<PAGE>
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

(MARK ONE)

[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
        ACT OF 1934. FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001, OR

[ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
        EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM ________ TO

                          COMMISSION FILE NO.: 0-19786
                                  PHYCOR, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                                                    <C>
                             TENNESSEE                                                62-1344801
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)         (I.R.S. EMPLOYER IDENTIFICATION NO.)

                 30 BURTON HILLS BOULEVARD, SUITE 400
                       NASHVILLE, TENNESSEE                                             37215
             (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                                 (ZIP CODE)
</TABLE>

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 665-9066

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

         NONE                                        NONE
  (TITLE OF EACH CLASS)            (NAME OF EACH EXCHANGE ON WHICH REGISTERED)

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

                      COMMON STOCK; NO PAR VALUE PER SHARE

                                (TITLE OF CLASS)
                4.5% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003

                                (TITLE OF CLASS)
                         PREFERRED STOCK PURCHASE RIGHTS

                                (TITLE OF CLASS)

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

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

         The aggregate market value of the shares of common stock (based upon
the closing sales price of these shares as reported on the Over-the-Counter
Bulletin Board on April 10, 2002) of the registrant held by non-affiliates on
April 10, 2002, was approximately $364,000.

         As of April 10, 2002, 73,234,105 shares of the registrant's common
stock were outstanding.

<PAGE>

                           FORWARD-LOOKING STATEMENTS

         The disclosure and analysis in this report and other information that
is provided by PhyCor, Inc. ("PhyCor," the "Company," "we," "our," or "us")
contain some forward-looking statements. Forward-looking statements give our
current expectations or forecasts of future events. These statements do not
relate solely to historical or current facts and can be identified by the use of
words such as "may," "believe," "will," "expect," "project," "estimate,"
"anticipate," "plan," "should" or "continue." From time to time, we also may
provide oral or written forward-looking statements in other materials we release
to the public.

         Any of our forward-looking statements in this report and in any other
public statements we make may turn out to be incorrect. These statements can be
affected by inaccurate assumptions we might make or by known or unknown risks
and uncertainties. Many factors mentioned in this report will be important in
determining future results, including the following:

         -      uncertainties related to our voluntary petition under Chapter 11
                of the Bankruptcy Code including, but not limited to, (i) our
                ability to consummate the plan of reorganization as amended on
                substantially the terms proposed, (ii) actions which may be
                taken by creditors and the outcome of various administrative
                matters in the Chapter 11 proceeding and (iii) the possibility
                of delays in the effective date of the proposed plan of
                reorganization;

         -      our inability to access capital markets given our current
                financial condition;

         -      the amount of time and effort that our senior management must
                devote to the Chapter 11 case and other matters relating to our
                financial condition, thereby reducing time spent directly on
                the operations of our businesses;

         -      the possibility that we may be unable to retain top management
                and other key personnel;

         -      competition and general economic, demographic and business
                conditions, both nationally and in the regions in which we
                operate;

         -      existing government regulations and changes in legislative
                proposals for healthcare reform, including changes in Medicare
                and Medicaid reimbursement levels;

         -      our ability to operate independent practice associations and
                other physician organizations profitably;

         -      the ability of the independent practice associations to
                negotiate acceptable contracts with payors and the possibility
                of decreases in federal reimbursement;

         -      changes in contractual relationships;

         -      the nature of capitated fee arrangements and other methods of
                payment for medical services;

         -      the risk of professional liability claims; and

         -      the outcome of pending litigation.

Actual future results may vary materially from those reflected in the
forward-looking statements. For a more detailed discussion of the factors that
could affect our results of operations and financial condition, please see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Factors."

         We undertake no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosures we make on related
subjects in our future 10-Q, 8-K, and 10-K reports to the SEC.



                                       2
<PAGE>

                                     PART I

ITEM 1.    BUSINESS

         Overview

         We are a Tennessee corporation which was incorporated in 1988. We are a
medical network management company that develops and manages independent
practice associations ("IPAs"), manages physician hospital organizations
("PHOs"), provides contract management services to physician networks owned by
health systems, and provides management and consulting services to independent
medical organizations.

         North American Medical Management, Inc. ("NAMM"), one of our
wholly-owned subsidiaries, through its subsidiaries, manages IPAs in northern
and southern California, Kansas, and Tennessee and manages eight PHOs in
Illinois. NAMM's California subsidiary, North American Medical Management
California, Inc. ("NAMM California"), manages our IPAs in California, and its
affiliate, PrimeCare Medical Network, Inc. ("PMNI"), owns certain of these IPAs.
PMNI holds a limited Knox-Keene license in California. This license allows PMNI
to contract with payors to assume risk under certain managed care contracts and
then delegate risk to certain of our IPAs. Through NAMM California, effective
March 1, 2002, we acquired management contracts of seven additional IPAs from
Medical Pathways, Inc. ("Medical Pathways"). Finally, through our PhySys
division, we provide management and support services to two of our formerly
affiliated multi-specialty clinics and to the physician networks of two health
systems. In addition, PhySys offers consulting services to independent medical
organizations through limited engagements.

FILINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

         On January 31, 2002 (the "Petition Date"), we and 47 of our
subsidiaries (collectively, the filing entities are referred to as the
"Debtors") filed voluntary petitions for relief under Chapter 11 of the United
States Bankruptcy Code (the "Bankruptcy Filings") with the United States
Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court")
(Case No. 02-40278 (PCB)). On the Petition Date, we also filed a joint plan of
reorganization (as and to the extent subsequently amended, the "Plan"), which
sets forth the manner in which claims against, and interests in, us will be
treated following our emergence from bankruptcy, as well as a disclosure
statement. The disclosure statement has not yet been approved by the Bankruptcy
Court. Our IPA management operating subsidiaries are not part of the Bankruptcy
Filings and have continued paying, in the ordinary and normal course of
business, all wages, benefits and other employee obligations as well as all
outstanding and ongoing accounts payable to their vendors.

