focuses on
pre-managed-care secondary markets located principally outside of or adjacent to
large  metropolitan  areas. The Company believes that the primary care physician
increasingly  will be the principal  point of access to the healthcare  delivery
system  and will  control,  directly  or  indirectly,  a growing  percentage  of
healthcare  expenditures,  and it therefore  affiliates  with  physician  groups
having a primary care orientation. ProMedCo assists in expanding and integrating
the affiliated groups into  comprehensive  multi-specialty  networks to increase
their market presence.  The groups expand through  affiliations  with additional
primary care  physicians and  specialists  and selective  additions of ancillary
services.  The groups are thus well positioned to become the physician component
of locally  developing  managed care delivery systems.  In addition to providing
operating and expansion capital, the Company provides its affiliated groups with
a broad range of strategic and management expertise and services.

     ProMedCo  commenced  operations in December  1994 and has since  affiliated
with  approximately  980 providers in 10 states  consisting of approximately 350
physicians and 100 mid-level providers (primarily physician assistants and nurse
practitioners)  in affiliated  physician groups and approximately 530 physicians
in  associated  IPA  networks.  Currently,  approximately  62% of the  Company's
affiliated  physicians are primary care providers.  The Company has also entered
into a letter of intent to  affiliate  with  Berkshire  Physicians  and Surgeons
("Berkshire"),   located   in   Pittsfield,   Massachusetts.   Berkshire   is  a
multi-speciality physician group with 108 providers consisting of 79 physicians,
15 mid-level  providers and 14 physicians  in an  associated  IPA network.  This
affiliation  is subject to  regulatory  approval  and  approval  by  Berkshire's
shareholders.

     During  1997,  the Company  expanded the scope of its services by acquiring
Health  Plans,  Inc.  ("Health  Plans"),  a provider  of  capitation  management
services.  These services include clinical  quality  assessment,  enrollment and
patient registration,  capitation processing and payment, utilization management
and case management.  Health Plans, located in Portland,  Maine,  contracts with
health  maintenance  organizations  ("HMOs")  and  other  third-party  payors to
arrange for the provision of comprehensive health services to their members on a
capitation  basis.  Currently,  the  Company  provides  such  services  covering
approximately  100,000 capitated lives through its affiliated groups, as well as
through associated IPA networks.

Development and Operations

    Market Development

         ProMedCo's  development  objective is to affiliate with leading primary
care   groups   or    primary-care-oriented    multi-specialty   groups   within
pre-managed-care  secondary  markets.  The Company performs  research and market
analyses to identify priority markets, which generally are communities that have
populations  of at least 30,000 and less than 500,000,  typically have less than
20% HMO penetration, and meet other market criteria. Such market criteria relate
to,  among  other  things,  the number of primary  care  physicians  relative to
demand, Medicare payment rates, physician group competition,  proximity to other
ProMedCo groups, the number of hospitals,  demographics,  population growth, and
the likelihood

                                                         1

<PAGE>



of  significant  future HMO growth.  The Company  estimates  that there are over
1,200 markets  representing a total population of approximately 120 million, and
containing  an  estimated  144,000  physicians   generating  $50-60  billion  in
revenues, that currently satisfy its priority market criteria. The Company ranks
these markets based upon the degree to which they satisfy its criteria, enabling
the Company further to prioritize its development efforts.

         Within its priority  markets,  ProMedCo seeks to affiliate  either with
primary  care groups or with  multi-specialty  groups that are  committed to the
importance  of primary care  physicians.  The Company  seeks to  affiliate  with
groups  that  have a  reputation  for  providing  high  quality  care and have a
substantial share of their local markets or the potential to acquire such share.
These groups are frequently the largest groups in their markets.

         Once ProMedCo has identified a group meeting its criteria,  the Company
conducts  preliminary  discussions  to  ascertain  the  group's  interest  in an
affiliation. If such interest is established,  the Company conducts site visits,
analyzes  financial  and other data,  and  conducts an extensive  due  diligence
investigation  into  the  group's  operations,  leadership,  and  commitment  to
long-term growth. Assuming a favorable outcome of the investigation, the Company
proposes to purchase  the  group's  operating  assets and enter into a long-term
service agreement with the group. See "--Affiliation Structure."

         Upon  affiliation  with a group,  the  Company  immediately  begins  to
facilitate  expansion of the group within its local market.  Group expansion may
be accomplished through affiliations with additional  primary-care and specialty
physicians  in  the  community,  recruitment  of  physicians  from  outside  the
community,  addition of physician  extenders and expansion of ancillary services
such as radiology and laboratory services. The Company will also seek to improve
the group's  profitability  through  management of expenses and strengthening of
existing managed care contracts and conversion to capitation.

    Current Operations

     Since commencing  operations in December 1994, ProMedCo has affiliated with
approximately  980  providers  in 10  states  consisting  of  approximately  350
physicians and 100 mid-level providers (primarily physician assistants and nurse
practitioners)  in affiliated  physician groups and approximately 530 physicians
in  associated  IPA  networks.   Currently,   approximately  62%  of  ProMedCo's
affiliated  physicians are primary care providers.  The Company has also entered
into  a  letter  of  intent  to  affiliate  with   Berkshire.   Berkshire  is  a
multi-specialty  physician group with 108 providers consisting of 79 physicians,
15 mid-level  providers  and 14 physicians  in an  associated  IPA network.  The
primary  care  physicians  generally  consist of family  practitioners,  general
internists,   pediatricians,    obstetrician/gynecologists,    and   urgent-care
physicians. Increasingly, these physicians are augmented by mid-level providers,
primarily consisting of physician  assistants and nurse practitioners,  whom the
Company believes  significantly increase the efficiency of delivery of a group's
primary care services.  Each of the physician  groups also provides,  to varying
degrees, medical specialty services and ancillary services.  Medical specialties
currently  include  anesthesiology,  endocrinology,   gastroenterology,  general
surgery,  infectious diseases,  nephrology,  neurology,  occupational  medicine,
orthopedic surgery, otolaryngology, pulmonology, rheumatology, and urology. Each
of the physician  groups is continually  seeking to expand its practice  through
the addition of primary care physicians and specialties.

         The physician  groups offer, to varying  degrees,  a range of ancillary
services such as  audiology,  clinical  laboratories,  diagnostic  imaging,  and
stress  testing.  The  Company  and each of its  affiliated  groups  continually
evaluate  the  addition  of  ancillary   services  to  enhance  the  growth  and
profitability of such group.


                                                         2

<PAGE>



         The following  table sets forth  information  concerning  the Company's
providers as of March 2, 1998:
<TABLE>
<CAPTION>

                                                                        Beginning Of
                                                                          ProMedCo                    Mid-Level   Medical
                                                      Location           Affiliation      Physicians Providers    Specialties
<S>                                              <C>                  <C>                 <C>          <C>            <C>
Affiliated Physician Groups:
   North Texas Medical Surgical, P.A...........  Denton, TX           June 1995                   8         --           3
   Abilene Diagnostic Clinic Practices.........  Abilene, TX          December 1995              36         11           9
   Cullman Primary Care, P.C...................  Cullman, AL          March 1996                 11          3           1
   Morgan-Haugh, P.S.C.........................  Mayfield, KY         April 1996                 13          2           6
   HealthFirst Medical Group, P.A..............  Lake Worth, TX       June 1996                  14          7           4
   King's Daughters Clinic, P.A................  Temple, TX           September 1996             44         13          17
   The Medical Group of Northern Nevada........  Reno, NV             October 1996               17         11           7
   Naples Medical Center, P.A..................  Naples, FL           March 1997                 38          4          18
   Beacon Medical Group, P.C.(1)...............  Harrisburg, PA       April 1997                 37          3           7
   Intercoastal Medical Group, Inc.............  Sarasota, FL         August 1997                24          2           4
   Christie Clinic Association.................  Champaign, IL        August 1997                87         39          44
   Thomas-Spann Clinic, P.A....................  Corpus Christi, TX   December 1997              12          1           3
   HealthStar Physicians, P.C..................  Knoxville, TN        December 1997              13          4           6
                                                                                          ---------  ---------
                                                                                                354        100
IPA Physicians:
   PMC Medical Management IPA..................  Maine
                                                 New Hampshire        June 1997                 510         --          --
   Christie Clinic IPA.........................  Champaign, IL        August 1997                18         --          --
                                                                                          ---------  ---------
                                                                                                528         --
Total Providers................................                                                 882        100
                                                                                          =========  =========
</TABLE>

(1) Cowley Medical Associates of Harrisburg, PA affiliated with ProMedCo 
    effective November 1997 and was merged with Beacon Medical Group in 
    December 1997.

     During  1997,  the Company  expanded the scope of its services by acquiring
Health  Plans,  a provider of capitation  management  services.  These  services
include  clinical  quality  assessment,  enrollment  and  patient  registration,
capitation processing and payment,  utilization  management and case management.
Through this subsidiary, now known as PMC Medical Management,  Inc., the Company
contracts with HMOs and other third-party payors to arrange for the provision of
comprehensive health services to their members on a capitation basis. Currently,
the Company is providing  such services to  approximately  100,000 lives through
IPA networks of  approximately  530  physicians  and 20 hospitals in Maine,  New
Hampshire and Illinois and through affiliated  physician groups in Pennsylvania,
Illinois and Texas. The Company believes that this acquisition has significantly
augmented its contracting,  information systems, and clinical expertise relating
to  risk-sharing  contracts,  and has  enhanced  the services it provides to its
affiliated  physician  groups and managed care delivery systems develop in their
local markets.

    Management Services

         Upon affiliating with a physician group,  ProMedCo  immediately assumes
the management of all aspects of the group's operations other than the provision
of medical  services.  The operating assets acquired by the Company are provided
for  the  exclusive  use of  the  group,  and  substantially  all  non-physician
personnel  utilized in the group's  practice  become  employees  of the Company.
ProMedCo  provides the full range of  administrative  services  required for the
group's operations,  including facilities management and the purchase of medical
malpractice insurance, supplies, and equipment, and a broad

                                                         3

<PAGE>



spectrum of financial and accounting services,  including budgeting, billing and
third-party  reimbursement  services.  The Company also provides each group with
operating  capital and expansion capital for affiliations with other physicians,
additions of ancillary  services,  and  improvements of existing  facilities and
equipment. As managed care organizations ("MCOs") expand their presence into the
local market,  the Company provides expertise in the negotiation of managed care
contracts and the management of risk-sharing  arrangements.  Currently,  four of
the Company's  affiliated groups derive a significant  portion of their revenues
from managed care contracts.

         While the Company  provides a  centralized  source of  expertise in all
aspects of management,  it believes that each physician group presents different
operational   issues  and   challenges   and  therefore   employs  a  system  of
decentralized  local management of each group. The Company generally retains the
group's existing  administrative staff as ProMedCo employees,  adding additional
management  personnel as the group expands. The physicians in the group continue
to maintain full professional control of the practice of medicine, including the
hiring and termination of physicians and the setting of practice  guidelines and
standards.  The Company  establishes  for each group a policy council  comprised
equally of  physicians  and  ProMedCo  representatives  to  determine  the broad
strategic and operational policies of the group. See "--Affiliation Structure."

         The  Company  believes  that  sophisticated   information  systems  are
essential to reducing the cost and  improving the quality of  healthcare.  Basic
practice  management  systems have long been  necessary  for  efficient  patient
scheduling  and  registration,  billing,  and  collections.  In the future,  the
integration  of  financial  practice,  managed  care,  and  clinical  systems is
expected to be imperative for physician groups to remain  competitive.  Clinical
systems will provide  information in the  physician's  workplace -- such as case
management,  practice guidelines,  and clinical pathways -- that will facilitate
the  improvement of patient care.  Electronic  medical records will automate the
clinical  workflow and allow access to patient records from multiple sites, thus
providing more effective clinical decision support and increasing the quality of
care.   Systems  that  effectively   measure   clinical   outcomes  and  patient
satisfaction  are likely to become  increasingly  important as quality becomes a
more significant factor in maintaining and increasing market share.

         Rather  than  attempting  to develop  its own  proprietary  information
systems,  ProMedCo believes it is more  cost-effective,  in light of the rapidly
changing healthcare and information technology environments,  to utilize systems
developed and proven by independent  companies.  Although there are many systems
currently  under  development,  none is yet  available  that,  in the  Company's
opinion,  effectively  address  all of the  evolving  needs of  physicians.  The
Company  initially  works with its affiliated  physician  groups to maximize the
performance of the groups' existing systems.  As MCOs increase their penetration
of each group's market, new or enhanced  information systems will be implemented
as required.  Ultimately, the Company expects to interface all of its affiliated
clinics with a central data  repository  for  consolidation  and  evaluation  of
operating, clinical, and financial data.

     The  Company  continues  to assess the impact of the Year 2000 issue on its
information  systems  and  operations.  With  disparate  systems in place at the
Company's various  affiliated groups, the assessment process continues with each
new affiliation. Noncompliant practice management systems could be acquired in a
new affiliation,  which would require system  remediation or replacement.  Given
these issues,  the Company is unable to estimate the costs of the remediation or
replacements  that may be  required.  With its  current  strategy  of  replacing
inadequate practice management  systems,  however,  the Company does not believe
that Year 2000 issues will cause a conversion to be more or less  difficult than
a  typical  system  conversion.  If  the  issues  prove  more  significant  than
anticipated,

                                                         4

<PAGE>



or if  noncompliant  third-party  systems  "reinfect"  the  Company's  Year 2000
compliant  systems,  there could be a material  adverse  impact on the Company's
financial position, results of operations or cash flows.

Affiliation Structure

         ProMedCo  utilizes  an  affiliation  structure  that  fully  aligns the
interests of the Company with those of its physician  partners.  Moreover,  each
physician  group  retains  professional  autonomy  and control  over its medical
practices  through  continued  ownership  and  governance  of  its  professional
corporation or similar organization.

         When a  physician  group has agreed to  affiliate  with  ProMedCo,  the
Company typically purchases the group's operating assets, excluding real estate,
and the group  enters into a  long-term  service  agreement  with the Company in
exchange for a  combination  of common  stock,  cash,  other  securities  of the
Company, and/or assumption of certain liabilities. The Company has utilized, and
intends to continue to utilize, common stock in payment of a significant portion
of its consideration for affiliated physician groups.

         The service agreements between the Company and the physician groups are
for a term of 40 years and cannot be terminated  by either party without  cause,
consisting  primarily  of  bankruptcy  or  material  default.  Under the service
agreement,  the Company  provides the physician  group with the  facilities  and
equipment used in the group's medical practice,  assumes  responsibility for the
management of the operations of the practice,  and employs  substantially all of
the non-physician  personnel  utilized by the group. Upon expiration of the term
of a service  agreement or in the event of  termination,  the physician group is
required to purchase the assets  related to the practice,  including  intangible
assets, then owned by the Company at their current book value. Concurrently with
the execution of a service  agreement,  the physician group is required to enter
into an  employment  contract  with  each of its  physicians,  typically  for an
initial term of five years. The employment  contract  provides for the repayment
by  the  physician  of  all  or a  portion  of  the  physician's  share  of  the
consideration  paid by  ProMedCo  for the group's  operating  assets and service
agreement in the event of the physician's breach of the contract. Each physician
group also enters into an agreement  not to compete  with the Company,  and each
physician's  employment  contract  includes an agreement not to compete with the
physician  group  during the period of his  employment  and for a period of time
thereafter,  typically two years. The employment contract also provides that the
Company is a third-party beneficiary entitled to enforce the repayment provision
and the agreement not to compete.