         We elected to seek Chapter 11 protection to attempt to realign our
capital structure and to preserve the value of our remaining businesses for our
creditors. We negotiated the Plan with an informal committee of holders of our
4.5% convertible subordinated debentures (the "Notes") and Warburg, Pincus
Equity Partners, L.P. ("Warburg, Pincus"), which through its affiliates holds
all of our zero coupon convertible subordinated notes ("Zero Coupon Notes").
These creditors collectively hold approximately two-thirds of our outstanding
indebtedness. The Plan is subject to a number of conditions, including approval
by certain of our creditors and confirmation by the Bankruptcy Court. Creditors
who do not vote in favor of the Plan may challenge its confirmation. Resolution
of any such challenges could result in delays and increased expenses as well as
failure of the Plan.

         If the Plan is confirmed, our general unsecured creditors, including
the holders of the Notes ("Bondholders") and Warburg, Pincus, will receive
shares of the reorganized company's common stock or, in certain instances, cash
in an amount equal to approximately 11.9% of their claims in full satisfaction
of their claims. Under the terms of the Plan, our outstanding and authorized
common stock, options, warrants and rights to purchase preferred stock will be
cancelled and holders of these securities will not receive any consideration,
either in cash or in newly issued stock. We currently have outstanding
approximately 73,000,000 shares of common stock and options and warrants to
purchase approximately 2,506,000 and 348,000 shares of common stock,
respectively, all of which will be cancelled for no consideration. Finally,
under the terms of the Plan, we anticipate that there will be fewer than 300
shareholders of record upon consummation. If that is the case, the securities of
the reorganized company will not be publicly traded and the reorganized company
will be a privately-held company not subject to the reporting obligations of the
Securities and Exchange Commission (the "SEC").



                                       3
<PAGE>

INDEPENDENT PRACTICE ASSOCIATIONS

         IPAs And PHOs

         Through our IPAs and PHOs, we currently provide healthcare-related
services to approximately 810,000 commercial equivalent members ("CEMs") in four
states. Approximately 237,000 of these CEMs are enrolled in Medicare+ Choice
Plans offered by payors to individuals who qualify for Medicare benefits. The
payor contracts entered into on behalf of our IPAs are based on capitated fee
arrangements. Under capitation arrangements, healthcare providers bear the risk,
subject to certain loss limits, that the aggregate costs of providing medical
services to members will exceed the payments received. Currently, we operate 23
IPAs through our subsidiaries in California. Our California operations include
654,000 CEMs and constitute over 90% of our ongoing revenue. Our next largest
market is Chicago, Illinois where we provide services to 128,000 CEMs and these
operations constitute 3% of our revenue. In 2001, revenue from IPA and PHO
operations constituted approximately 92% of our total revenue. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations." We anticipate that revenue from IPA and
PHO operations will continue to constitute such a high percentage of our revenue
in the future.

         NAMM. Through its subsidiaries, NAMM manages 23 IPAs in California, one
IPA in Kansas, and two IPAs in Tennessee and manages eight PHOs in Illinois.
Seven of the IPA contracts in California were acquired, effective March 1, 2002,
from Medical Pathways. The Medical Pathways acquisition expanded our service
area into Los Angeles, Orange and San Luis Obispo counties. Eight of the
California IPAs are owned by PMNI and a few are owned by a physician who also
serves as medical director of our California operations. These IPAs contract
with PMNI to have access to payor contracts. In addition, the management
agreements for the IPAs which contract with PMNI provide for NAMM California to
receive a percentage of revenue that is no less than NAMM's cost to manage plus
the surplus remaining after distributions to physicians. The management
agreements for the PHOs and IPAs which do not contract with PMNI provide for the
NAMM subsidiary to receive fees based upon either a percentage of revenue
collected by the IPAs or a per member per month payment, plus a share of
surplus, if any, of capitated revenue of the IPAs or PHOs in excess of any
healthcare claims expense. These IPAs contract directly with payors, and these
contracts typically provide that the payor may terminate the agreement without
cause on 120 days notice. The loss by an IPA or PHO of any significant payor
contract would have a material adverse effect on the revenue and financial
condition of the NAMM managing entity and potentially on our ongoing operations
as a whole.

         The IPA management agreements are typically short-term agreements with
automatic renewal provisions for additional periods. The California IPAs that
contract with PMNI have management agreements with NAMM California for ten year
terms which commenced January 2002, and are renewable for additional five year
terms. The remaining California IPAs generally have management agreements with a
NAMM subsidiary with terms ranging from one year to three years. The initial
terms of all of the Illinois management agreements have been completed and all
but one of these agreements automatically renew indefinitely for one-year terms;
the other agreement renews for a single two-year term, with subsequent
indefinite one-year renewals. Six of the eight Illinois management agreements
can be terminated without cause upon 90 days notice, and with cause on 30 days
notice. The other two agreements can be terminated without cause by the
applicable IPA upon three months notice and by NAMM on six months notice, and
they can be terminated with cause by either party upon 60 days notice. The
management agreement in Kansas City terminates in 2009 although it renews
indefinitely for five-year terms unless either party gives six months notice of
its intention not to renew the agreement. The Kansas City agreement can only be
terminated for cause upon 60 days notice after the passage of a 90-day cure
period. We manage two IPAs in Tennessee in partnership with a local hospital.
The initial term of each Tennessee agreement has been completed. The agreements
have automatically renewed for additional five-year terms and will do so
indefinitely unless terminated by either party. Both Tennessee agreements can be
terminated without cause upon 180 days notice and with cause upon 30 days
notice.


                                       4
<PAGE>

         The following table sets forth the membership enrolled in the IPAs and
PHOs managed or operated by us in our four markets as of March 1, 2002:

<TABLE>
<CAPTION>
                 MARKET                   NUMBER OF IPAS/PHOS              CEMS
                 ------                   -------------------              ----
<S>                                       <C>                            <C>
              California(1)                       23                     654,000
              Illinois                             8                     128,000
              Tennessee                            2                      19,000
              Kansas                               1                       9,000
</TABLE>

------------------------
(1) These numbers reflect the Medical Pathways transaction that was completed in
March, 2002 and included the acquisition of contracts with seven IPAs and
approximately 230,000 CEMs.

         Our affiliated IPAs derived approximately 41% of their 2001 net revenue
from payments for services provided to approximately 188,000 CEMs that qualified
for Medicare benefits in 2001. In the past two years, many payors have
discontinued enrollment in Medicare+ Choice Plans or abandoned markets
altogether because the rate increases provided to the payors by the federal
government have not kept pace with inflation and the rising utilization of
healthcare services. Although this trend has not yet affected our operations in
California, our Chicago market has lost approximately 15,000 senior CEMs to date
in 2002. Our dependence on the viability of Medicare+ Choice products offered by
payors is a key factor in the assessment of our business strength and is central
to our development of a long-term business strategy.

         PMNI. In connection with certain of our California operations, PMNI
contracts with payors primarily on a capitated basis (i.e., fixed payment per
payor plan member per month). Payors delegate to PMNI the administrative and
financial responsibility for credentialing, medical management, capitation
management, and claims adjudication and payment. PMNI contracts with our owned
IPAs to perform physician services. Contractually, PMNI is at risk if the cost
of physician professional services exceeds the capitated payments received from
payors. Through its contracts with various hospitals, PMNI also assumes some
risk for the institutional (hospital) costs.

         Although PMNI contracts with several payors, its contracts with
Pacificare of California represented approximately 24% of our total revenue in
2001. PMNI's payor contracts are renewed annually on a calendar basis, and the
payor contracts for 2002 were renewed. Loss of any significant payor contract,
however, would have a material adverse effect on our operations.

         PMNI is subject to a significant level of state oversight, including a
requirement to maintain a defined level of tangible net equity by the California
Department of Managed Healthcare (the "DMHC"), because it holds a limited
Knox-Keene license in California. A Knox-Keene license is a license issued by
the State of California that allows an entity to assume limited risk under
certain managed care contracts. The license renews annually provided PMNI
complies with the renewal requirements. If PMNI lost its limited Knox-Keene
license, it would no longer be able to enter these risk contracts and,
accordingly, our revenue would decline materially. In addition, pursuant to the
Knox-Keene requirements, PMNI, as a condition to receipt of its license, agreed
not to make any distributions of cash to us if any such distribution would cause
PMNI to fail to be in compliance with the Knox-Keene requirements. In addition,
during the third quarter of 2000, PMNI reached an agreement with the DMHC
regarding the funding of certain cash reserve requirements for claims payment.
PMNI was in compliance with such requirements as of February 28, 2002. As of
that date, PMNI had restricted cash reserves of $28.2 million and outstanding
healthcare claims and liabilities of $20.6 million.

         Future Prospects For IPA Business. We intend to continue to pursue the
growth of NAMM and PMNI. We are seeking to contract with additional payors and
to add additional physicians to our managed IPAs. PMNI currently operates
primarily in the San Bernadino and Riverside counties in California. Through the
Medical Pathways acquisition, we expanded NAMM California's service area into
Los Angeles, Orange and San Luis Obispo counties. We believe that we will be
able to add physicians and members within these counties as a result of our
marketing efforts and those of payors with which we contract. We are also
seeking to develop additional management relationships with IPAs to enhance both
capitated and non-capitated managed care contracting systems. There is no
assurance, however, that we will be successful in these efforts.


                                       5
<PAGE>

PHYSICIAN AFFILIATIONS

         Service, Management and Consulting Agreements

         Through our PhySys division, we provide support services to health
systems and independent medical organizations. Our strategy is to assist these
organizations to improve the operations of their physician networks by offering
them a range of services to address their needs. Pursuant to these affiliations,
we provide management services to physician networks for a fee, but do not
acquire the assets or employ the personnel of the physician groups, except
certain key employees, and do not have any ongoing obligation to provide capital
to the affiliated groups. We may choose to negotiate an investment in these
groups in the future, and may do so through a joint venture. To date, however,
we have not invested any capital in these groups and have no commitment to do
so. This modified structure enables the physician group or health system to
benefit from our management expertise while retaining control of its employees
and decisions regarding future capital investment.

         Rome and Suffolk Agreements. We have support services contracts with
two of our formerly affiliated multi-specialty clinics: the Harbin Clinic in
Rome, Georgia and the Lakeview Medical Center in Suffolk, Virginia. Our fee
under each of the Rome and Suffolk agreements is a fixed monthly fee plus
reimbursement of certain expenses. We do not employ the personnel at these
clinics and do not own any of the assets of either clinic. Under the Rome
agreement, we are obligated to provide lease financing of up to $750,000
annually through September 30, 2005 for the acquisition of equipment to be used
in the group's operation. The lease rate is the prime rate, and the group has
the sole discretion whether to use us as its source of capital for leased
equipment. No such financing has been requested to date. The Rome agreement
terminates on September 30, 2007, subject to earlier termination for various
reasons. The Suffolk agreement terminates on November 30, 2005, subject to
earlier termination without cause upon 90 days notice and payment of a
termination fee. Under the Suffolk agreement, the physician group may offset,
against any obligation it has to us, amounts that we owe to the physician group
under a promissory note, dated January 1, 1998, in the principal amount of
$173,783. We assigned the obligations under this note to our wholly-owned
subsidiary, SynerPhy of Suffolk, Inc. Our subsidiary which contracts with the
Harbin Clinic is part of the bankruptcy proceeding, however, our Suffolk
subsidiary is not. We do not anticipate that the Bankruptcy Filings will
negatively impact these relationships.