         The income of both the Company and the physicians  within each group is
dependent upon the operating income of the group.  Under its service  agreement,
the Company  receives a fixed percentage  (typically  15-20%) of group operating
income,  which is defined as the group's net revenue less certain  contractually
agreed-upon    clinic   expenses   before    physician    salaries   and   other
physician-related   expenses.  In  addition,   the  Company  typically  receives
implementation and transitional fees in return for significant up-front services
required in the first one to three months of the  affiliation.  The distribution
to the Company is increased  or decreased by a percentage  (typically a variable
percentage ranging from 25% to 50%, depending upon the amount of revenue) of the
group's surplus or deficit, respectively, arising from risk-sharing arrangements
pursuant to capitated  managed care  contracts.  Thus,  both the Company and the
physicians have incentives to improve the group's  operating  income and revenue
surplus under risk-sharing arrangements,  and both share the risk that the group
may have  limited or no  operating  income or a deficit  under its  risk-sharing
arrangements. Although the risk-sharing provisions currently

                                                         5

<PAGE>



do not have a material effect upon the Company's  operating income,  the Company
expects such  provisions  to become  significant  as managed care emerges in its
groups'  local  markets and its groups enter into managed  care  contracts.  See
"Item 7 --  Management's  Discussion  and  Analysis of Financial  Condition  and
Results of Operations."

         The policy council  established for each group is comprised  equally of
physicians  and ProMedCo  representatives.  The council  meets  periodically  to
consider and  determine  broad  policies  regarding  strategic  and  operational
planning, marketing,  arrangements with MCOs, and other major issues involved in
the group's  operations.  This  ensures  that the  physicians  within each group
retain a significant voice in the expansion and operation on their group,  while
benefiting from ProMedCo's management experience and expertise.

Competition

         The physician practice management  industry is highly competitive.  The
Company is subject to significant competition both in affiliating with physician
groups and in seeking managed care contracts on behalf of its affiliated groups.
Its competitors include hospitals,  managed care organizations,  other physician
groups, and other physician practice management companies. Many of the Company's
competitors are larger,  have substantially  greater resources,  and have longer
established  relationships  with  purchasers  of  healthcare  services  than the
Company.  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  to enter into  affiliations  with
physician groups on terms beneficial to the Company.

         The  Company  also  experiences  competition  in  the  recruitment  and
retention of qualified  physicians and other healthcare  professionals on behalf
of its affiliated  physician groups.  There can be no assurance that the Company
will be able to recruit or retain a sufficient  number of  qualified  physicians
and other healthcare professionals to continue to expand its operations.

Government Regulation

     As a participant in the healthcare  industry,  the Company's operations and
relationships are subject to extensive and increasing  regulation by a number of
governmental  entities at the federal and state levels. The Company believes its
operations  are  in  material  compliance  with  applicable  laws.  Because  the
structure of its relationship  with physician groups is relatively new, however,
many aspects of the Company's  business  operations have not been the subject of
state or federal regulatory interpretation.  There can therefore be no assurance
that a review of the Company's or the affiliated  physicians' business by courts
or  regulatory  authorities  will  not  result  in a  determination  that  could
adversely affect the operations of the Company or that the healthcare regulatory
environment  will not change so as to  restrict or require  modification  of the
Company's  or  its  affiliated  physician  groups'  operations  or  limit  their
liability to expand.

         The  Company  estimates  that  approximately  25% of the net  physician
groups   revenue   of  the   Company   is   derived   from   payments   made  by
government-sponsored healthcare programs (principally Medicare and Medicaid). As
a  result,  any  change  in  government  reimbursement  regulations,   policies,
practices, interpretations, or statutes could adversely affect the operations of
the Company. There are also state and federal civil and criminal status imposing
substantial penalties, including civil and criminal

                                                         6

<PAGE>



fines and imprisonment,  on healthcare providers that fraudulently or wrongfully
bill governmental or other third-part payors for healthcare services.

         The laws of many  states  prohibit  business  corporations  such as the
Company from practicing medicine and employing  physicians to practice medicine.
The Company performs only  non-medical  administrative  services,  does not hold
itself out as a provider of medical services, and does not exercise influence or
control  over  the  practice  of  medicine  by the  physicians  with  whom it is
affiliated.  Accordingly,  the  Company  believes  it is  not  in  violation  of
applicable  state laws  relating  to the  practice of  medicine.  In addition to
prohibiting  the  practice of  medicine,  numerous  states  limit the ability of
entities  such as the  Company  to  control  physician  revenues  or to  receive
portions of such revenues in excess of the value of services  provided.  In most
states, such so-called  "fee-splitting"  laws provide that the laws are violated
only if a physician shares fees with a referral source. In Florida, however, the
Board of Medicine has recently  interpreted the Florida  fee-splitting  law very
broadly so as arguably to include the payment of any percentage-based management
fee,  even to a management  company that does not refer  patients to the managed
group.  That  Board of  Medicine  opinion  is  being  appealed.  Because  of the
structure  of the  relationship  of the Company  with its  affiliated  physician
groups  and   managed   IPAs  and in  light  of that  opinion,  there  can be no
assurance that a review of the Company's  business by  governmental  authorities
will not have an adverse effect upon the Company.

         Certain  provisions of the Social  Securities Act, commonly referred to
as the fraud and abuse  provisions,  prohibit the payment or receipt of any form
of remuneration in return for the referral of Medicare or Medicaid patients care
opportunities,  or in  return  for the  recommendation,  arrangement,  purchase,
lease,  or order of items or  services  that are covered by Medicare or Medicaid
programs.  Many states have adopted similar  prohibitions  against payments that
are  intended  to induce  referrals  of  Medicaid  and other  third-party  payor
patients.  Although  the  Company  believes  that  neither  it  nor  any  of its
affiliated  physician  groups  is in  violation  of any such  prohibitions,  its
operations  do not fit within  any of the  existing  or  proposed  federal  safe
harbors and may therefore be subject to challenge.

         Significant  prohibitions  against physician  referrals were enacted by
Congress in the Omnibus Budget  Reconciliation  Act of 1993.  Subject to certain
exemptions, a physician or a member of his or her immediate family is prohibited
by this  legislation from referring  Medicare or Medicaid  patients to an entity
providing  "designated  health services" in which the physician has an ownership
or  investment  interest  or  with  which  the  physician  has  entered  into  a
compensation  arrangement.  Some  states  have also  enacted  similar  so-called
"physician  self-referral"  laws, and additional states may follow.  The Company
believes that its practices fit within  exemptions  contained in such  statutes.
Nevertheless,   expansion   of  the   operations   of  the  Company  to  certain
jurisdictions  may require  structural and  organizational  modifications of the
Company's  relationships  with  physician  groups to comply  with new or revised
state statutes.

         Because the Company's affiliated physician groups remain separate legal
entities,  they may be deemed  competitors  subject to a range of antitrust laws
that  prohibit  anti-competitive  conduct,  including  price  fixing,  concerted
refusals to deal,  and  division of market.  The Company  intends to comply with
such state and federal laws in its development of integrated healthcare delivery
networks,  but there can be no assurance that a review of the Company's business
by courts or  regulatory  authorities  will not result in a  determination  that
could adversely affect the operation of the Company and its affiliated physician
groups.


                                                         7

<PAGE>



         As a result of the continued  escalation  of  healthcare  costs and the
inability of many  individuals to obtain health  insurance,  numerous  proposals
have  been or may be  introduced  in the U.S.  Congress  and  state  legislators
relating to  healthcare  reform.  There can be no  assurance  as to the ultimate
content,  timing,  or effect of any  healthcare  reform  legislation,  nor is it
possible at this time to estimate  the impact of  potential  legislation,  which
could be material, on the Company.

Insurance

         The Company's  affiliated physician groups maintain medical malpractice
liability insurance in the amount of $1 million per occurrence and $3 million in
the aggregate.  The Company is named as the  additional  insured on the policies
maintained by each of its affiliated  groups. The Company also maintains general
liability and umbrella  coverage,  including excess  malpractice  coverage of $5
million  per  occurrence  and  $5  million  in  the  aggregate.   The  cost  and
availability  of such  coverage  has varied  widely in recent  years.  While the
Company believes its insurance  policies are adequate in amount and coverage for
its current  operations,  there can be no assurance that the coverage maintained
by the Company will be sufficient to cover all future claims or will continue to
be available in adequate amounts or at a reasonable cost.

Employees

         As of December  31,  1997,  the Company  employed  approximately  2,000
people,  including  those employed in its corporate  office.  The Company is not
party to any  collective  bargaining  agreement with a labor union and considers
its relations  with its employees to be good. The Company does not employ any of
the physicians practicing in its affiliated groups.

Item 2.  Properties

         The Company currently leases  approximately  5,500 square feet of space
at 801 Cherry Street in Fort Worth,  Texas,  where its headquarters are located,
under a lease  terminable  upon 60 days'  notice by either  party.  The  Company
believes these  facilities are adequate for its current uses and that additional
space is available to accommodate its anticipated growth.

         The Company  leases,  subleases,  or  occupies  pursuant to its service
agreements  the  clinic  facilities  at which its  affiliated  physician  groups
conduct   their   practices.   The  leases  have  varying   terms  ranging  from
month-to-month  to ten years.  The Company  anticipates  that as the  affiliated
practices  continue to grow and add new services,  expanded  facilities  will be
required.

Item 3.  Legal Proceedings

     The  Company  and its  affiliated  physician  groups  are from time to time
subject to medical malpractice claims and other various claims and legal actions
that arise in the ordinary course of business. Such claims, if successful, could
result in  substantial  damage  awards  that may exceed the limits of  insurance
coverage.  The  Company  does not engage in the  practice of medicine or provide
medical services, nor does it control the practice of medicine by its affiliated
physician  groups  or  the  compliance  with  regulatory  requirements  directly
applicable  to such groups.  Nevertheless,  there can be no  assurance  that the
Company will not become subject to such claims in the future.


                                                         8

<PAGE>


Item 4.  Submission of Matters to a Vote of Security Holders.

         Not applicable.

                                  PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

          Since March 12,  1997,  the Common Stock has been traded on the Nasdaq
National Market under the symbol "PMCO." The following table sets forth the high
and low sale  prices per share of the  Common  Stock as  reported  by the Nasdaq
National Market for each calendar quarter since the commencement of trading.

                                                               High         Low
         1997
            First Quarter (commencing March 12)...........  $    9.25  $    9.00
            Second Quarter................................       9.25       6.00
            Third Quarter.................................      11.00       6.75
            Fourth Quarter................................      11.63       8.00
         1998
            First Quarter (through March 25)..............      16.25       8.75

         The Company has not paid any cash  dividends  on its common stock since
its  formation.  It  presently  intends  to retain its  earnings  for use in its
business and  therefore  does not  anticipate  paying any cash  dividends in the
foreseeable  future.  The payment of any future  dividends will be determined by
the Board of Directors  in light of  conditions  then  existing,  including  the
Company's  earnings,  financial  condition  and  requirements,  restrictions  in
financing agreements,  business conditions,  and other factors. In addition, the
Company's ability to pay dividends or make  distributions to its stockholders is
restricted by the terms of its credit facility.  As of March 2, 1998, there were
210 holders of record of common stock.

         In March 1997,  the Company  completed the initial  public  offering of
4,000,000  shares of its common stock at an aggregate price of $36,000,000.  The
effective date of the  registration  statement  (SEC file number  333-10557) was
March 12, 1997. The managing  underwriters  for the offering were Piper Jaffray,
Inc.; Robertson, Stephens & Company; and Cowen & Company. All securities offered
were sold in the offering.

Through  December 31, 1997, the use of net proceeds of  $31,745,000  has been as
follows:

                                                        (A)            (B)
Purchase and installation of
   machinery and equipment........................     --        $    1,030,000
Acquisition of other businesses...................     --            24,729,000
Repayment of indebtedness.........................     --             1,716,000
Working capital...................................     --             4,270,000

   (A)  Direct or indirect payments to directors or officers of the issuer.
   (B)  Direct or indirect payments to others


                                                         9

<PAGE>



         In March 1997, the Company issued 442,549 shares of Common Stock to the
stockholders of a privately held physician management company in connection with
its merger with the Company. In January, April, and May 1997, the Company issued
252,385, 3,400, and 774,717 shares of Common Stock,  respectively,  to physician
groups and their  stockholders as post-closing  adjustments to the consideration
payable  by the  Company in  connection  with its  affiliations  with the groups
during 1996. In December 1997, the Company issued 578,154 shares of Common Stock
to  the  stockholders  of  a  provider  of  capitation  management  services  in
connection  with its  acquisition  by the Company.  As of December 31, 1997, the
Company had  commitments  to issue an aggregate  of  2,875,073  shares of Common
Stock  to  physician  groups  and  their  stockholders  in  connection  with its
affiliations  with five physician groups between June and December 1997. Each of
such issuances was or will be exempt from registration under the Securities Act,
pursuant to section 4(2) of the Act as they did not involve any public offering.



                                                        10

<PAGE>



Item 6.  Selected Financial Data

         The  selected   financial  data  presented  below  should  be  read  in
conjunction with the consolidated  financial statements and the notes thereto of
the Company and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Form 10-K. Prior year selected
financial  data have been  restated  to include the  results of  operations  and
balance sheet data for Western Medical Management Corp., Inc., which merged with
the Company in March 1997, and has been accounted for as a pooling of interests.
<TABLE>
<CAPTION>

                                                        July 1, 1994
                                                        (Inception) to
                                                        December 31,          Year Ended December 31,
                                                                       ---------------------------------------------
                                                            1994           1995            1996           1997
                                                        ------------   -------------   ------------  ---------------
<S>                                                   <C>             <C>            <C>             <C>
Statement of Operations Data:
Physician groups revenue, net.......................  $  4,040,924    $  13,188,405  $  47,036,801   $   127,716,775
Less: amounts retained by physician groups..........     1,781,775        5,344,688     20,791,605        47,075,240
                                                      ------------    -------------  -------------   ---------------
Management fee revenue..............................     2,259,149        7,843,717     26,245,196        80,641,535
Operating expenses:
     Clinic salaries and benefits...................     1,689,007        4,249,813     11,694,973        29,859,718
     Clinic rent and lease expense..................       242,235          708,020      2,670,138         7,016,261
     Clinic supplies................................       261,811          624,370      3,213,443         9,667,085
     Purchased medical services.....................       170,909          781,000        969,650         7,946,989
     Other clinic costs.............................       183,158        1,759,013      5,018,876        10,883,588
     General corporate expenses.....................       172,462          802,980      2,633,585         3,793,552
     Depreciation and amortization..................        64,170          203,482        723,641         2,942,604
     Interest expense...............................         6,659           20,958        209,474           456,175
     Merger costs...................................            --               --        682,269                --
                                                      ------------    -------------  -------------   ---------------
                                                         2,790,411        9,149,636     27,816,049        72,565,972
                                                      ------------    -------------  -------------   ---------------
Income (loss) before provision for income taxes.....      (531,262)      (1,305,919)    (1,570,853)        8,075,563
Provision for income taxes..........................        12,566          (54,405)            --         2,602,379
                                                      ------------    -------------  -------------   ---------------
Net income (loss)...................................  $   (543,828)   $  (1,251,514) $  (1,570,853)  $     5,473,184
                                                      ============    =============  =============   ===============

Net earnings (loss) per share:
     Basic..........................................  $      (0.07)   $       (0.16) $       (0.20)  $          0.48
                                                      ============    =============  =============   ===============
     Diluted........................................  $      (0.07)   $       (0.16) $       (0.20)  $          0.38
                                                      ============    =============  =============   ===============
Weighted average number of common shares outstanding:
     Basic..........................................     7,871,746        7,871,746      7,870,908        11,375,662
                                                      ============    =============  =============   ===============
     Diluted........................................     7,871,746        7,871,746      7,870,908        14,224,198
                                                      ============    =============  =============   ===============
</TABLE>

<TABLE>
<CAPTION>

                                                                              December 31,
                                                      --------------------------------------------------------------
                                                           1994             1995           1996           1997
                                                      --------------   -------------   ------------   -------------
<S>                                                   <C>              <C>             <C>            <C>
Balance Sheet Data:
Cash and cash equivalents..........................   $     490,391    $   3,047,366   $  1,633,534   $  15,760,920
Working capital....................................         951,542        3,376,293      2,253,291      20,516,672
Total assets.......................................       2,317,951        6,203,340     30,559,774     162,966,150
Long-term debt, less current maturities............          57,625          278,962      7,809,193      52,912,730
Redeemable equity securities.......................              --        3,945,134      3,949,417              --
Total stockholders' equity.........................       1,423,141          240,439     10,523,972      80,618,737

</TABLE>


                                                              11

<PAGE>



Item 7.  Management's Discussion and Analysis of Financial Condition and 
         Results of Operations

Overview

     ProMedCo is a physician  practice  management company that consolidates its
affiliated physician groups into primary-care-driven  multi-specialty  networks.
The Company was incorporated in Texas in 1993 and was reincorporated in Delaware
in January 1997.  ProMedCo commenced  operations in December 1994 and affiliated
with its initial  physician  group in June 1995.  The Company's  rapid growth in
1996 and 1997 has  resulted  primarily  from  its  affiliation  with  additional
physician  groups.  As of December 31,  1997,  the Company was  affiliated  with
aproximately  980  providers  in  10  states  consisting  of  approximately  350
physicians  and 100  mid-level  providers  in  affiliated  physician  groups and
approximately  530  physicians  in  associated  IPA  networks.  The Company also
contracts with HMOs and other third-party payors to arrange for the provision of
comprehensive health services to their members on a capitation basis.  Currently
the Company  provide ssuch services  covering  approximately  100,000  capitated
lives through its affiliated groups as well as through associated IPA networks.

         When affiliating with a physician group, the Company typically acquires
at fair market value the group's  non-real  estate  operating  assets and enters
into a 40-year service agreement with the group in exchange for a combination of
Common Stock,  cash, other  securities of the Company,  and/or the assumption of
certain  liabilities.  The Company is continually  seeking additional  physician
groups  with  which  to  affiliate  and at any  time  is  typically  engaged  in
negotiations with several such groups.

         Physician  groups  revenue  represents  the  revenue  of the  physician
groups, reported at the estimated realizable amounts from patients,  third-party
payors  and  others  for  services  rendered,   net  of  contractual  and  other
adjustments.  Management fee revenue  represents  physician  groups revenue less
amounts retained by physician  groups.  The amounts retained by physician groups
(typically  80-85% of the physician group operating  income)  represent  amounts
paid to the physicians  pursuant to the service  agreements  between the Company
and the physician  groups.  Under the service  agreements,  the Company provides
each  physician  group with the  facilities  and  equipment  used in its medical
practice,   assumes   responsibility  for  the  management  of  the  non-medical
operations of the practice,  and employs  substantially all of the non-physician
personnel  utilized  by the  group.  The  Company's  management  fee  revenue is
dependent upon the operating  income of the physician  groups.  Physician  group
operating income is defined in the service  agreements as the physician  group's
net medical  revenues less certain  contractually  agreed-upon  clinic expenses,
including non-physician clinic salaries and benefits, rent, insurance, interest,
and other direct clinic  expenses.  The amount of the physician  groups' revenue
retained and paid to the physician groups primarily  consists of the cost of the
affiliated  physicians'  services.  The remaining  amount of the physician group
operating  income  (typically  15-20%) and an amount equal to 100% of the clinic
expenses are reflected as management fee revenue earned by the Company.

         Operating  expenses consist of the expenses  incurred by the Company in
fulfilling its obligations under the service agreements.  These expenses are the
same as the  operating  costs and expenses  that would have been incurred by the
affiliated groups, including non-physician salaries,  employee benefits, medical
supplies,  building rent,  equipment  leases,  malpractice  insurance  premiums,
management information systems, and other expenses related to clinic operations.
The  distribution  to the group for providing  medical  services is increased or
decreased  by  a  percentage  of  the  physician  group's  surplus  or  deficit,
respectively,  in  net  revenue  under  risk-sharing  arrangements  pursuant  to
capitated managed care contracts.


                                                        12

<PAGE>



         In addition to the clinic expenses  discussed  above,  the Company also
incurs  personnel and  administrative  expenses in connection with maintaining a
corporate office function that provides  management,  administrative,  marketing
and acquisition  services to the affiliated groups. The Company's  profitability
depends on, among other things,  increasing market share,  expanding  healthcare
services, enhancing operating efficiencies, and developing favorable contractual
relationships with payors.

         Management  believes that industry  trends toward cost  containment and
lower reimbursement rates will continue to result in a reduction from historical
levels in per patient revenue.  Further reductions in reimbursement  rates could
have an  adverse  effect on the  Company's  operations  unless  the  Company  is
otherwise able to offset such payment reductions.

         For the year ended December 31, 1997, four of the Company's  affiliated
physician  groups each  contributed 10% or more of the Company's  management fee
revenue.  Clinics in Champaign,  Illinois;  Temple, Texas; Naples,  Florida; and
Abilene,  Texas represented  approximately  18%, 16%, 14%, and 11% of management
fee revenue, respectively.

Results of Operations

         The Company  commenced  operations in December 1994 and affiliated with
its first  physician  group in June 1995 and its second group in December  1995.
The Company entered into  affiliations  with five additional  groups during 1996
and seven additional  groups during 1997.  Changes in results of operations were
caused primarily by affiliations with these additional physician groups.

         The  following  table sets forth the  percentages  of physician  groups
revenue  represented  by certain items  reflected in the Company's  consolidated
statements of operations.
<TABLE>
<CAPTION>

                                                                                  Year Ended December 31,
                                                                                1995        1996        1997
                                                                             ---------   ---------   ----------
<S>                                                                          <C>         <C>         <C>
Physician groups revenue, net.............................................       100.0%      100.0%      100.0%
Less:  amount retained by physician groups................................        40.5        44.2        36.9
                                                                             ---------   ---------   ---------
Management fee revenue....................................................        59.5        55.8        63.1
Operating expenses:
   Clinic salaries and benefits...........................................        32.3        24.8        23.3
   Clinic rent and lease expense..........................................         5.4         5.7         5.5
   Clinic supplies........................................................         4.7         6.8         7.6
   Purchased medical services.............................................         5.9         2.1         6.2
   Other clinic costs.....................................................        13.3        10.7         8.5
   General corporate expenses.............................................         6.1         5.6         3.0
   Depreciation and amortization..........................................         1.5         1.5         2.3
   Interest expense (revenue).............................................         0.2         0.4         0.4
   Merger costs...........................................................         0.0         1.5         0.0
                                                                             ---------   ---------   ---------
                                                                                  69.4%       59.1%       56.8%
                                                                             ---------   ---------   ---------
Income (loss) before provision for income taxes...........................        (9.9)       (3.3)        6.3
Provision for income taxes................................................        (0.4)        0.0         2.0
                                                                             ---------   ---------   ---------
Net income (loss).........................................................        (9.5)%      (3.3)%       4.3%
                                                                             =========   =========   =========
</TABLE>


                                                        13

<PAGE>



   Year Ended December 31, 1997 Compared with Year Ended December 31, 1996

         Physician  groups  revenue  increased by 172% to $127.7 million for the
year ended  December 31, 1997 from $47.0 million for the year ended December 31,
1996.  New  affiliations  in 1997  produced  $48.8  million  of  this  increase,
including $10.4 million of revenues from full professional and global capitation
contracts,  with $27.2 million  resulting  growth in revenues from  affiliations
completed  prior  to 1996  and  from a full  year  of  revenue  production  from
affiliations  completed in 1996.  Another $4.7  million of other  revenues  from
consulting and transitional services contributed to this increase in 1997.

         Amounts retained by physician groups increased by 126% to $47.1 million
for the year  ended  December  31,  1997 from $20.8  million  for the year ended
December 31, 1996.  This increase  resulted  primarily from new  affiliations in
1997 and a full year of  operations  from  affiliations  completed in 1996. As a
percentage of physician  groups revenue,  amounts  retained by physician  groups
declined to 36.9% for the year ended  December 31,  1997,  compared to 44.2% for
the year ended  December  31,  1996.  This decline  resulted  primarily  from an
increase in revenues from  capitation  contracts,  which generate more aggregate
dollars  to the  affiliated  physician  groups,  but  less  as a  percentage  of
physician groups revenue, and from the increase in other revenues noted above.

         Overall  clinic  costs,  including  purchased  medical  services,  as a
percentage  of physician  groups  revenue  increased to 51.1% for the year ended
December  31,  1997,  compared to 50.1% for the year ended  December  31,  1996.
Purchased  medical  services  created the largest  increase as a  percentage  of
physician  groups revenue,  increasing to 6.2% in 1997 compared to 2.1% in 1996.
This  increase is directly  related to the  increase  in full  professional  and
global  capitation  revenues,  which in turn  requires  the  Company  to procure
medical  services  that are not provided  within its  affiliated  groups.  These
services may include hospitalization, emergency room care and other technical or
specialty  services not available in the affiliated  group. This ratio will vary
depending  on the amount of  services  that can be  provided  by the  particular
affiliated physician group and the terms of the individual contracts.

         Because of the significance of individual  groups  affiliations and the
level of capitation  and other  revenues,  clinic cost expense  ratios will vary
with  each new  affiliation.  The mix of  physician  specialties  and  ancillary
services  affects the level of clinic salaries and benefits and clinic supplies.
Generally,  primary care and office-based  physician  practices require a higher
number of support staff than specialty care or hospital-based practices.  Clinic
rent and lease  expense as a percentage  of physician  groups  revenue will vary
based on the size of each  affiliated  group's  offices and the  current  market
rental rate for medical office space in the particular geographic markets. Other
clinic costs will vary as a  percentage  of physician  groups  revenue  based on
regional cost  differences  and the Company's  ability to implement  operational
efficiencies and negotiate more favorable purchasing arrangements.

         General corporate  expenses as a percentage of physician groups revenue
declined to 3.0% for the year ended December 31, 1997,  compared to 5.6% for the
year ended  December 31,  1996.  While these costs  declined as a percentage  of
physician groups revenue, the amount of general corporate expenses increased 44%
to $3.8  million for the year ended  December 31, 1997 from $2.6 million for the
year ended  December  31,  1996.  This  increase in expenses was expected as the
Company  continued  to  add  management  and  technology  infrastructure.  While
management  expects  these  increases  in amounts  to  continue  as the  Company
increases  the number of  affiliated  physician  groups,  it believes that these
expenses will continue to decline as a percentage of physician groups revenue.


                                                        14

<PAGE>



         Depreciation  and  amortization  as a percentage  of  physician  groups
revenue increased to 2.3% for the year ended December 31, 1997, compared to 1.5%
for the year ended  December 31, 1996.  This increase  resulted  primarily  from
increased   amortization  of  service  agreement  rights  obtained  in  the  new
affiliations  in 1997, as well as differences  in the mix of assets  acquired in
connection with these affiliations.

         Net  interest  expense as a  percentage  of  physician  groups  revenue
remained consistent at 0.4% for both the years ended December 31, 1997 and 1996.
Although  long  term debt  levels  increased  in the  latter  part of 1997,  the
resulting  interest  expense was offset by interest income earned in the earlier
part of 1997 on unused proceeds from the Company's initial public offering.

         Provision for income taxes  reflects an effective  rate of 32.2%.  This
effective  rate is lower than the  expected  Federal  statutory  rate due to the
realization  of net  operating  loss  carryforwards,  which had been  previously
reserved for. At December 31, 1997,  all net operating  loss  carryforwards  had
been utilized and recognized.

    Year Ended December 31, 1996 Compared with Year Ended December 31, 1995.

         Physician groups revenue  increased to $47.0 million for the year ended
December 31, 1996 from $13.2 million for the year ended  December 31, 1995.  The
increase  in  physician  groups  revenue  resulted  primarily  from the  various
affiliations with physician groups in 1996.

         Amounts  retained by  physician  groups as a  percentage  of  physician
groups revenue increased to 44.2% for the year ended December 31, 1996, compared
with 40.5% for the year ended  December  31,  1995.  Overall  clinic  costs as a
percentage  of  physician  groups  revenue  declined to 50.1% for the year ended
December 31, 1996, compared with 61.6% for the year ended December 31, 1995. The
mix of  physician  specialties  and  ancillary  services  affects  the  cost  of
affiliated physician services, clinic salaries and benefits and clinic supplies.
Because of the  significance of individual  group  affiliations and the level of
other  revenue to the Company as a whole,  these  expense  ratios will vary with
each  new  acquisition.  Generally,  primary  care  and  office-based  physician
practices  require a higher  number of  support  staff  than  specialty  care or
hospital-based  practices.  Clinic  rent and  lease  expense  as  percentage  of
physician  groups  revenue will vary based on the size of each of the affiliated
group's  offices and the current  market rental rate for medical office space in
the particular geographic markets.  Other clinic costs will vary as a percentage
of physician groups revenue based on regional cost differences and the Company's
ability to implement  operational  efficiencies  and  negotiate  more  favorable
purchasing arrangements.

         General corporate  expenses as a percentage of physician groups revenue
declined to 5.6% for the year ended  December 31, 1996,  compared  with 6.1% for
the year ended December 31, 1995. The amount of these expenses  increased during
1996, as the Company  continued to add to its management  infrastructure.  While
the Company expects that these expenses will continue to increase as the Company
increases  the number of  affiliated  physician  groups,  it believes that these
expenses will continue to decline as a percentage of physician groups revenue.

         Depreciation  and  amortization  as a percentage  of  physician  groups
revenue remained constant at 1.5% for the year ended December 31, 1996, compared
with the year ended December 31, 1995.


                                                        15

<PAGE>



         Net  interest  expense as a  percentage  of  physician  groups  revenue
increased  to 0.4% for the year  ended  December  31,  1996,  compared  with net
interest  income of 0.2% for the year ended December 31, 1995,  primarily due to
increased debt associated with the acquisition of physician practices.

         Provision for income taxes  reflects no income tax expense for the year
ended December 31, 1996.  This resulted from fully reserving for the tax effects
of the net operating loss generated during the year.