         Rockford Health Agreement. Through PhySys, we also provide management
services to the physician networks of certain health systems. Currently, this
division provides management and support services to a 110-physician group
affiliated with the Rockford Health System, a healthcare delivery system serving
northern Illinois and southern Wisconsin. Under the agreement, we receive a
fixed annual fee, payable monthly, and reimbursement of various expenses. We are
obligated to provide Rockford with an executive director, a controller, and an
analyst to perform the required management and support services. The Rockford
agreement terminates on December 31, 2002, and we will receive a termination fee
at such time.

         Mercy Health Agreement. PhySys also provides services to MedClinic of
Sacramento, a 120-member physician group affiliated with the Mercy Health System
in Sacramento, California. We are obligated to provide an executive director and
a controller to perform services for Mercy Health. The term of the Mercy Health
agreement is three years, subject to earlier termination by either party in
certain circumstances, including termination prior to June 30, 2002 for any
reason.

         Future Plans For Service Arrangements. We are pursuing additional
management services relationships with other health systems and physician
groups, but there can be no assurance that we will enter into arrangements
similar to those with Rockford and Mercy Health in the future or that any such
arrangements will be successful. Finally, through PhySys, we offer consulting
services to independent medical organizations through limited engagements.

SALE AND LIQUIDATION OF CERTAIN ASSETS

         Historically, we managed multi-specialty clinics pursuant to service
agreements. In 2000, as a result of the outcome of discussions with our
affiliated clinics, we determined to sell the assets of our medical clinic
business. In April 2001, we completed the disposition of all of the assets of
our affiliated multi-specialty clinics. Revenue from multi-specialty clinic
operations constituted approximately 3% of our total revenue for 2001. We do not
anticipate


                                       6
<PAGE>

acquiring the assets of any physician clinics in the future. We sold our
healthcare decision-support services subsidiary, CareWise, Inc. ("CareWise"), on
May 25, 2001. In the second quarter of 2001, we completed the liquidation of
Advantage Care, Inc., our Kentucky Health Maintenance Organization ("HMO")
operation, and we no longer operate any HMOs. We completed the sale of our one
remaining hospital effective January 1, 2001. We do not anticipate pursuing any
of these business lines in the future.

REGULATION

         General

         The healthcare industry is highly regulated and consistently subject to
significant change. In connection with their entry into new business lines, new
markets, and managed care arrangements, our managed IPAs, and the physician
networks, the health systems, and the payors with whom they contract to provide
services may become subject to additional regulation. In general, regulation of
healthcare companies is increasing.

         PMNI holds a limited Knox-Keene license under California law that
permits it to assume limited risk under certain managed care contracts. NAMM's
Illinois operation holds an Illinois Third Party Administrator license to
adjudicate payment of claims and to review the medical necessity of certain
claims. In addition, NAMM's Kansas operations hold a Kansas Utilization
Management/Utilization Review license which enables it to review the medical
necessity of certain claims. These licenses are renewed on an annual basis
unless revoked by the state agency. If we lost any of these licenses our
revenues would be negatively affected.

         PhySys and the physician organizations and health systems to which it
provides services are also subject to federal, state, and local laws dealing
with issues such as fraud and abuse in Medicare and Medicaid claims,
occupational safety, employment, patient confidentiality and privacy, insurance
regulations, civil rights and discrimination, and medical waste and other
environmental issues. At an increasing rate, federal, state, and local
governments are expanding their regulatory requirements of businesses, including
healthcare organizations. The imposition of these regulatory requirements may
have the effect of increasing our exposure to liability and/or increasing our
operating costs.

         HIPAA Privacy And Security Requirements

         There are currently numerous legislative and regulatory initiatives at
the federal and state levels addressing patient privacy concerns. In particular,
the Health Insurance Portability and Accountability Act of 1998 ("HIPAA")
contains provisions that may require us to acquire and implement expensive new
computer systems and to adopt business procedures designed to protect the
privacy of patients' individual health information. On December 27, 2001,
President Bush signed H.R. 33231 into law which delays the required compliance
date with HIPAA's Transactions and Code Sets requirements until October 16,
2003, provided that entities submit a compliance plan to the Secretary of the
Department of Health and Human Services by October 16, 2002. On December 28,
2000, the Department of Health and Human Services published health privacy
regulations. Compliance with these regulations is required by April 14, 2003 for
most healthcare organizations. On March 27, 2002, the Department of Health and
Human Services published proposed revisions to the privacy regulations. There is
a 30-day comment period during which the Department of Health and Human Services
has indicated it will consider public comments before issuing the final
revisions to the privacy regulations. Under the proposed revisions, compliance
with the privacy regulations is still required by April 14, 2003 for most
healthcare organizations.

         In their current form, the HIPAA regulations contain very broad and
complex provisions which increase patient control over medical records, severely
limit the ways in which patient health information can be used, and impose
substantial financial penalties for violating a patient's privacy. The HIPAA
regulations will significantly affect providers, payors, and all consultants or
business partners of providers, including us, who have access to or transmit
information about patients. The current form of the regulations requires
providers, among other things, to adopt privacy policies and designate privacy
officers charged with implementing the HIPAA privacy and security standards. The
HIPAA privacy and security regulatory scheme is new, complex, and somewhat
controversial. There is little or no available authority interpreting the
statute or the regulations. We intend to comply fully with the HIPAA
regulations, once implemented, although such compliance may increase operating
costs and adversely affect performance standards. Our actions may be reviewed or
challenged by the authorities having responsibility for


                                       7
<PAGE>

HIPAA enforcement. If we violate HIPAA, we could be subject to monetary fines
and penalties, criminal sanctions, and civil causes of action. We cannot predict
how further modifications to the final regulations will impact our ability to
comply or the costs of compliance.

         Knox-Keene License

         PMNI holds a limited Knox-Keene license in the State of California and,
as a result, is subject to significant state oversight, including tangible net
equity requirements by the DMHC. During the third quarter of 2000, we reached an
agreement with the DMHC regarding the funding of certain cash reserve
requirements for claims payment. Our operations would be adversely affected if
we failed to maintain compliance with this agreement or any other regulations
applicable to Knox-Keene licenses and the California regulators took corrective
action.