Summary of Operations by Quarter (unaudited)

         The following table presents unaudited  quarterly operating results for
the  preceding  eight  quarters.   The  Company   believes  that  all  necessary
adjustments,  consisting  only  of  normal,  recurring  adjustments,  have  been
included in the amounts  stated below to present  fairly the  quarterly  results
when read in conjunction with the Company's  consolidated  financial  statements
and notes thereto included  elsewhere in this Report.  Future quarterly  results
may  fluctuate  depending  on,  among  other  things,  the  timing and number of
affiliations  with physicians  groups.  Results of operations for any particular
quarter are not necessarily indicative of results of operations for full year or
for future periods.
<TABLE>
<CAPTION>

                                               Three Months Ended                                 Three Months Ended
                                March 31    June 30,   September 30, December 31,   March 31,   June 30,  September 30, December 31,
                                  1996        1996          1996        1996          1997        1997          1997         1997
                                ---------   ---------   -----------  -----------  -----------  -----------  -----------  -----------
<S>                            <C>         <C>          <C>          <C>          <C>          <C>          <C>          <C>
Statement of Operations Data:
Physician groups 
   revenue, net..............  $7,091,429  $10,041,414  $12,672,590  $17,231,368  $20,725,577  $25,732,048  $29,302,573  $51,956,577
Less: amounts retained by
   physician groups..........   3,428,089    4,712,459    5,332,128    7,318,929    9,008,171   10,532,177   11,496,972   16,037,920
                                ---------   ----------  -----------  -----------  -----------  -----------  -----------  -----------
Management fee revenue.......   3,663,340    5,328,955    7,340,462    9,912,439   11,717,406   15,199,871   17,805,601   35,918,657
Operating expenses:
   Clinic salaries and 
      benefits...............   1,741,516    2,483,746    3,301,399    4,168,312    4,639,895    5,926,457    6,795,818   12,497,548
   Clinic rent and lease 
      expense................     411,372      549,656      727,252      981,858    1,079,862    1,429,063    1,620,677    2,886,659
   Clinic supplies...........     404,298      639,858      972,824    1,196,463    1,513,716    1,962,366    2,034,422    4,156,581
   Purchased medical 
      services...............     134,815      157,306      289,116      388,413      685,158      780,510      725,486    5,755,835
   Other clinic costs........     801,206    1,196,244    1,342,318    1,679,108    1,778,472    2,154,875    2,100,817    4,849,424
   General corporate 
      expenses...............     581,596      676,099      643,704      732,186      818,772      823,533    1,113,978    1,037,269
   Depreciation and 
      amortization...........      51,564       67,068      204,369      400,640      435,875      602,552      923,093      981,084
   Interest expense
      (revenue)..............     (19,625)      33,071       59,024      137,004      115,949        1,148      110,468      228,610
   Merger costs..............          --           --      139,501      542,768           --           --           --           --
                                ---------   ----------  -----------  -----------  -----------  -----------  -----------  -----------
Income (loss) before 
  provision
  for income taxes...........    (443,402)    (474,093)    (339,045)    (314,313)     649,707    1,519,367    2,380,842    3,525,647
 Provision for income taxes..          --           --           --           --      194,912      412,429      778,494    1,216,544
                                ---------   ----------  -----------  -----------  -----------  -----------  -----------  -----------
Net income (loss)............   $(443,402)  $ (474,093)  $ (339,045) $  (314,313) $   454,795  $ 1,106,938  $ 1,602,348  $ 2,309,103
                                =========   ==========  ===========  ===========  ===========  ===========  ===========  ===========

Net earnings (loss) per share:
   Basic.....................   $   (0.06)  $   (0.06)   $    (0.04) $     (0.04) $      0.05  $      0.09  $      0.13  $      0.18
                                =========   ==========  ===========  ===========  ===========  ===========  ===========  ===========
   Diluted...................   $   (0.06)  $   (0.06)   $    (0.04) $     (0.04) $      0.04  $      0.07  $      0.11  $      0.15
                                =========   ==========  ===========  ===========  ===========  ===========  ===========  ===========

Weighted average number of
 common shares outstanding:
   Basic.....................   7,871,406   7,870,746     7,870,746    7,870,746    8,669,343   12,031,726   12,042,769   12,507,883
                                =========   ==========  ===========  ===========  ===========  ===========  ===========  ===========
   Diluted...................   7,871,406   7,870,746     7,870,746    7,870,746   11,617,229   14,904,451   15,260,449   15,355,033
                                =========   ==========  ===========  ===========  ===========  ===========  ===========  ===========

Other Data (at end of period):
Total providers..............          60          88           145          192          233          238          280          982
                                =========   ==========  ===========  ===========  ===========  ===========  ===========  ===========
Affiliated physicians........          51          72           118          146          180          186          224          354
Mid-level providers..........           9          16            27           46           53           52           56          100
IPA physicians...............          --          --            --           --           --           --           --          528
Number of states.............           2           3             3            4            5            5            6           10
</TABLE>


                                                                    16


<PAGE>



Liquidity and Capital Resources

         At December 31, 1997, the Company had working capital of $20.5 million,
compared to $2.3 million at December 31, 1996. This increase resulted  primarily
from the acquisition of current assets (primarily accounts receivable) in excess
of  current  liabilities   assumed  in  new  affiliations.   Although  each  new
affiliation will have its own specific structure, the Company typically acquires
current assets well in excess of the current liabilities it assumes.

         Cash from  operations  for the year ended December 31, 1997 amounted to
$1.3 million. Net income, combined with depreciation and amortization,  deferred
taxes,  and  increases  in accounts  payable and amounts  payable to  affiliated
physician  groups  provided  $16.4  million  in cash  flows.  This was offset by
increases  in  accounts  receivable,   management  fees  receivable,   due  from
affiliated  physician groups,  prepaid and other current assets and other assets
and decreases in accrued expenses and other current  liabilities  totaling $15.1
million.  This positive cash flows from operations in 1997 marked an improvement
over 1996 and 1995, in which the Company experienced usage of cash in operations
of $1.2 million and $0.9 million, respectively.

         The Company had aggregate cash expenditures of $22.4 million and issued
or committed to issue an aggregate of 3.5 million shares of its common stock for
the acquisition of clinic assets during the year ended December 31, 1997. Of the
cash  expenditures,  $1.0  million  was for  additional  physicians  at existing
clinics and deferred payments associated with previously completed acquisitions.
Capital  expenditures  amounted to $2.8 million for the year ended  December 31,
1997.  Although each of the Company's  service  agreements  with its  affiliated
physician  groups  requires  the  Company  to  provide  capital  for  equipment,
expansion,  additional  physicians  and other  major  expenditures,  no specific
amounts have been  committed  in advance.  Capital  expenditures  are made based
partially  upon the  availability  of funds,  the sources of funds,  alternative
projects and an acceptable repayment period.

         In November 1997, the Company completed an expansion of its bank credit
facility  from $25 million to $50  million.  The  facility  provides for working
capital and acquisition financing, subject to certain restrictions. The interest
rate under this facility is, at the Company's option, either the adjusted 30-day
commercial paper rate or one month LIBOR plus 2.70% to 3.25%, or the bank's base
rate plus 0.35% to  0.88%,  depending on certain  debt  levels.  The bank credit
facility, which expires January 2, 2004, contains certain restrictive covenants,
including prohibitions on paying dividends,  limitations on capital expenditures
and maintenance of minimum net worth and certain  financial  ratios. At December
31, 1997,  outstanding  borrowings  against the bank credit  facility were $33.0
million and the effective  interest  rate was 8.5%.  The Company is currently in
the process of further expanding its bank credit facility by another $15 million
to $25 million and expects to complete this expansion in April 1998.

         In connection with the Christie Clinic affiliation,  the Company agreed
to loan the physician  group a total of $42.7  million.  An initial loan of $3.0
million was funded in  November  1997 and $16.4  million in  December  1997 with
additional  loans of $5.825  million to be granted each  December  through 2001.
This note  receivable  is recorded  in long term  receivables  in the  Company's
consolidated  balance sheet.  The note receivable earns interest at 8% and is an
interest only loan,  payable  monthly,  through  November 2007,  after which the
balance is to be paid off in annual  installments  through  December 2022. After
December 2007, an amount equal to one twelfth of the annual amortization will be
set  aside by the  physician  group  each  month to fund  each  upcoming  annual
installment.


                                                        17

<PAGE>



     In connection with the Naples affiliation, the Company issued notes payable
to the group  totaling  $8.6  million.  These  notes are  payable in three equal
annual  installments  in each of April  1998,  1999 and  2000.  The  notes  bear
interest  at 9%, with  interest  payable in options to  purchase  the  Company's
common stock at a price of $9.00 per share,  providing  the market price for the
stock is above the exercise  price at the time of payment.  Interest may be paid
in cash at the option of either party if the market price for the stock is $9.00
or less at the time of payment.

         The Company had cash and cash  equivalents of $15.8 million at December
31, 1997. In addition to this, the Company's  principal sources of liquidity are
accounts receivable of $24.4 million at December 31, 1997 and availability under
the  working  capital  portion of the bank line of credit of $7.3  million.  The
Company  believes  that the  combination  of these sources will be sufficient to
meet the  Company's  working  capital  needs  for the next  twelve  months.  The
Company's future acquisition,  expansion and capital  expenditure  programs will
require substantial  amounts of capital resources.  To meet the capital needs of
these  programs,  the Company will continue to evaluate  alternative  sources of
financing,  including short-and  long-term bank indebtedness,  additional equity
and other forms of financing,  the  availability  and terms of which will depend
upon market and other  conditions.  There can be no  assurance  that  additional
financing will be available on terms acceptable to the Company.

Forward-Looking Statements

         This  Form  10-K  includes  certain  forward-looking  statements  about
anticipated results, including statements as to operating results, liquidity and
capital  resources,   and  negotiations  with  and  acquisitions  of  additional
physician  groups.  The Company notes that such  forward-looking  statements are
based upon internal estimates,  which are subject to change because they reflect
preliminary  information  and  management  assumptions,  and that a  variety  of
factors  could  cause the  Company's  actual  results and  experience  to differ
materially from the anticipated  results or other expectations  expressed in the
Company's  forward-looking  statements.  The  factors  that could  cause  actual
results or outcomes to differ from such  expectations  include the extent of the
Company's  success in (i) negotiating  the  acquisition of additional  physician
groups;  (ii)  integrating all operations  within the planned time frame;  (iii)
locating and  negotiating  additional  financing at terms that are acceptable to
the Company; and (iv) negotiating favorable  reimbursement rates, along with the
uncertainties  and other  factors  described  from time to time in the Company's
public filings and reports.

Item 8.  Financial Statements

         The  Company's  Consolidated  Financial  Statements  are listed in Item
14(a)(1), included at the end of this report on Form 10-K beginning on page F-1,
and incorporated herein by reference.

Item 9.  Changes in and Disagreements with Accountants on Accounting and 
         Financial Disclosure.

         None

                                                        18

<PAGE>



                                  Part III

Item 10.  Directors and Executive Officers of the Registrant.

         The information  required by Item 10 will be contained in the Company's
Proxy Statement for the 1998 Annual Meeting of  Stockholders  under the captions
"Directors and Nominees,"  "Executive  Officers of the Company" and  "Compliance
with Section 16(a) of the Securities Exchange Act of 1934."

Item 11.  Executive Compensation.

         The information  required by Item 11 will be contained in the Company's
Proxy  Statement for the 1998 Annual Meeting of  Stockholders  under the caption
"Executive Compensation," and is incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management.

         The information  required by Item 12 will be contained in the Company's
Proxy  Statement for the 1998 Annual Meeting of  Stockholders  under the caption
"Common Stock Ownership of Certain  Beneficial  Owners and  Management,"  and is
incorporated herein by reference.

Item 13.  Certain Relationships and Related Transactions.

         The information  required by Item 13 will be contained in the Company's
Proxy  Statement for the 1998 Annual Meeting of  Stockholders  under the caption
"Compensation   Committee  Interlocks  and  Insider  Participation  and  Certain
Transactions," and is incorporated herein by reference.



                                                        19

<PAGE>



                                   Part IV

Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K.

         (a) (1) List of Financial  Statements.  The  following is a list of the
financial  statements  included at the end of this Report of Form 10-K beginning
on page F-1:

         Report of Independent Public Accountants
         Consolidated Balance Sheets as of December 31, 1996 and 1997
         Consolidated  Statements of Operations for the Years Ended December 31,
              1995, 1996 and 1997 
         Consolidated Statements of Stockholders' Equity for the Years Ended 
              December 31, 1995, 1996 and 1997
         Consolidated Statements of Cash Flows for the Years Ended December 31, 
              1995, 1996 and 1997
         Notes to Consolidated Financial Statements

              (2) List of Financial Statement Schedules. All schedules have been
omitted  because  they  are not  applicable  or not  required,  or the  required
information is provided in the financial statements or notes thereto.

         (b)  Reports on Form 8-K.

         The following  Reports on Form 8-K were filed during the fourth quarter
of 1997:

         Report on Form 8-K filed  October  15,  1997,  to report the  Company's
affiliation with Beacon Medical Group.

         Report on Form 8-K filed  October  23,  1997,  to report the  Company's
affiliation with Intercoastal Medical Group, Inc.

         Report on Form 8-K filed  December  17, 1997,  to report the  Company's
acquisition of Health Plans, Inc.

         Amendment to Report on Form 8-K filed  December  22,  1997,  to include
historical  and  pro  forma  financial  statements  relating  to  the  Company's
affiliation with Intercoastal Medical Group, Inc.

<PAGE>

         (c) List of Exhibits.  The  following is a list of exhibits  furnished.
Copies of exhibits will be furnished upon written  request of any stockholder at
a charge of $.25 per page plus postage.

Exhibit
Number                                                Exhibit


2       Asset Purchase Agreement dated as of January 19, 1996 by and among 
        ProMedCo, Inc., ProMedCo of Abilene, inc. and Abilene Diagnostic Clinic,
        P.L.L.C. (1)
2(a)    First  Amendment  to  Asset  Purchase  Agreement  dated  as of
        January  19,  1996 by and among  ProMedCo,  Inc.,  ProMedCo of
        Abilene, inc., and Abilene Diagnostic Clinic, P.L.L.C. (1)
2.1     Plan and  Agreement for  Reorganization  dated as of September
        13, 1996 by and between  ProMedCo,  Inc.,  ProMedCo of Temple,
        Inc., and King's Daughters Clinics, P.A. (1)
2.2     Agreement for Statutory merger dated as of November 7, 1996 by and 
        between ProMedCo, Inc., ProMedCo of Northern Nevada, Inc. and Western 
        Medical Management Corporation, Inc. (1)
3.1     Form of Restated Certificate of Incorporation of ProMedCo Management 
        Company. (1)
3.2     By-laws of ProMedCo Management Company. (1)
4       Form of Rights Agreement. (1)
10.1    Interim Service Agreement dated as of January 19, 1996 by and between 
        ProMedCo of Abilene, inc. and Abilene Diagnostic Clinic, P.L.L.C. (1)(2)
10.1(a) First Amendment to Service Agreement and Interim Service Agreement dated
        as of January 19, 1996 by and between ProMedCo of Abilene, inc. and 
        Abilene Diagnostic Clinic, P.L.L.C. (1)
10.2    Service Agreement dates as of January 19, 1996 by and between ProMedCo 
        of Abilene, Inc. and Abilene Diagnostic Clinic, P.L.L.C. (1)(2)
10.3    Service Agreement dates as of March 12, 1996 by and between ProMedCo, 
        Inc. of Cullman, Inc. and Cullman Primary Care, P.C. (1)(2)
10.4    Service Agreement dated as of April 1, 1996 by and between ProMedCo of 
        Mayfield, Inc. and Morgan-Haugh, P.S.C. (1)(2)
10.5    Amended and Restated Service Agreement dated as of June 24, 1996 by and 
        between ProMedCo of Lake Worth, Inc. and Tarrant Family Practice, P.A. 
        (1)(2)
10.6    Service Agreement dated as of June 30, 1995 by and between ProMedCo of 
        Denton, Inc. and North Texas Medical Surgical Clinic, P.A. (1)(2)
10.7    Credit Agreement dated as of June 12, 1996 among ProMedCo, Inc., the 
        Lenders referred to therein, and Nationscredit Commercial Corporation, 
        as Agent. (1)
10.8    1996 Stock Option Plan. (1)
10.9    Employee Stock Purchase Plan. (1)
10.10   Employment Agreement with H. Wayne Posey. (1)
10.11   Employment Agreement with Richard R. D'Antoni. (1)
10.12   Amended and Restated Employment Agreement with Dale K. Edwards. (1)
10.13   Employment Agreement with R. Alan Gleghorn. (1)
10.14   Employment Agreement with Rick E. Weymier. (1)
10.15   Employment Agreement with Deborah A. Johnson. (1)
10.16   Service Agreement dated as of September 1, 1996 by and between ProMedCo 
        of Temple, Inc. and Physicians of King's Daughters, P.A. (1)
10.17   Employment Agreement with Robert D. Smith. (1)
10.18   Form of Service Agreement by and between ProMedCo of Northern Nevada, 
        Inc. and Knutzen Goring Medical Group, Ltd. DBA The Northern Nevada 
        Medical Group. (1)(2)
10.19   1994 Stock Option Plan. (1)

                                         20
<PAGE>


10.20   Asset Purchase Agreements as of April 23, 1997 by and between ProMedCo
        Management  Company,  ProMedCo  of Southwest Florida,  Inc., Naples 
        Medical Center, P.A. and  Naples  Obstetrics  &  Gynecology, M.D., P.A.
        Included as  Appendix  2.9A to the  Agreement  is the Service Agreement
        by and between ProMedCo of Southwest Florida and Naples Medical Center,
        P.A. (3)
10.21   Asset Purchase Agreement as of August 12, 1997 by and between ProMedCo
        Management Company, PHB Management Company, Inc. and HealthAmerica
        Pennsylvania, Inc.  Service Agreement by and between PHB Management 
        Company, Inc. and HealthAmerica Pennsylvania, Inc. effective October 1,
        1997. (4)
10.22   Stock Purchase Agreement as of October 8, 1997 by and btween ProMedCo
        Management Company, ProMedCo of Sarasota, Inc., IMG, Inc.(formerly known
        as Intercoastal Medical Group, Inc.), and Intercoastal Medical Group,
        Inc. Service Agreement by and between ProMedCo of Sarasota and 
        Intercoastal  Medical Group, Inc., effective August 1, 1997. (5)
10.23   Agreement for Statutory Merger by and between HP Acquisition Corp., a 
        Wholly Owned Subsidiary of ProMedCo Management Company, with PBMA Health
        Systems, Inc. and Health Plans, Inc. dated July 25, 1997. (6)
10.24   Amended and Restated Credit Agreement dated as of November 13, 1997,
        among ProMedCo Management Company, the Lenders refered to therein,
        and Nationscredit Commercial Corporation, as Agent.
11      Computation of Net Income Per Share.
22      List of Subsidiaries.
23.1    Consent of Independent Public Accountants.
27      Financial Data Schedule.