         Under California law, PMNI also is responsible for monitoring the
financial viability of the IPAs with which it contracts. If the information
submitted indicates financial deficiencies that need to be corrected, PMNI and
the affected IPA are required to develop a corrective action plan and
contingency plans in order to ensure the delivery of healthcare services if the
corrective action fails. Our operations would be adversely affected if we failed
to comply with these provisions and the DMHC took corrective action.

         Insurance Regulation

         Our managed IPAs that do not contract through PMNI and managed
physician groups typically enter into contracts and joint ventures with licensed
insurance companies, such as HMOs, pursuant to which these IPAs and physician
groups may be paid on a capitated fee basis. Under capitation arrangements,
healthcare providers bear the risk, subject to certain loss limits, that the
total costs of providing medical services to members will exceed the premiums
received. To the extent that the IPAs and affiliated physician groups
subcontract with physicians or other providers for their services on a
fee-for-service basis, the managed IPAs and affiliated physician groups may be
deemed, under state law, to be in the business of insurance. If the IPAs and
physician groups are deemed to be insurers, they will be subject to a variety of
regulatory and licensing requirements applicable to insurance companies or HMOs,
resulting in increased costs and corresponding lower revenue for us.

         Managed Care Plans - Risk Of Loss

         As indicated above, under capitation arrangements, healthcare providers
receive a fixed fee per plan member per month, and providers bear the risk,
generally subject to certain loss limits, that the total costs of providing
medical services to the members will exceed the fixed fee. The IPA management
fees are based, in part, upon a share of the portion, if any, of the fixed fee
that exceeds actual costs incurred. Some agreements with payors also contain
"shared risk" provisions under which, through the IPA, the IPA and its manager
can share additional fees or additional costs, depending on the utilization
rates of the members and the success of the IPAs. Any significant costs that
exceed the fixed fee could have a material adverse effect on our operations.

         The healthcare provider's ability to manage effectively the costs and
utilization of medical services determines the profitability of a capitated fee.
The management fees are also based upon a percentage of revenue collected by the
IPAs. Any loss of revenue by the IPAs because of the loss of affiliated
physicians, the termination of third party payor contracts, or other changes in
plan membership or capitated fees may reduce our revenue. Like other managed
care management entities, we are often subject to liability claims arising from
the incentives inherent in capitated fee arrangements and activities such as
quality assurance and utilization management, which are designed to control
costs through more efficient utilization of healthcare services. A successful
claim on this basis against us or a physician group, health system, physician
network, or IPA with whom we contract to provide services could have a material
adverse effect on our operations.

         Antitrust Risks

         Federal and state antitrust laws prohibit agreements in restraint of
trade, the exercise of monopoly power and other practices that are considered to
be anti-competitive. We believe that we are in material compliance with federal
and state antitrust laws in connection with the operation of our physician
relationships and IPAs.


                                       8
<PAGE>

         State Legislation

         In addition to state insurance laws (as discussed above), all states
have laws restricting the unlicensed practice of medicine, and many states also
prohibit the splitting or sharing of fees between physicians and non-physician
entities. Some states have interpreted management agreements with physicians as
unlawful fee-splitting. We do not believe that our contractual arrangements with
physician networks, hospitals, or physician groups will subject us to these
types of claims. Changes in the laws may necessitate modifications in our
relationships with our clients.

         Medicare Payment System

         Our affiliated IPAs derived approximately 41% of their 2001 net revenue
from payments for services provided to patients enrolled in the federal Medicare
program, including patients covered by risk contracts. In 2001, our managed IPAs
provided medical services under risk contracts to approximately 63,000 Medicare
members. Rate increases provided to the payors by the federal government have
not kept pace with inflation and the rising utilization of healthcare services,
as a result many payors have discontinued enrollment in Medicare+ Choice Plans
and abandoned markets.

         Medicare Fraud and Abuse And Anti-Referral Provisions

         Many provisions in the Social Security Act are intended to address
fraud and abuse among healthcare providers and other healthcare companies. One
of the fraud and abuse provisions, the Anti-Kickback Statute, prohibits
providers and others from soliciting, receiving, offering, or paying, directly
or indirectly, any form of remuneration in return for the referral of, or the
arranging for the referral of, Medicare and other federal or state healthcare
program patients or patient care opportunities. It also prohibits payments in
return for the purchase, lease, arrangement, or order of any item or service
that is covered by Medicare, certain other federal healthcare programs, or a
state health program.

         In July 1991, the federal government published regulations that provide
exceptions, or "safe harbors," for business transactions that will be deemed not
to violate the Anti-Kickback Statute. In November 1999, additional safe harbors
were published for eight activities, including referrals within group practices
consisting of active investors. In April 1998, the Office of the Inspector
General of the Department of Health and Human Services released Advisory Opinion
98-4, which states that a percentage-based management fee paid to a medical
network management company does not fit within any safe harbor. The opinion
concludes that, because a percentage-based fee does not fit within a safe
harbor, such a fee could implicate the Anti-Kickback Statute if any part of the
management fee is intended to compensate the manager for its efforts in
arranging for referrals to the managed group. The opinion acknowledges, however,
that a management fee that does not fit within a safe harbor is not necessarily
illegal. Both the opinion and the preamble to the government's published safe
harbors state that arrangements that do not fall within safe harbors are
nevertheless legal so long as there is no intent on the part of either party to
pay for or accept payment for referrals.

         We believe that our operations are in material compliance with
applicable Medicare fraud and abuse laws. Although we received remuneration
under our management agreements for the services provided to formerly affiliated
clinics and IPAs, we were not in a position to make or influence referrals of
federal or state healthcare program patients or services to the physician groups
or networks. Under our current agreements, we will not be in a position to make
or influence referrals. Moreover, we believe that our fees represent fair value
for our services. No part of the fees is intended to constitute remuneration for
improper activities. Consequently, we do not believe that the service and
management fees we receive from our clients could be viewed as remuneration for
referring or influencing referrals of patients or services covered by federal or
state healthcare programs as prohibited by the Anti-Kickback Statute.

         If any of our arrangements were found to be in violation of the
Anti-Kickback Statute, the health system, the physician groups, us, and/or the
individual physicians would be subject to civil and criminal penalties,
including possible exclusion from participation in government healthcare. These
penalties could have a materially adverse effect on our results of operations.



                                       9
<PAGE>

         Under legislation known as the Stark Law, physicians who have an
ownership interest or a compensation arrangement with certain providers of
"designated health services" are prohibited from referring Medicare and Medicaid
patients to those providers, unless an exception exists. The "designated health
services" covered by the Stark Law include physical therapy services;
occupational therapy services; radiology services, including magnetic resonance
imaging, computed tomography, and ultrasound; radiation therapy services;
durable medical equipment; parenteral and enteral nutrients, equipment, and
supplies; prosthetics, orthotics, and prosthetic devices; home health services;
outpatient prescription drugs; and inpatient and outpatient hospital services.
If any of the providers with whom we contract is found to be in violation of the
Stark Law, such provider could be subject to significant penalties. In that
event, the likelihood of our continuing the relationship with the affected
provider would be remote, and termination of such a relationship would
negatively affect our revenue.

         Impact Of Healthcare Regulatory Changes

         Congress and many state legislatures routinely consider proposals to
control healthcare spending. Government efforts to reduce healthcare expenses
through the use of managed care or the reduction of Medicare and Medicaid
reimbursement may adversely affect our cost of doing business and our
contractual relationships. For example, recent developments that affect our
activities include (i) federal legislation requiring a health plan to continue
coverage for individuals who are no longer eligible for group health benefits
and prohibiting the use of "pre-existing condition" exclusions that limit the
scope of coverage, (ii) a Centers for Medicare and Medicaid Services' policy
prohibiting restrictions in Medicare risk payor plans on a physician's
recommendation of other health plans and treatment options to patients, and
(iii) regulations imposing restrictions on physician incentive provisions in
physician provider agreements. Our operating results may be adversely affected
by these types of legislation, programs, and other regulatory changes.

         We believe that our operations are in material compliance with
applicable law and expect to modify our agreements and/or operations to conform
in all material respects to future regulatory changes. Our ability to be
profitable will depend in part upon the entities we own and the IPAs and
physician groups we manage (i) obtaining and maintaining all necessary licenses,
certificates of need, and other approvals and (ii) operating in compliance with
applicable healthcare regulations. We cannot determine what additional
government regulations affecting our business, if any, may be enacted in the
future or how existing or future laws and regulations might be interpreted by
the relevant regulatory authorities. Our failure, or that of any managed IPAs,
or any physician network or group with which we contract, to comply with
applicable law could have a material adverse effect on our results of
operations.

COMPETITION

         A large number of companies engage in IPA management activities in
California. Kaiser Permanente has more than six million members in its various
networks in California. IPAs are common in California because payors there have
traditionally been willing to delegate risk and the payment of claims to third
parties like IPAs. The delegated risk model is not as prevalent in Illinois,
Kansas and Tennessee as it is in California. Therefore, we have fewer
competitors in those markets. We are highly dependent on the continuation of the
"delegated risk model" and capitation within our various markets. Many payors
organize their own physician networks and do not rely on third parties to take
risk or to organize physician networks on their behalf. In the event that our
customers choose to implement their own physician networks or to abandon the
capitated delivery model and pay medical providers primarily on a fee for
service basis, we would be adversely affected.

         Our revenue is dependent upon the revenue of, and in most cases the
creation of surplus in, the IPAs we manage. These organizations face competition
from several sources, including other IPAs, sole practitioners, single and
multi-specialty groups, and staff-model HMOs. We believe that we are able to
compete successfully through superior quality service, our commitment to medical
management initiatives, our ability to pay claims efficiently and effectively,
our ability to contract with providers and payors, our stable physician networks
including both primary care doctors and specialists, and our ability to provide
capital reserves to backstop medical claims incurred. We also believe that our
claims payment operations are highly efficient and provide a level of confidence
to payors and physicians that medical claims are paid accurately and promptly.

         Our PhySys division faces competition from many sources. Physician
consulting, and, to a lesser extent, management services, are provided by many
companies, including large accounting and consulting firms that



                                       10
<PAGE>

provide a broad array of healthcare services and physician consulting
businesses. PhySys' competitive advantages are its employees and their
experience and expertise in the management of multi-specialty medical clinics.

         Our current financial position may adversely affect our ability to
compete effectively in all of our business areas. Competitors such as large
hospitals, public healthcare companies, HMOs, and insurance companies may have
closer relationships with potential customers and/or may have greater access to
capital than we do.

INSURANCE

         We maintain managed healthcare errors and omissions insurance on a
claims made basis for all of our managed care operations and officers' and
directors' liability insurance. These policies expired on September 1 and
September 11, 2001, respectively, but each was extended until September 1, 2002.
Upon a change of control, including the change of control anticipated as a
result of the approval of our Plan by the Bankruptcy Court, these policies will
terminate. Insurance coverage under such policies is contingent upon a policy
being in effect when a claim is made, regardless of when the events which caused
the claim occurred. In addition, we maintain a separate healthcare errors and
omissions insurance policy and a medical malpractice insurance policy for most
of our California operations. These policies expire August 18, 2003. We also
maintain property and casualty, general liability, worker's compensation and
some umbrella coverage on an occurrence basis. In addition, we are named as an
additional insured on medical malpractice policies of some of our formerly
affiliated physician groups. In other cases, however, we have no insurance for
malpractice claims brought against such physician groups. There are known claims
and incidents that may result in the assertion of additional claims, as well as
claims from unknown incidents that may be asserted. We are not aware of any
claims against management or our formerly affiliated physician groups which
might have a material adverse impact on our financial position. The cost and
availability of insurance coverage has varied widely in recent years. Management
believes its insurance policies are adequate in amount and coverage for its
current operations. There can be no assurance, however, that the coverage is
sufficient to cover all future claims or will continue to be available after the
consummation of the Plan or at a reasonable cost. All claims against us or our
subsidiaries which filed for bankruptcy will be barred after the effective date
of the Plan (the "Effective Date").