-----------------
(1)      Filed as an exhibit of the same number to the Company's registration 
         statement on Form S-1 (File No. 333-10557).
(2)      Confidential  treatment has been requested and an application has been
         separately filed with the Commission.
(3)      Filed as exhibit 2.3 to the Company's report on Form 8-K filed with the
         Commission on May 7, 1997.
(4)      Filed as an exhibit to the Company's report on Form 8-K filed with the
         Commission on October 15, 1997.
(5)      Filed as an exhibit to the Company's report on Form 8-K filed with the
         Commission on October 23, 1997.
(6)      Filed as an exhibit to the Company's  report on Form 8-K filed with the
         Commission on December 17, 1997.






                                                        21

<PAGE>


                                   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.

                                    PROMEDCO MANAGEMENT COMPANY

                                    By:  /s/ H. WAYNE POSEY
                                          H. Wayne Posey
                                   President and Chief Executive Officer

       Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the  following  persons in the  capacities  and on the
dates indicated.
<TABLE>
<CAPTION>

              Signature                              Title                                 Date


<S>                                     <C>                                         <C>
/S/ H. WAYNE POSEY                                                                    March 27, 1998
H. Wayne Posey                           President, Chief Executive Officer,
                                         and Director
                                         (Principal Executive Officer)
/S/ ROBERT D. SMITH                                                                   March 27, 1998
Robert D. Smith                          Vice President-Finance
                                         (Principal Financial and Accounting
                                         Officer)
/S/ RICHARD R. RAGSDALE                                                               March 27, 1998
Richard R. Ragsdale                      Chairman and Director


/S/ DAVID T. BAILEY, M.D.                                                             March 27, 1998
David T. Bailey, M.D.                    Director


/S/ CHARLES J. BUYSSE, M.D.                                                           March 27, 1998
Charles J. Buysse, M.D.                  Director


/S/ E. THOMAS CHANEY                                                                  March 27, 1998
E. Thomas Chaney                         Director


/S/ JAMES F. HERD, M.D.                                                               March 27, 1998
James F. Herd, M.D.                      Director


/S/ JACK W. MCCASLIN                                                                  March 27, 1998
Jack W. McCaslin                         Director

</TABLE>


                                                        22



<PAGE>

            INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

ProMedCo Management Company                                                                                   Page
<S>                                                                                                             <C>
Report of Independent Public Accountants........................................................................F-1

Consolidated Balance Sheets as of December 31, 1996 and 1997 ...................................................F-2

Consolidated Statements of Operations for the Three Years Ended
  December 31, 1997............................................................................................ F-4

Consolidated Statements of Shareholders' Equity for the Three Years Ended
  December 31, 1997.............................................................................................F-5

Consolidated Statements of Cash Flows for the Three Years Ended
  December 31, 1997.............................................................................................F-6

Notes to Consolidated Financial Statements......................................................................F-7
</TABLE>



<PAGE>






                     REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Board of Directors of
ProMedCo Management Company:

We have  audited  the  accompanying  consolidated  balance  sheets  of  ProMedCo
Management Company (a Delaware  corporation) and subsidiaries as of December 31,
1996  and  1997,  and  the  related   consolidated   statements  of  operations,
stockholders'  equity,  and cash flows for each of the three years in the period
ended December 31, 1997. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of ProMedCo Management Company and
subsidiaries  as of  December  31,  1996  and  1997,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.



                                     ARTHUR ANDERSEN LLP


Fort Worth, Texas,
    March 3, 1998





                                      F-1

<PAGE>






                   PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

                             CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>


                                                                                           December 31,
                                 ASSETS                                              1996              1997
                                 ------                                          -------------    --------------
<S>                                                                              <C>              <C>
Current assets:
         Cash and cash equivalents                                               $   1,633,534    $   15,760,920
         Accounts receivable, net of allowances of approximately
              $4,035,000 and $19,281,000, respectively                               6,227,228        24,420,979
         Management fees receivable                                                  1,266,598         1,938,464
         Due from affiliated physician groups                                          660,278         2,870,607
         Prepaid expenses and other current assets                                     742,845         4,960,385
                                                                                 -------------    --------------

                      Total current assets                                          10,530,483        49,951,355

Property and equipment, net of accumulated depreciation of approximately
         $865,000 and $2,630,000, respectively                                       3,930,191        10,590,561

Intangible assets, net of accumulated amortization of $289,000 and
         $1,775,000, respectively                                                   14,860,171        77,195,351

Long term receivables                                                                        -        23,915,884

Other assets                                                                         1,238,929         1,312,999
                                                                                 -------------    --------------

                      Total assets                                               $  30,559,774    $  162,966,150
                                                                                 =============    ==============
</TABLE>


   The accompanying notes are an integral part of these financial statements.







                                  F-2
<PAGE>



                 PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
                  CONSOLIDATED BALANCE SHEETS - (Continued)
<TABLE>
<CAPTION>

                                                                                           December 31,
                  LIABILITIES AND STOCKHOLDERS' EQUITY                               1996              1997
                  ------------------------------------                           -------------    --------------
<S>                                                                              <C>              <C>
Current liabilities:
         Accounts payable                                                        $   1,505,762    $    6,687,168
         Payable to affiliated physician groups                                      1,341,876         6,562,903
         Accrued salaries, wages and benefits                                        1,153,558         2,895,023
         Accrued expenses and other current liabilities                              2,353,381         2,512,769
         Deferred income tax liability                                                       -           174,101
         Current maturities of notes payable                                         1,151,191         3,676,365
         Current portion of obligations under capital leases                           589,438           609,591
         Current portion of deferred purchase price                                    181,986         5,265,713
         Income taxes payable                                                                -         1,051,050
                                                                                 -------------    --------------
                      Total current liabilities                                      8,277,192        29,434,683

Notes payable, net of current maturities                                             4,585,173        39,688,325
Obligations under capital leases, net of current portion                             1,030,171         1,073,886
Deferred purchase price, net of current portion                                              -         7,318,526
Convertible subordinated notes payable                                               1,800,274         1,765,058
Deferred income tax liability                                                                -         1,103,876
Other long term liabilities                                                            393,575         1,963,059
                                                                                 -------------    --------------
                      Total liabilities                                             16,086,385        82,347,413
                                                                                 -------------    --------------

Commitments and contingencies

Series   A redeemable  convertible  preferred stock,  700,000 shares authorized;
         500,000  and  0  shares  issued  and  outstanding  in  1996  and  1997,
         respectively                                                                2,957,641                 -

Redeemable common stock, 165,296 and 0 shares issued and outstanding in 1996
         and 1997, respectively                                                        991,776                 -

Stockholders' equity:
         Preferred stock, $0.01 par value, 19,300,000 shares authorized,
              0 shares issued and outstanding                                                -                 -
         Class B Common Stock, $0.01 par value; 2,600,000 shares authorized;
              1,226,150 and 0 shares issued and outstanding in 1996 and 1997,
              respectively                                                              12,262                 -
         Common stock, $0.01 par value; 47,400,000 shares authorized;
              3,187,129 and 10,686,767 shares issued and outstanding in 1996
              and 1997, respectively                                                    31,871           106,868
         Additional paid-in-capital                                                 11,987,480        58,946,838
         Common stock to be issued, 187,482 and 2,875,073 shares, in 1996 and
              1997, respectively                                                     2,303,212        20,121,059
         Stockholder notes receivable                                                 (151,306)         (369,665)
         Accumulated earnings (deficit)                                             (3,659,547)        1,813,637
                                                                                 -------------    --------------
                      Total stockholders' equity                                    10,523,972        80,618,737
                                                                                 -------------    --------------

                      Total liabilities and stockholders' equity                 $  30,559,774    $  162,966,150
                                                                                 =============    ==============
</TABLE>


  The accompanying notes are an integral part of these financial statements.




                                         F-3
<PAGE>







                  PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES


                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                                            Year Ended December 31,
                                                                    1995             1996               1997
<S>                                                          <C>                <C>               <C>
Physician groups revenue, net                                $   13,188,405     $   47,036,801    $   127,716,775

Less- Amounts retained by physician groups                        5,344,688         20,791,605        47,075,240
                                                              -------------     --------------    --------------

Management fee revenue                                            7,843,717         26,245,196        80,641,535

Operating expenses:
     Clinic salaries and benefits                                 4,249,813         11,694,973        29,859,718
     Clinic rent and lease expense                                  708,020          2,670,138         7,016,261
     Clinic supplies                                                624,370          3,213,443         9,667,085
     Purchased medical services                                     781,000            969,650         7,946,989
     Other clinic costs                                           1,759,013          5,018,876        10,883,588
     General corporate expenses                                     802,980          2,633,585         3,793,552
     Depreciation and amortization                                  203,482            723,641         2,942,604
     Interest expense                                                20,958            209,474           456,175
     Merger costs                                                   -                  682,269           -
                                                              -------------     --------------    --------------

              Total operating expenses                            9,149,636         27,816,049        72,565,972
                                                              -------------     --------------    --------------

Income (loss) before provision (benefit) for income taxes        (1,305,919)        (1,570,853)        8,075,563

Provision (benefit) for income taxes                                (54,405)           -               2,602,379
                                                              -------------     --------------    --------------

Net income (loss)                                             $  (1,251,514)    $   (1,570,853)   $    5,473,184
                                                              =============     ==============    ==============
Net earnings (loss) per share
     Basic                                                    $       (0.16)    $        (0.20)   $         0.48
     Diluted                                                  $       (0.16)    $        (0.20)   $         0.38

Weighted average number of common shares outstanding
     Basic                                                        7,871,746          7,870,908        11,375,662
     Diluted                                                      7,871,746          7,870,908        14,224,198

</TABLE>


  The accompanying notes are an integral part of these financial statements.





                                          F-4

<PAGE>


                      PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES


                     CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>


                             Class B                               Additional    Common    Stockholder   Accumulated
                          Common Stock         Common Stock          Paid-In    Stock To      Notes       Earnings
                       Shares     Amount     Shares      Amount      Capital    Be Issued  Receivable     (Deficit)      Total
<S>                 <C>          <C>         <C>         <C>        <C>         <C>         <C>          <C>            <C>
Balance, December 
  31, 1994, as
  previously 
  reported           1,226,150   $  12,262   1,878,000    $ 18,780  $   673,561  $    -     $ (33,500)   $ (169,890)    $   501,213

  Adjustments 
   for pooling
   of interest
   (Note 3)             -             -        421,549       4,215    1,585,003       -          -         (667,290)        921,928
                     ---------   ---------   ---------    --------  -----------  ----------  ---------    ----------     -----------

Balance, December 
  31, 1994, as
  restated           1,226,150      12,262   2,299,549      22,995    2,258,564       -       (33,500)     (837,180)      1,423,141

  Common stock 
   subscribed            -            -          -             -          -           4,000    (4,000)          -             -
  Common stock
    and warrants
    issued               -            -         21,000         210       62,936       -       (10,000)          -            53,146
  Stockholder
   notes payments        -            -          -             -          -           -        15,666           -            15,666
Net loss                 -            -          -             -          -           -           -      (1,251,514)     (1,251,514)
                     ---------   ---------   ---------    --------  -----------  ----------  --------    ----------     -----------

Balance, December 
  31, 1995           1,226,150      12,262   2,320,549      23,205    2,321,500       4,000   (31,834)   (2,088,694)        240,439

  Common stock 
   issued                -            -        843,729       8,437    9,634,903       -      (120,000)         -          9,523,340
  Stock options
   exercised             -            -         22,851         229       31,077       -       (31,306)         -            -
  Stock 
   subscription
   canceled              -            -           -            -          -          (4,000)    4,000          -            -
  Common stock
    to be issued         -            -           -            -          -       2,303,212        -           -          2,303,212
  Stockholder
   notes payments        -            -           -            -          -            -       27,834          -             27,834
Net loss                 -            -           -            -          -            -          -      (1,570,853)     (1,570,853)
                     ---------   ---------   ---------    --------  -----------  ---------- ---------    ----------     -----------

Balance, December 
  31, 1996           1,226,150      12,262   3,187,129      31,871   11,987,480   2,303,212  (151,306)   (3,659,547)     10,523,972

  Common stock 
   issued in
   initial public
   offering, net        -             -      4,000,000      40,000   31,705,000       -          -           -           31,745,000
  Redeemable
    preferred
    shares 
    converted           -             -        500,000       5,000    2,952,641       -          -           -            2,957,641
  Redeemable 
    common shares
    converted           -             -        165,296       1,653      990,123       -          -           -              991,776
  Class B common 
    converted       (1,226,150)    (12,262)  1,226,150      12,262         -          -          -           -                 -
  Warrants and
    options
    exercised           -             -         59,786         597       92,142       -          -           -               92,739
  Subordinated 
   notes payable
   converted            -             -          3,912          39       35,177       -          -           -               35,216
  Common stock
   issued and
   to be issued,
   net                  -             -      1,608,656      16,087   11,565,716  17,817,847  (249,671)       -           29,149,979
  Treasury stock
   purchased
   and retired          -             -        (64,162)       (641)    (381,441)      -          -           -             (382,082)
  Stockholder
   notes payments       -             -           -            -            -         -        31,312        -               31,312
Net income              -             -           -            -            -         -          -        5,473,184       5,473,184
                     ---------   ---------   ---------    --------  -----------  ---------  ---------    ----------     -----------

Balance, December 
  31, 1997              -        $   -      10,686,767    $106,868  $58,946,838  20,121,059 $(369,665)   $1,813,637     $80,618,737
                     =========   =========   =========    ========  ===========  ==========  ========    ==========     ===========
</TABLE>


   The accompanying notes are an integral  part of these financial statements.




                                        F-5
<PAGE>



                    
                    PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>


                                                                            Year Ended December 31,
                                                                    1995             1996               1997
<S>                                                           <C>               <C>               <C>
Cash flows from operating activities:
    Net income (loss)                                         $  (1,251,514)    $   (1,570,853)    $  5,473,184
    Adjustments to reconcile net income 
     (loss) to net cash provided by (used
     in)operating activities (net of effects 
     of purchase transactions)
       Depreciation and amortization                                203,482            723,641        2,942,604
       Deferred provision for income taxes                          -                   -               329,840
       Net gain on sale of fixed assets                             (53,370)          (229,251)         -
       Noncash compensation                                         -                   14,750          -
       Changes in assets and liabilities-
          Accounts receivable                                      (345,472)          (785,773)      (7,179,281)
          Management fees receivable                               (116,968)        (1,149,630)        (592,551)
          Due from affiliated physician groups                      -                 (428,830)      (1,972,295)
          Prepaid expenses and other current assets                  63,216           (205,401)      (2,574,430)
          Other assets                                              (13,949)          (172,985)        (402,298)
          Accounts payable                                          459,442            (96,932)       2,459,925
          Payable to affiliated physician groups                       (402)         1,242,641        5,191,027
          Accrued expenses and other current liabilities            155,381          1,468,040       (2,401,270)
                                                              -------------     --------------    --------------
              Net cash provided by (used in) 
                 operating activities                              (900,154)        (1,190,583)       1,274,455
                                                              -------------     --------------    --------------

Cash flows from investing activities:
    Purchases of property and equipment                             (88,234)        (1,102,029)      (2,817,907)
    Proceeds from sale of equipment                                 218,890            242,175          -
    Purchases of clinic assets, net of cash                         (90,424)        (2,435,905)     (22,391,718)
    Increase in long term receivables (net of 
      effects of purchase transactions)                             -                 -             (20,024,375)
              Net cash provided by (used in) 
                  investing activities                               40,232         (3,295,759)     (45,234,000)
                                                              -------------     --------------    --------------

Cash flows from financing activities:
    Borrowings under notes payable                                  623,740          4,482,557       30,550,891
    Payments on notes payable                                      (146,118)          (331,715)      (2,838,760)
    Payments on capital leases                                      (82,895)           (70,132)        (561,998)
    Payment of deferred financing costs                             -                 (565,137)        (300,500)
    Payment of deferred offering costs                              -                 (564,427)         -
    Proceeds from issuance of Series A redeemable 
       convertible preferred stock                                2,953,358            -                -
    Proceeds from issuance of common stock                           63,146            125,000       31,837,739
    Purchase and retirement of treasury shares                      -                  -               (382,082)
    Issuance (payments) of stockholder notes receivable, net          5,666             (3,636)        (218,359)
                                                              -------------     --------------    --------------

              Net cash provided by financing activities           3,416,897          3,072,510       58,086,931
                                                              -------------     --------------    -------------

Increase (decrease) in cash and cash equivalents                  2,556,975         (1,413,832)      14,127,386

Cash and cash equivalents, beginning of period                      490,391          3,047,366        1,633,534
                                                              -------------     --------------    -------------

Cash and cash equivalents, end of period                      $   3,047,366     $    1,633,534    $  15,760,920
                                                              =============     ==============    =============

Supplemental disclosure of cash flow information (See Notes 3 and 7):
    Cash paid during the year-
       Interest expense                                       $      37,320     $      137,242    $     689,199
       Income taxes                                           $      67,420     $       -         $   1,299,118
</TABLE>



  The accompanying notes are an integral part of these financial statements.


                                      F-6
<PAGE>



                     PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 1995, 1996 and 1997


1.   DESCRIPTION OF BUSINESS

     ProMedCo Management Company and subsidiaries ("ProMedCo" or the "Company"),
a Delaware  corporation,  is engaged in operating and managing physician groups.
ProMedCo   commenced   operations  in  1994  and  has  since   affiliated   with
approximately  980  providers  in 10  states  consisting  of  approximately  350
physicians and 100 mid-level providers (primarily physician assistants and nurse
practitioners) in affililated  physician groups and approximately 530 physicians
in associated IPA networks.  During 1997, the Company  expanded the scope of its
services by  acquiring  a provider  of  capitation  management  services.  These
services   include   clinical   quality   assessment,   enrollment  and  patient
registration, capitation processing and payment, utilization management and case
management.  Through this  wholly-owned  subsidiary,  the Company contracts with
health  maintenance  organizations  ("HMOs")  and  other  third-party  payors to
arrange for the provision of comprehensive health services to their members on a
capitation  basis.  Currently,  the  Company  provides  such  services  covering
approximately  100,000 capitated lives through its affiliated groups, as well as
through associated IPA networks.

The Company, through its wholly-owned subsidiaries,  acquires certain net assets
of and  manages  physician  groups  under  long  term  service  agreements  with
affiliated  physician groups. The Company provides  administrative and technical
support for professional services rendered by the physician groups under service
agreements.  Under the service  agreements,  the Company is  reimbursed  for all
clinic expenses, as defined in the agreement, and participates at varying levels
in the excess of net clinic revenue over clinic expenses.


2.   SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation/Basis of Consolidation

The consolidated financial statements have been prepared on the accrual basis of
accounting  and  include  the  accounts  of the  Company  and its  wholly  owned
subsidiaries. The Company's subsidiaries acquire the operating assets and assume
certain  liabilities  of the  physician  groups and  account  for the  Company's
management  activities  with the physician  groups under the Company's long term
service  agreements.  The Company does not consolidate the operating results and
accounts of the affiliated  physician groups. For display purposes,  the Company
has  presented  the  physician  groups  revenues  and  amounts  retained  by the
physician groups (typically 80-85% of the physician groups' operating income and
is paid to the affiliated  physicians in accordance with the service agreements)
in the  accompanying  consolidated  statements  of  operations  to arrive at the
Company's   management  fee  revenue.   (See  further   discussion  below.)  All
significant intercompany accounts and transactions have been eliminated.


                                   F-8

<PAGE>


In November 1996, the Company  entered into a definitive  agreement with Western
Medical Management Corp., Inc. ("Reno"), a physician  management company.  Under
the terms of the agreement,  Reno exchanged its common stock for common stock of
the  Company  upon  consummation  of the  Offering  (see  Notes 3 and  8).  This
transaction has been accounted for as a pooling of interests,  as defined by APB
No. 16, "Business Combinations." The accompanying financial statements are based
on the  assumption  that  the  companies  were  combined  for the  full  periods
presented and prior  financial  statements  have been restated to give effect to
the combination.

Certain  prior  year  balances  have been  reclassified  to  conform to the 1997
presentation.

Physician Groups Revenue, Net

Physician groups revenue represents the revenue of the physician groups reported
at the estimated  realizable  amounts from  patients,  third-party  payors,  and
others for services rendered, net of contractual and other adjustments.

Revenue  under  certain  third-party  payor  agreements  is subject to audit and
retroactive  adjustments.  Provisions  for  third-party  payor  settlements  and
adjustments  are  estimated in the period the related  services are rendered and
adjusted in future periods as final  settlements  are  determined.  There are no
material claims, disputes, or other unsettled matters that exist to management's
knowledge  concerning  third-party  reimbursements.   In  addition,   management
believes  there are no  retroactive  adjustments  that would be  material to the
Company's financial statements. During 1996 and 1997, the Company estimates that
approximately 30% and 25%,  respectively,  of net physician groups revenue,  was
received  under  government-sponsored   healthcare  programs  (principally,  the
Medicare and Medicaid  programs).  The physician groups have numerous agreements
with managed care  organizations and other payors to provide physician  services
based on negotiated fee schedules.  No individual  managed care  organization or
other payor is material to the Company.

Management Fee Revenue

Management fee revenue represents physician groups revenue less amounts retained
by physician groups.  The amounts retained by physician groups (typically 80-85%
of the  physician  groups'  operating  income)  represents  amounts  paid to the
physicians  pursuant  to the  service  agreements  between  the  Company and the
physician  groups.  Under the  service  agreements,  the Company  provides  each
physician group with the facilities and equipment used in its medical  practice,
assumes responsibility for the management of the operations of the practice, and
employs substantially all of the non-physician personnel utilized by the group.

     The  Company's  management  fee revenues are  dependent  upon the operating
income of the physician  groups. As discussed  previously,  the physician groups
retain a fixed  percentage  (typically  80-85%)  of  physician  group  operating
income. Physician group operating income is defined in the service agreements as
the physician group's net medical revenue less certain contractually agreed-upon
clinic expenses,  including  non-physician  clinic salaries and benefits,  rent,
insurance,  depreciation,  interest and other direct clinic expenses. The amount
of the  physician  groups  revenue  retained  and  paid to the  physician  group
primarily  consists  of the  cost  of the  affiliated  physician  services.  The
remaining amount of the physician groups operating income (typically 15-20%) and
an amount equal to 100% of the clinic  expenses are reflected as management  fee
revenue earned by the Company.  Other revenue  represents  fees from  management
consulting,   supplemental   implementation  services  and  other  miscellaneous
revenues.




                                        F-8
<PAGE>


Management fee revenue is detailed as follows:
<TABLE>
<CAPTION>

                                                                   1995             1996              1997
                                                              -------------     -------------    -------------
<S>                                                           <C>               <C>              <C>
         Component based upon percentage of physician
              groups operating income                         $     943,180     $   2,378,966    $   9,043,126
         Reimbursement of clinic expenses                         6,900,537        23,866,230       65,626,945
         Revenue from non-affiliated physician groups               -                 -              1,317,179
         Other revenue                                              -                 -              4,654,285
                                                              -------------     -------------    -------------

         Management fee revenue                               $   7,843,717     $  26,245,196    $  80,641,535
                                                              =============     =============    =============
</TABLE>

Concentration of Risk

For the year ended December 31, 1997, four of the Company's affiliated physician
groups each  contributed  10% or more of the Company's  management  fee revenue.
Clinics in Champaign,  Illinois;  Temple,  Texas; Naples,  Florida; and Abilene,
Texas represented approximately 18%, 16%, 14% and 11% of management fee revenue,
respectively.

Clinic Expenses and General Corporate Expenses

Clinic expenses represent substantially all clinic operating expenses, including
clinic  salaries  and  benefits,   rent,  supplies,   maintenance  and  repairs,
insurance, utilities,  depreciation,  interest and other direct clinic expenses.
General  corporate  expenses  represent  primarily  the salaries and benefits of
corporate  headquarters  personnel,   rent,  travel,  and  other  administrative
expenses.

Net Earnings (Loss) Per Share

In September 1995, the Company's Board of Directors declared a two-for-one split
of the Company's  Common Stock including the Class B Common Stock. All share and
per share amounts have been restated to reflect the stock split.

The Company adopted the Statement of Financial Accounting Standards ("SFAS") No.
128,  "Earnings per Share" effective  December 31, 1997. SFAS No. 128 simplifies
the  computation  of EPS by  replacing  the  presentation  of primary EPS with a
presentation  of basic EPS.  Basic EPS is calculated  by dividing  income (loss)
available to common shareholders by the weighted average number of common shares
outstanding during the period. Common stock to be issued is assumed to be common
stock  outstanding  and is included  in the  weighted  average  number of common
shares outstanding for the basic EPS calculation.  Options,  warrants, and other
potentially  dilutive securities are excluded from the calculation of basic EPS.
Diluted EPS includes  the  options,  warrants,  and other  potentially  dilutive
securities  that are excluded from basic EPS using the  treasury  method to the
extent that these securities are not anti-dilutive.

There is no  difference  between  basic  and  diluted  EPS for the  years  ended
December  31,  1995  and  1996  because   options,   warrants  and   convertible
subordinated  notes  payable  have  an  anti-dilutive  effect.  Similarily,  the
convertible  subordinated  notes  payable have been excluded from diluted EPS in
the  year  ended   December  31,  1997  because  they  are   considered   to  be
anti-dilutive.  The following is a  reconciliation  of basic and diluted EPS for
the year ended December 31, 1997:


                                     F-9

<PAGE>


                                   Income           Shares           Per-Share
                                 (Numerator)     (Denominator)        Amount
Basic EPS                      $   5,473,184        11,375,662    $        0.48
                                                                  =============
Effect of dilutive securities
     Options                         -                 657,273
     Warrants                        -               2,191,263
                               -------------     -------------
Diluted EPS                    $   5,473,184        14,224,198    $        0.38
                               =============     =============    =============

In accordance with SFAS No. 128, the net earnings (loss) per share for all prior
periods have been restated.

Cash and Cash Equivalents

The Company  considers all highly liquid  investments  with  maturities of three
months or less when purchased to be cash equivalents.  Cash and cash equivalents
as of December 31, 1997, include approximately $6,317,000 of cash held in escrow
accounts  for  the  payment  of  premiums  under   split-dollar  life  insurance
contracts. (See Note 6.)

Accounts Receivable

Accounts receivable  principally  represents receivables from patients and other
third party payors for medical services provided by the physician  groups.  Such
amounts are recorded net of contractual allowances and estimated bad debts.

Property and Equipment

Property  and  equipment  are  stated  at cost.  Depreciation  of  property  and
equipment  are  calculated  using the  straight-line  method over the  estimated
useful  lives of the  assets,  which  range from  three to ten years.  Leasehold
improvements  are  amortized  on a  straight-line  basis over the shorter of the
lease term or  estimated  useful life of the  assets.  Routine  maintenance  and
repairs are charged to expense as incurred, while major renewals or improvements
are capitalized.

Intangible Assets

Service Agreement Rights

The  Company's  acquisitions  involve the  purchase of tangible  and  intangible
assets and the assumption of certain  liabilities  of the  affiliated  physician
groups. As part of the purchase  allocation,  the Company allocates the purchase
price  to the  tangible  assets  acquired  and  liabilities  assumed,  based  on
estimated fair market values. In connection with each  acquisition,  the Company
enters into long term service  agreements with the affiliated  physician groups.
The service  agreements  are for a term of 40 years and cannot be  terminated by
either party  without  cause,  consisting  primarily of  bankruptcy  or material
default.

In  connection  with  the  allocation  of the  purchase  price  to  identifiable
intangible  assets,  the Company  analyzes the nature of each group with which a
service  agreement is entered  into,  including the number of physicians in each
group, number of service sites and ability to recruit additional physicians, the
Group's  relative  market  position,  the  length of time each group has been in
existence, and the term and enforceability of the service agreement. Because the
Company  does  not  practice  medicine,  maintain  patient  relationships,  hire
physicians, enter into employment and noncompete agreements with the physicians,
or directly  contract with payors,  the intangible asset created in the purchase
allocation  process is  associated  solely with the service  agreement  with the
physician group.



                                       F-10
<PAGE>



The Company believes that there is no material value allocable to the employment
and  noncompete  agreements  entered  into between the  physician  group and the
individual  physicians.  The primary economic beneficiary of these agreements is
the physician  group,  an entity that the Company does not legally  control.  In
addition,  any damages  under the  agreements  are paid solely to the  physician
group for  purposes of replacing  departing  physicians.  Generally,  due to low
expected  physician  turnover in the industry  and the ability of the  physician
group to actively replace  departing  physicians,  there would be no significant
economic  loss to either the  physician  group or the Company  due to  physician
departure.   The  physician  groups  continually   recruit  physicians  and,  as
appropriate and necessary,  subsequently add qualified  physicians to the group.
This manner of  operations  allows the physician  group to perpetuate  itself as
individual  physicians  retire or are otherwise  replaced.  The Company believes
that the physician  groups with which it has service  agreements  thus are long-
lived entities with an  indeterminable  life, and that the physicians,  customer
demographics,  and various contracts will be continuously  replaced. The service
agreement  intangible  is  being  amortized  on a  straight-line  method  over a
composite average life of 30 years.

Excess of Cost of Acquired Assets Over Fair Value

Excess of cost of acquired assets over fair value  (goodwill) is amortized using
the straight-line method over thirty years.