EMPLOYEES

         As of December 31, 2001, we employed approximately 750 people, a
decline of 80% from December 31, 2000, as a result of the disposition of the
assets of our multi-specialty clinics and certain IPA market closures. Our
corporate office includes 29 of these employees. None of our employees is a
member of a labor union, and we consider our relations with our employees to be
good.

ITEM 2.    PROPERTIES

         We currently lease approximately 22,000 square feet of rentable space
at 30 Burton Hills Boulevard in Nashville, Tennessee, our corporate
headquarters. We are in the process of negotiating an altered leasing structure
with our landlord that will reduce our leased space and cost. Under the proposed
new arrangement we will lease approximately 16,300 square feet. The lease for
approximately 4,500 square feet will terminate September 30, 2002 and the
remaining 11,800 square feet will terminate in August 2003. In addition, we
lease various office space relating to our IPA management operations in
Tennessee, California, Kansas and Illinois, the most significant of which is
approximately 47,000 square feet of administrative office space in Ontario and
Redlands, California. We believe these leasing arrangements are adequate for our
current needs.

         In conjunction with the acquisition of PrimeCare International, Inc.
("PrimeCare") and PMNI, we acquired real estate related to PrimeCare's
operations in California. One of these properties is subject to a mortgage with
an aggregate outstanding principal balance, as of March 31, 2002, of
approximately $1.1 million that bears interest at 9.75% and matures in 2006.

         We do not anticipate acquiring real estate in connection with any
future activities.



                                       11
<PAGE>

ITEM 3.    LEGAL PROCEEDINGS

         On the Petition Date, the Debtors filed the Bankruptcy Filings with the
Bankruptcy Court (Case No. 02-40278 (PCB)). On that date, we also filed the
Plan, which sets forth the manner in which claims against, and interests in, us
will be treated following our emergence from bankruptcy, as well as a disclosure
statement. The disclosure statement has not yet been approved by the Bankruptcy
Court. Our IPA management operating subsidiaries are not part of the Bankruptcy
Filings and have continued paying, in the ordinary and normal course of
business, all wages, benefits and other employee obligations as well as all
outstanding and ongoing accounts payable to their contractors and vendors. We
elected to seek Chapter 11 protection to attempt to realign our capital
structure and to preserve the value of our remaining businesses for our
creditors. We had been in negotiations regarding the reorganization with
representatives of certain Bondholders and Warburg, Pincus and filed the Plan
with the support of certain of these creditors, which collectively hold
approximately two-thirds of our outstanding indebtedness. The Plan is subject to
a number of conditions, including approval by certain of our creditors and
confirmation by the Bankruptcy Court. Creditors who do not vote in favor of the
Plan may challenge its confirmation. Resolution of any such challenges could
result in delays and increased expenses as well as failure of the Plan.

         If the Plan is confirmed, our general unsecured creditors, including
the Bondholders and Warburg, Pincus, will receive shares of the reorganized
Company's common stock or, in certain instances, cash in an amount equal to
approximately 11.9% of their claims in full satisfaction of their claims. Under
the terms of the Plan, our outstanding and authorized common stock, options and
warrants will be cancelled and current holders of these securities will not
receive any consideration, either in cash or in newly issued stock. Finally,
under the terms of the Plan, we anticipate that there will be fewer than 300
shareholders of record upon consummation. If that is the case, the securities of
the reorganized company will not be publicly traded and the reorganized company
will be a privately-held company not subject to the reporting obligations of the
SEC.

         As a result of the Bankruptcy Filings, all current litigation against
the Debtors is stayed. Litigation is continuing, however, against our
subsidiaries that did not seek protection under Chapter 11. All judgments
against the Debtors will be treated as claims under the Plan.

         Stayed Litigation

         We and certain of our current and former officers and directors, Joseph
C. Hutts, Derril W. Reeves, Thompson S. Dent, Richard D. Wright and John K.
Crawford (only Mr. Dent and Mr. Hutts currently serve as our directors) have
been named defendants in 10 securities fraud class actions filed in state and
federal courts in Tennessee between September 8, 1998 and June 24, 1999. The
factual allegations of the complaints in all 10 actions are substantially
identical and assert that during various periods between April 22, 1997 and
September 22, 1998 (the "Class Period"), the defendants issued false and
misleading statements which materially misrepresented our earnings and financial
condition and our clinic operations and misrepresented and failed to disclose
various other matters concerning our operations in order to conceal the alleged
failure of our business model. Plaintiffs further assert that the alleged
misrepresentations caused our securities to trade at inflated levels while the
individual defendants sold shares of our stock at such levels.

         In each of the actions, the plaintiff seeks to be certified as the
representative of a class of all persons similarly situated who were allegedly
damaged by the defendants' alleged violations during the Class Period. Each of
the actions seeks damages in an indeterminate amount, interest, attorneys' fees
and equitable relief, including the imposition of a trust upon the profits from
the individual defendants' trades. The federal court actions have been
consolidated in the United States District Court for the Middle District of
Tennessee. Defendants' motion to dismiss was denied. The state court actions
were consolidated in Davidson County, Tennessee. The plaintiffs' original
consolidated class action complaint in state court was dismissed for failure to
state a claim. Plaintiffs, however, were granted leave to file an amended
complaint. The amended complaint filed by the plaintiffs asserted, in addition
to the original Tennessee Securities Act claims, that the defendants had also
violated Section 11 and 12 of the Securities Act of 1933 for alleged misleading
statements in a prospectus released in connection with the CareWise acquisition.
The amended complaint also added KPMG LLP ("KPMG"), our independent public
auditors, as a defendant. KPMG removed this case to federal court and its motion
to dismiss was denied. On October 20, 2000, this case was consolidated with the
original federal consolidated action and a new consolidated complaint was filed.
On May 30, 2001, the court granted plaintiffs' motion for class certification.