Impairment of Long-Lived Assets

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed  Of," the Company  periodically  reviews its  intangible  assets for
impairment  whenever  events  or  changes  in  circumstances  indicate  that the
carrying  amount of the asset may not be recoverable.  If this review  indicates
that the  carrying  amount  of the asset  may not be  recoverable,  based on the
undiscounted  cash  flows  of the  operations  over the  remaining  amortization
period, then the carrying value of the asset is reduced to fair value. Among the
factors that the Company will  continually  evaluate are unfavorable  changes in
each  physician  group's  relative  market  share and local  market  competitive
environment, current period and forecasted operating and cash flow levels of the
physician group and its impact on the management fee earned by the Company,  and
legal factors governing the practice of medicine.

Income Taxes

The Company  accounts for income taxes under the  liability  method which states
that  deferred  taxes are to be  determined  based on the  estimated  future tax
effects of differences  between the financial  statement and tax bases of assets
and  liabilities  given the provisions of enacted tax laws.  Deferred income tax
provisions  and benefits are based on the changes to the asset or liability from
period to period.  The  Company and its  subsidiaries  file a  consolidated  tax
return.

Use of Estimates

The  preparation of the  consolidated  financial  statements in conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that 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.

Stock-Based Compensation

In October 1995, the Financial  Accounting  Standards Board ("FASB") issued SFAS
No. 123,  "Accounting  for Stock-Based  Compensation,"  which allows entities to
measure  compensation costs related to awards of stock-based  compensation using
either the fair value method or the intrinsic value method. Under the fair value
method,  compensation  expense is  measured  at the grant date based on the fair


                                        F-11
<PAGE>


value of the award.  Under the intrinsic value method,  compensation  expense is
equal to the  excess,  if any,  of the quoted  market  price of the stock at the
grant date over the amount the employee must pay to acquire the stock.  Entities
electing to measure  compensation  costs using the  intrinsic  value method must
make pro forma  disclosures  of net income and earnings per share as if the fair
value  method  had  been  applied.  The  Company  has  elected  to  account  for
stock-based   compensation  programs  using  the  intrinsic  value  method.  The
following pro forma  disclosures are presented to reflect amounts as if the fair
value method were applied:

                                             Year Ended December 31,
                                 1995             1996              1997
                              (Unaudited)     (Unaudited)        (Unaudited)

Net income (loss)           $  (1,251,514)  $  (2,045,455)     $   3,921,296
                            =============   =============      =============

Basic net earnings 
   (loss) per share         $       (0.16)  $       (0.26)     $        0.34
                            =============   =============      =============

The Company used the minimum value method to estimate the fair values of options
for the above pro forma  information.  For purposes of the minimum value method,
the Company used U.S.  Treasury  strip rates for its risk-free  interest  rates,
assumed no future dividends and assumed the expected life of the options through
the  applicable  expiration  dates.  For 1995 and 1996,  the years  prior to the
Offering,  the Company  assumed no volatility,  and assumed a volatility rate of
58% in 1997. Also see Note 8 -- Stock Option Plans.

New Accounting Pronouncement

The Financial Accounting Standards Board's Emerging Issues Task Force has issued
its abstract,  Issue 97-2, "Application of FASB Statement No. 94 and APB Opinion
No. 16 to Physician Practice Management Entities and Certain Other Entities with
Contractual  Arrangements" ("EITF 97-2"). EITF 97-2 addresses issues relating to
(1) whether a  "controlling  financial  interest" can be  established  through a
contractual  management  agreement  under FASB  Statement  No. 94, (2) whether a
transaction  between  a  physician  practice  management  entity  ("PPM")  and a
physician practice in which the PPM enters into a management  agreement with the
physician  practice  should  be  considered  a  business  combination  and  thus
accounted for under APB No. 16, (3) whether the pooling-of  interests  method of
accounting  may be  followed in certain  circumstances,  (4) what are the common
types of intangibles  that should be considered in performing the purchase price
allocation  and (5)  whether an  employee of the  physician  practice  should be
considered  an  employee  of  the  PPM  for  purposes  of  accounting  for  that
individual's stock-based compensation.

The primary effect of this pronouncement on the Company will be the presentation
of revenues. The Company currently presents net physician groups revenues in its
statement of operations.  The Company expects to adopt this pronouncement in the
fourth  quarter of 1998 and,  with such,  will no longer  present net  physician
groups revenue in its consolidated statement of operations.





                                       F-12

<PAGE>




3.   ACQUISITIONS

Medical Clinics

During 1997, 1996, and 1995, the Company, through its wholly-owned subsidiaries,
acquired  certain  operating  assets  or  all of the  outstanding  stock  of the
following physician groups:
<TABLE>
<CAPTION>

                    Physician Group                     Effective Date                      Location
<S>      <C>                                         <C>                                <C>
1997:    Naples Medical Center                       March 1, 1997                      Naples, FL
         Abilene Diagnositic Clinic                  June 1, 1997 (a)                   Abilene, TX
         Intercoastal Medical Group                  August 1, 1997                     Sarasota, FL
         Beacon Medical Group                        October 1, 1997 (b)                Harrisburg, PA
         Cowley Medical Associates (c)               November 1, 1997                   Harrisburg, PA
         Thomas-Spann Clinic                         December 1, 1997                   Corpus Christi, TX
         HealthStar, Inc.                            December 1, 1997                   Knoxville, TN

1996:    Cullman Primary Care                        March 6, 1996                      Cullman, AL
         Morgan-Haugh                                April 1, 1996                      Mayfield, KY
         HealthFirst Medical Group                   June 1, 1996                       Lake Worth, TX
         King's Daughters Clinic                     September 1, 1996                  Temple, TX

1995:    North Texas Medical Surgical                June 1, 1995                       Denton, TX
</TABLE>

         (a)  Abilene  Diagnostic  Clinic was  operated by the Company  under an
              interim service agreement  effective December 1, 1995. The Company
              completed its acquisition of certain  operating  assets on June 5,
              1997,  and entered  into a long term  service  agreement  with the
              physician group effective June 1, 1997.

         (b)  Beacon  Medical Group was operated by the Company under an interim
              service  agreement  effective April 1, 1997. The Company completed
              its  acquisition of certain  operating  assets on October 1, 1997,
              and entered into a long term service  agreement  effective on that
              date.

         (c) Cowley  Medical  Associates  merged  with Beacon  Medical  Group in
             December 1997.

The acquisitions of the operating assets and liabilities have been accounted for
by the purchase  method of accounting and,  accordingly,  the purchase price has
been allocated to the tangible assets acquired and liabilities  assumed based on
the estimated fair values at the dates of  acquisition.  Simultaneous  with each
acquisition,  the Company  entered into a long term service  agreement with each
physician  group.  In  conjunction  with  certain  acquisitions,  the Company is
obligated  to make  deferred  payments to  physician  groups.  Such  amounts are
included in deferred  purchase price in the  accompanying  consolidated  balance
sheets.  The following is the  preliminary  allocation of purchase price for the
acquisitions completed during the year ended December 31, 1997.

Fair value of assets acquired                                $    33,468,257
Liabilities assumed                                              (11,296,484)
Intangible assets                                                 63,821,926
                                                             ---------------
                                                                  85,993,699
Less - Fair value of common stock issued and to be issued         29,964,077
Less - Notes issued                                                9,780,602
Less - Deferred purchase price (payable in cash)                  12,402,253
                                                             ---------------

Cash purchase price                                          $    33,846,767
                                                             ===============



                                    F-13

<PAGE>


For certain  acquisitions  occurring  close to or at the end of the period,  the
estimated fair values are  preliminary  and,  therefore,  are subject to change.
Under the purchase  agreements,  the purchase price is adjustable by the Company
for a period  between 90 to 120 days after the  closing  of the  transaction  in
order to  finalize  the fair  values  of the  assets  acquired  and  liabilities
assumed.

Health Plans, Inc.

Effective  December 1, 1997, the Company,  through its wholly-owned  subsidiary,
completed its  acquisition  of Health Plans,  Inc.,  and renamed the company PMC
Medical  Management  , Inc.  ("PMCMM").  PMCMM  provides  capitation  management
services through risk contracting with HMOs and other  third-party  payors.  The
total  consideration  for the transaction was  approximately  $8.5 million which
consisted of $1.7 million  cash and $6.8 million of the  Company's  common stock
and stock options.

Pro Forma Information

The  following   unaudited  pro  forma   information   reflects  the  effect  of
acquisitions  on the  consolidated  results of operations of the Company had the
acquisitions   occurred   at  January  1,  1996.   Future   results  may  differ
substantially  from pro forma  results and cannot be  considered  indicative  of
future results.

<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                                                          1996                1997
                                                                       (unaudited)         (unaudited)
<S>                                                                   <C>                <C>
         Physician groups revenue, net                                $  122,605,838     $   171,827,614
         Less- Amounts retained by physician groups                       43,701,877          58,001,796
                                                                      --------------     ---------------

         Management fee revenue                                       $   78,903,961     $   113,825,818
                                                                      ==============     ===============

         Net income                                                   $    2,525,608     $     5,372,738
                                                                      ==============     ===============

         Basic net earnings per share                                 $         0.29     $          0.44
                                                                      ==============     ===============

         Weighted average number of shares outstanding                     8,757,139          12,200,655
                                                                      ==============     ===============
</TABLE>

Pro forma net  income  and pro forma  net  income  per share for the year  ended
December  31, 1997 are lower than  historical  net income and net  earnings  per
share for the same period  primarily  due to a higher pro forma tax rate,  which
assumes that all net operating  loss  carryforwards  would have been  recognized
prior to 1997.






                                         F-14
<PAGE>


Western Medical Management Corp. Inc.

As  discussed  in Note 1, the  Company  completed  its merger with Reno in March
1997,  the  date  of  the  Offering.  The  accompanying  condensed  consolidated
financial  statements  are  based  on the  assumption  that the  companies  were
combined for the full periods presented and prior financial statements have been
restated to give effect to the combination.  The following unaudited information
reflects the separate results of the combined  entities for periods prior to the
combination:

<TABLE>
<CAPTION>

                                Three Months Ending            Twelve Months Ending           Twelve Months Ending
                                  March 31, 1997                 December 31, 1996              December 31, 1995
                               ProMedCo         Reno         ProMedCo          Reno         ProMedCo         Reno
<S>                         <C>            <C>             <C>            <C>            <C>             <C>
Physician groups
    revenue, net            $  17,343,665  $   3,381,912   $  34,641,222  $  12,395,579  $    1,918,029  $  11,270,376
Less: amounts retained
    by physician groups         7,669,484      1,338,687      15,322,220      5,469,385         759,513      4,585,175
                            -------------  -------------   -------------  -------------  --------------  -------------
Management fee revenue          9,674,181      2,043,225      19,319,002      6,926,194       1,158,516      6,685,201
                            -------------  -------------   -------------  -------------  --------------  -------------
Operating expenses
    Clinic expenses             8,025,524      1,671,579      16,460,181      7,106,899       1,023,606      7,098,610
    General corporate
     expenses                     818,772         -            2,633,585         -              802,980         -
    Depreciation and
     amortization                 391,507         44,368         610,827        112,814          34,302        169,180
    Interest expense              112,666          3,283         163,714         45,760           (5030)        25,988
    Merger costs                    -              -               -            682,269           -                  -
                            -------------  -------------   -------------  -------------  --------------  -------------

                                9,348,469      1,719,230      19,868,307      7,947,742       1,855,858      7,293,778
                            -------------  -------------   -------------  -------------  --------------  -------------
Income (loss) before
    provision for income
    taxes                         325,712        323,995        (549,305)    (1,021,548)       (697,342)      (608,577)
Provision for income
    taxes                          97,714         97,198          -              -               -             (54,405)
                            -------------  -------------   -------------  -------------  --------------  -------------
Net income (loss)           $     227,998  $     226,797   $    (549,305) $  (1,021,548) $     (697,342) $    (554,172)
                            =============  =============   =============  =============  ==============  =============
</TABLE>

4.   PROPERTY AND EQUIPMENT

Property and equipment is summarized as follows:

                                                         December 31,
                                                    1996              1997

Furniture, fixtures, and equipment              $   4,193,498    $  12,212,561
Leasehold improvements                                601,241        1,008,421
                                                -------------    -------------
                                                    4,794,739       13,220,982
Less- Accumulated depreciation                       (864,548)      (2,630,421)
                                                --------------   -------------

Property and equipment, net                     $   3,930,191    $  10,590,561
                                                =============    =============



                                        F-15



<PAGE>



5.   INTANGIBLE ASSETS

Intangible assets are summarized as follows:
<TABLE>
<CAPTION>

                                                                      December 31,
                                                                 1996              1997
<S>                                                           <C>              <C>
Service agreement rights                                      $  15,148,866    $  73,200,258
Excess of cost of acquired assets over fair value                   -              5,770,534
                                                              -------------    -------------
                                                                 15,148,866       78,970,792
Less- Accumulated amortization                                     (288,695)      (1,775,441)
                                                              --------------   --------------

Intangible assets, net                                        $  14,860,171    $  77,195,351
                                                              =============    =============
</TABLE>

6.   LONG TERM RECEIVABLES

During 1997,  the Company  entered into an agreement to lend up to $42.7 million
to an affiliated  physician group. The loan will be funded in six advances.  The
first  advance  was made on November  15, 1997 in the amount of $3 million.  The
second advance was made on December 1, 1997 in the amount of $16.4 million.  The
next four  advances of $5.825  million each will be made annually on December 1,
beginning in 1998.  Interest is payable to the Company monthly at an annual rate
of 8.0%.  The loan  will be repaid  in  fifteen  annual  payments  beginning  on
November 30, 2008.  Certain assets of the affiliated  physician  group have been
pledged as security  under the loan,  and the loan  provides  certain  rights to
offset against distributions under the service agreement in the event of default
under the loan agreement.  As of December 31, 1997, the outstanding loan totaled
$19.4  million,  and the  Company  estimates  that  the  carrying  value of this
receivable approximates fair value.

During 1997 and in connection with the certain acquisitions, the Company entered
into split-dollar life insurance agreements with the physicians and prior owners
of the physician  groups.  Under these  agreements,  the Company  purchases life
insurance in the name of the individual seller. Upon the death of the individual
seller,  the amount of the premiums  paid by the Company  will be  returned.  In
addition, these receivables are guaranteed by the individual policy holders. The
total of the premiums that will be returned to the Company is $25.0 million. The
$3.9  million  carrying  value of these  receivables  as of December  31,  1997,
represents  the  present  value of the  premiums  that will be  returned  to the
Company  based on the  estimated  actuarial  life of the policy  holders  and an
implied  interest  rate of 6.75%.  The  accretion  of this  receivable  from the
initial  carrying value to the full premium amount is recorded as a reduction to
amortization expense in the accompanying consolidated statements of operations.

In May 1997, the Company loaned $600,000 to an officer of the Company. Beginning
in May 2001, the loan will be repaid in five equal annual  payments plus accrued
interest of 6.5%.




                                       F-16
<PAGE>


7.   NOTES PAYABLE, OTHER LONG TERM DEBT
     AND OBLIGATIONS UNDER CAPITAL LEASES

Notes payable are summarized as follows:
<TABLE>
<CAPTION>

                                                                                December 31,
                                                                           1996              1997
<S>                                                                    <C>              <C>
         Borrowings under Revolving Credit Facility                    $   4,157,027    $  32,968,000
         Notespayable  to  physician  group;  
              unsecured;  due  in  three  annual
              installments in April 1998, 1999, and 
              2000; 9% interest payable in
              cash or options to purchase the Company's common
              stock                                                          -              8,608,602
         Notes payable to physician group; unsecured; due
              in four annual installments in December 1998,
              1999, 2000, and 2001; 5% interest payable
              annually                                                       -              1,172,000
         Note payable to physician group; unsecured; due
              in two equal installments of principal and 7%
              interest in April 1997 and 1998                                851,549          440,173
         Note payable to a bank, interest at prime plus
              1.5%, paid in February 1997                                    300,000          -
         Other notes payable                                                 427,788          175,915
                                                                       -------------    -------------
                                                                           5,736,364       43,364,690
         Less- Current portion                                            (1,151,191)      (3,676,365)
                                                                       -------------    -------------

         Notes payable, net                                            $   4,585,173    $  39,688,325
                                                                       =============    =============
</TABLE>

The maturities of notes payable at December 31, 1997, are as follows:

              1998                           $   3,676,365
              1999                               8,210,199
              2000                               9,755,926
              2001                               6,886,600
              2002                               6,593,600
              Thereafter                         8,242,000
                                             -------------

                                             $  43,364,690
                                             =============

In connection with the issuance of notes payable to  stockholders  and one other
party in 1995, the Company issued 150,000  warrants to purchase  common stock at
$2.50 per share.  On June 30, 1996,  the warrants were exercised in exchange for
forgiveness of the notes payable.

Revolving Credit Facility

Effective July 15, 1996, the Company entered into a revolving  credit  agreement
which was  subsequently  amended and  restated  November  13, 1997 (the  "Credit
Facility").  The Credit  Facility  provides  for a six-year  commitment  to fund
revolving credit  borrowings of up to $50.0 million for acquisitions and general
working  capital  purposes.  Beginning  on April 1, 1999,  the  Credit  Facility
converts  to a term  loan  with  twenty  quarterly  payments  equal to 5% of the
outstanding  balance on January 1, 1999. Under the terms of the Credit Facility,
the Company  paid a  commitment  fee of  approximately  $780,000  which has been
capitalized in other assets in the accompanying  consolidated balance sheets and
amortized as an  adjustment to interest  expense  using the  effective  interest
method. The interest rate under the Credit Facility will be set at the Company's
option and varies based on selected  financial ratios,  as defined,  as follows:



                                      F-17

<PAGE>



(i) 30-day  commercial  paper rate of an issuer whose  corporate bonds are rated
"AA," plus 2.70% to 3.25%;  (ii) reserve adjusted LIBOR, as defined,  plus 2.70%
to 3.25%;  or (iii)  prime rate plus 0.35% to 0.88%  depending  on certain  debt
levels.  As of December  31, 1997,  the  effective  interest  rate on the Credit
Facility was 8.5% based on the 30-day  commercial  paper rate as  adjusted.  The
Credit Facility includes certain restrictive  covenants including limitations on
the payment of dividends as well as the maintenance of certain financial ratios.
The Credit Facility is secured by  substantially  all the assets of the Company.
As of December 31, 1997, the Company had $17.0 million available for acquisition
purposes under the Credit  Facility of which $7.3 million was also available for
working capital, subject to certain conditions as defined by the agreement.

Convertible Subordinated Notes Payable

On March 29, 1996, in connection with the  affiliation of two physician  groups,
the Company issued $1,800,274 in convertible  subordinated notes. The notes bear
interest at 7.0% and mature in March 2003. The notes may, at the election of the
noteholders,  be converted into shares of common stock at a conversion  price of
$9.00 per share,  subject to certain  limitations  and automatic  conversions as
defined in the note agreements. During 1997, one noteholder converted $35,216 of
notes into 3,912 shares of the Company's common stock.

Obligations Under Capital Leases

In connection with affiliations with physician groups and in the ordinary course
of business,  the Company  assumed the  obligation  of various  equipment  under
capital  leases.  As of December 31, 1997,  future  minimum lease payments under
capital leases are as follows:

               1998                           $         749,017
               1999                                     582,706
               2000                                     424,458
               2001                                     198,685
                                              -----------------
                                                      1,954,866
Less- Portion attributable to interest                 (271,389)
                                              ------------------
Obligations under capital leases                      1,683,477
Less- Current portion                                  (609,591)
                                              ------------------
                                              $       1,073,886
                                              =================


8.   REDEEMABLE CONVERTIBLE PREFERRED STOCK,
     COMMON STOCK, AND STOCKHOLDERS' EQUITY

The Company has authorized the issuance of 70,000,000  shares of stock, of which
(a) 20,000,000 shares, par value $0.01 per share, are to be designated Preferred
Stock  (of  which  700,000  shares  are to be  designated  Series  A  Redeemable
Convertible  Preferred Stock), (b) 47,400,000 shares, par value $0.01 per share,
are to be of a class  designated  Common Stock,  and (c) 2,600,000  shares,  par
value $0.01 per share, are to be of a class designated Class B Common Stock.

During March 1997,  the Company  completed  the initial  public  offering of its
common stock (the  "Offering").  The Offering  consisted of 4,000,000  shares of
common stock sold at a price of $9.00 per share. Gross and net proceeds from the
Offering were $36.0 million and $33.5 million,  respectively.  In addition,  net
proceeds were reduced by approximately  $1.8 million of expenses relating to the
Offering.

Series A Redeemable Convertible Preferred Stock

During  1996,   the  Company  issued  500,000  shares  of  Series  A  Redeemable
Convertible  Preferred  Stock and  warrants to purchase  an  additional  200,000
shares of Preferred  Stock.  The warrants are exercisable at


                                       F-18
<PAGE>



$4.50 per share and expire on  December  6,  2000.  Upon the  completion  of the
Offering,  the 500,000 shares of Series A Redeemable Convertible Preferred Stock
were automatically converted into Common stock.

Between  December 6, 1995 and the  completion of the  Offering,  the Company was
required for all shares or share  equivalents of Common stock issued,  excluding
shares and share equivalents  issued in connection with an acquisition or shares
issued in connection with a redemption or conversion  when the share  equivalent
was issued  prior to December 6, 1995,  to grant  options to purchase  shares of
Common stock to Preferred  Stockholders  in an amount equal to their  percentage
ownership of the Company prior to the issuance. During 1996, options to purchase
47,230 shares of Common stock were granted to Preferred  Stockholders,  of which
7,743 were exercisable at prices ranging from $6.00 to $10.20 per share.  During
1997 and prior to the completion of the Offering, additional options to purchase
294  shares of Common  stock  were  granted to  Preferred  Stockholders  with an
exercise price of $12.00.

Redeemable Common Stock

In connection  with an acquisition in 1995, the Company issued 165,296 shares of
Redeemable  Common Stock for $991,776.  On the  completion of the Offering,  the
165,296  shares of Redeemable  Common Stock were  automatically  converted  into
Common stock.

Class B Common Stock

During 1994, the Company issued  613,075 Class B units,  each  consisting of two
shares of Class B Common Stock and a warrant to purchase  1.5756 shares of Class
B Common  Stock at an  exercise  price of $1.25  per  share.  The  warrants  are
exercisable  on or before June 30,  2004.  The Company also granted an option to
purchase  77,500  Class B units at an  exercise  price of $0.50  per  unit.  The
options are fully vested and may be exercised  until  September  30, 2004. As of
December  31,  1997,  no warrants or options  have been  exercised.  The Class B
Common Stock had a liquidation  preference,  subordinate to the Preferred Stock,
at an amount  equal to $1.00 per share.  Each share of Class B Common  Stock was
automatically converted into Common stock on the completion of the Offering.

Common Stock

During 1994, the Company issued 907,000 Common stock units,  each  consisting of
two shares of Common  stock and a warrant to  purchase  1.5756  shares of Common
stock at an exercise price of $1.25 per share.  The warrants are  exercisable on
or before June 30,  2003.  As of December 31, 1997,  56,686  warrants  have been
exercised.

Common Stock To Be Issued

In  connection  with  acquisitions  completed in 1997,  common  shares valued at
$20,121,059 will be issued in 1998. The number of common shares to be issued and
the  price  per  share  was  fixed  at the  consummation  date  of the  specific
acquisitions in 1997.

In  connection  with  acquisitions  completed in 1996,  common  shares valued at
$2,303,212  were issued in 1997. The number of shares to be issued and the price
per share was fixed at the  consummation  date of the specific  acquisitions  in
1996 and 1995.

Stock Option Plans

The Company has reserved 1,500,000 shares of Common stock for issuance under its
1994 Stock Option Plan and 2,100,000  shares of Common stock for issuance  under
its 1996 Stock Option Plan  (collectively  the "Stock  Option  Plans").  Options
granted  under the  Plans  may be either  incentive  stock  options  ("ISO")  or
nonqualified  stock  options  ("NQSO").  The option price per share shall not be
less than the fair market  value of the  Company's  Common  stock at the date of
grant. Generally, options vest over a five-year 




                                      F-19

<PAGE>



period and expire in either 2004 or 2006.  As of December 31,  1997,  options to
purchase  1,947,729  shares  remain  available  for grant under the Stock Option
Plans.

The following table summarizes the activity in the Stock Option Plans:

                                                             Weighted-Average
                         Outstanding    Price Per Share       Exercise Price

December 31, 1994            80,000     $0.50 - $  2.50            $1.50
     Granted                546,200     $0.50 - $  6.00            $4.99
     Exercised              -                  -                     -
     Canceled              (121,000)    $3.00 - $  6.00            $3.36
                        -----------
December 31, 1995           505,200     $0.50 - $  6.00            $4.83
     Granted                805,800     $6.00 - $14.00             $7.81
     Exercised              (23,200)    $0.50 - $  6.00            $5.24
     Canceled              (223,400)    $0.50 - $  9.00            $5.89
                        -----------
December 31, 1996         1,064,400     $0.50 - $14.00             $6.85
     Granted                626,071     $6.00 - $12.00             $7.88
     Exercised               (3,100)         $6.00                 $6.00
     Canceled               (61,400)     $6.00 - $9.00             $6.67
                        -----------
December 31, 1997         1,625,971     $0.50 - $14.00             $6.71
                        ===========

Stock options available for exercise under the Stock Option Plans as of December
31, 1995, 1996, and 1997, totaled 8,000, 170,720, and 653,464, respectively.

When the  Company  entered  into the Credit  Facility  in 1996 (see Note 7), the
Company issued 46,875  options to purchase the Company's  Common stock at $10.00
per share. These options are outstanding and exercisable.


9.   INCOME TAXES

The  provision  for income tax expenses  for the years ended  December 31, 1995,
1996 and 1997 consists of:

                                 1995             1996              1997
                            -------------     -------------    -------------
Current
     Federal                $       1,731     $     -          $   2,146,759
     State                        -                 -                125,780
Deferred
     Federal                      (56,136)          -                306,510
     State                        -                 -                 23,330
                            -------------     -------------    -------------
                            $     (54,405)    $     -          $   2,602,379
                            ==============    =============    =============

Total  provision for income taxes differed from the amount  computed by applying
the U.S.  Federal income tax rate of 35% to earnings before taxes as a result of
the following:
<TABLE>
<CAPTION>

                                                                   1995             1996              1997
                                                              -------------     -------------    -------------
<S>                                                           <C>               <C>              <C>
         Federal tax (benefit) at statutory rate                   (365,441)         (534,090)       2,826,447
         State income taxes, net of federal income tax
                  benefit                                           (13,947)          (10,986)         422,352
         Change in valuation allowance                              360,023           571,118         (992,301)
         Amortization of nondeductible goodwill                     -                 -                209,234
         Other
                                                                    (35,040)          (26,042)         136,647
                                                              -------------     --------------    ------------
         Total provision for income taxes                     $     (54,405)    $     -           $  2,602,379
                                                              =============     ==============    ============
</TABLE>


                                        F-21
<PAGE>


Deferred  income tax assets  (liabilities)  reflect net tax effects of temporary
differences  between  the  amounts  of  assets  and  liabilities  for  financial
reporting  purposes  and the amounts used for income tax  purposes.  Significant
components of the Company's net deferred tax liability are as follows:
<TABLE>
<CAPTION>

                                                                                December 31,
                                                                           1996              1997
<S>                                                                    <C>              <C>
         Current deferred tax assets (liabilities)
              Operating loss carryforwards                             $     493,153    $     -
              Unrealized gains on security investments                       -               (381,323)
              Non-deductible accrued expenses                                346,637          207,222
                                                                       -------------    -------------
                                                                             839,790         (174,101)
         Non-current deferred tax liabilities
              Property and equipment, principally due to
                  differences in depreciation                                -               (299,838)
              Clinic service agreements                                      -               (729,896)
              Other                                                          152,511          (74,142)
                                                                       -------------    --------------

                                                                             152,511       (1,103,876)
                                                                       -------------    --------------
         Net deferred tax asset(liability)                                   992,301       (1,277,977)
         Valuation allowance                                                (992,301)         -
                                                                       -------------    --------------
                                                                       $     -          $  (1,277,977)
                                                                       =============    ==============
</TABLE>

10.  DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107, "Disclosures About Fair Value of Financial  Instruments," requires
disclosure  about  the  fair  value of  financial  instruments  for  which it is
practicable  to estimate fair value.  As of December 31, 1996 and 1997, the fair
value of the Company's cash and cash equivalents,  accounts receivable, accounts
payable,  due to  physician  groups  and  accrued  expenses  approximated  their
carrying value because of the short  maturities of those financial  instruments.
The fair value of the Company's  long term debt also  approximates  its carrying
value since the related notes bear interest at current market rates.

The  estimated  fair  value of the  convertible  subordinated  notes  payable to
physician groups was approximately  $1,800,274 and $1,985,690 as of December 31,
1996 and 1997,  respectively.  The carrying  value of these notes was $1,800,274
and  $1,765,058  as of December 31, 1996 and 1997,  respectively.  The estimated
fair  value of these  convertible  subordinated  notes  payable  is based on the
greater of their face value and the closing  market  value of the common  shares
into which they could have been converted at the respective balance sheet date.


11.  COMMITMENTS AND CONTINGENCIES

Leases

Operating  leases  generally  consist of short-term  leases for the office space
where the physician groups are located. Lease expense of approximately $716,000,
$2,740,000,   and  $7,086,000   for  the  years  ended  1995,   1996  and  1997,
respectively,  reflect  lease  commitments  for medical  practice  office space,
medical practice equipment, corporate office space, and corporate equipment.






                                          F-22
<PAGE>


The following is a schedule of future minimum lease payments under noncancelable
operating leases as of December 31, 1997.

                        1998                  $        5,929,466
                        1999                           5,428,666
                        2000                           4,906,781
                        2001                           4,150,848
                        2002                           3,649,947
                        Thereafter                    20,952,100
                                              ------------------
                                              $       45,017,808
                                              ==================

Litigation

The  Company is subject to various  claims and legal  actions  that arise in the
ordinary  course  of  business.  In the  opinion  of  management,  the  ultimate
resolution  of such  matters  will not have a  material  adverse  effect  on the
Company's financial position or results of operations.

Insurance

The  Company  and the  physician  groups  are  insured  with  respect to medical
malpractice risks on a claims- made basis. Management is not aware of any claims
against the Company or the physician groups that might have a material impact on
the Company's financial position or results of operations.

Year 2000

The Company has  assessed  and  continues  to assess the impact of the Year 2000
Issue on its reporting  systems and operations.  With disparate systems in place
at the Company's various  affiliated  groups,  the assessment  process continues
with each new affiliation.  Noncompliant  practice  management  systems could be
acquired  in a new  affiliation,  which  would  require  system  remediation  or
replacement.  Given these issues, the Company is unable to estimate the costs of
remediation or replacements  that may be required.  With its current strategy of
replacing inadequate practice management systems, however,, the Company does not
believe  that Year 2000  issues will cause a  conversion  to be any more or less
difficult than a typical system conversion. If the issues prove more significant
than  anticipated,  or  if  noncompliant  third-party  systems  "re-infect"  the
Company's Year 2000 compliant systems,  there could be a material adverse impact
on the Company's financial position, results of operations or cash flows.

<PAGE>