                                       12
<PAGE>

         We and the individual defendants have reached a proposed settlement
with the plaintiff class which will resolve all of the claims in the
consolidated actions. On March 12, 2002, the parties filed with the district
court a Memorandum of Understanding which outlines the proposed settlement, the
terms of which include the payment of $3.4 million to be paid by insurance
proceeds in exchange for complete releases of all defendants and dismissal of
the consolidated cases with prejudice. A preliminary hearing on the
appropriateness of the settlement is scheduled in the district court for April
19, 2002. In connection with the Bankruptcy Filings, an Amended Stipulation and
Order of the Bankruptcy Court lifting the automatic stay for purposes of
allowing the settlement process to proceed in the district court was entered on
April 12, 2002.

         The same Class Period and the same factual allegations made in the
federal court consolidated class actions are alleged in a separate derivative
action filed in the Chancery Court for Davidson County, Tennessee, Parul Patel
v. Joseph C. Hutts, et. al., Case No. 99-2353-I. By Order entered October 14,
1999, the derivative action was stayed pending the outcome of the federal
consolidated class actions. Mr. Patel has not agreed to settle his claim as a
part of the proposed federal court settlement. Under the terms of the Plan,
which is subject to creditor and court approval, Mr. Patel's interest as a
common stockholder will be cancelled, his litigation claim will be discharged
and he will receive no consideration. In addition, we will not pursue any
alleged claims made in the Patel action against our current and former officers
and directors. Finally, under the terms of the Plan, we are releasing any claims
we may have against our current and former officers and directors.

         On August 31, 1999, two relators brought an action in the United States
District Court for the District of Hawaii under the False Claims Act and for
employment related claims against Straub Clinic and Hospital, Inc. ("Straub"),
PhyCor of Hawaii, Inc., and us. This matter had been under seal until September
2000. On September 20, 2000, the United States government declined to intervene
in the matter. We sold PhyCor of Hawaii, Inc. to Straub in November 2000, and
Straub is defending the claims against PhyCor of Hawaii, Inc. We lost our motion
to dismiss the claims against PhyCor, Inc. and are defending ourselves in the
litigation. Trial was set for June 12, 2002; however, as a result of the
Bankruptcy Filings, the case is stayed.

         As a result of our decision to exit our IPA market in Houston, Texas, a
number of providers in the market have brought actions naming several parties,
including one of our IPA-management subsidiaries and us, alleging breach of
contract, breach of fiduciary duty, and fraud, among other matters. Several
million dollars have been claimed in these cases. We believe the plaintiffs have
sued the wrong party and that the claims are generally excessive. In addition,
as a result of our financial condition, we have been unable to meet certain
contractual obligations including, but not limited to, certain ongoing lease
obligations and severance obligations to former employees. There can be no
assurance that we will meet existing or additional contractual obligations in
the future. Several parties have sent us letters alleging breach of contract and
threatening to bring claims, and several suits have been filed. The litigation
has been stayed and the claims will be handled through the bankruptcy process.

         In a case which was filed in the Circuit Court of the 11th Judicial
Circuit in and for Miami-Dade County, Florida, Busch Drive Ltd. and Lime Street
Ltd., the landlords of our formerly affiliated physician group, First Coast
Medical Group, P.A., claimed we guaranteed the lease obligations of the
physician group. The judge in that case has entered judgments in favor of the
landlords in the aggregate amount of $2,474,510. This judgment will be dealt
with as a claim under the Plan.

         Active Litigation

         The following is a summary of material litigation in which certain of
our operating subsidiaries are parties, and accordingly, this litigation is not
stayed by the Bankruptcy Filings.

         As previously disclosed, in the case of United States of America ex
rel. William R. Benz v. PrimeCare International, Inc. and Prem Reddy, in the
United States District Court, Central District of California, the jury returned
a verdict in favor of the plaintiff in the amount of $4.6 million. The judgment
of $4.6 million was recorded as other operating expenses in the second quarter
of 2000. We entered into a settlement agreement with Mr. Benz which subsequently
received court approval. In exchange for PrimeCare paying Mr. Benz $2.7 million
(of which $0.7 million was paid during the second quarter of 2001 and the
remainder was paid during July 2001), all claims were dropped by Mr. Benz
against us and our affiliates. Mr. Benz has not settled with Dr. Reddy, and Dr.
Reddy continues to maintain that PrimeCare and several of its managed IPAs has
an indemnification obligation to him. In



                                       13
<PAGE>

March 2002, we were granted a demurrer with respect to Dr. Reddy's claim for
indemnity, and accordingly, his claim will be dismissed with prejudice. Dr.
Reddy has not appealed this decision as of the date hereof.

         The IPAs we manage, the physicians employed by those IPAs, and in some
cases PMNI, are parties to several medical malpractice and/or managed care
liability cases which we believe will be adjudicated within applicable insurance
coverage limits. In addition, many of our California subsidiaries and affiliated
IPAs have been sued on business claims such as breach of contract,
misrepresentation, fraud, and deceit. The plaintiffs in these suits are seeking
millions of dollars in damages, and we are vigorously defending these suits.
Because these subsidiaries are not part of the Bankruptcy Filings, these actions
are not stayed. One such case was recently tried in the Superior Court of the
State of California for the County of Riverside. On December 31, 2001, the jury
awarded the plaintiff damages jointly against PrimeCare and PMNI in the amount
of $3 million based upon its breach of contract claim, $208,189 against
PrimeCare on its constructive fraud claim and $5,000 in punitive damages against
PrimeCare. PrimeCare was awarded $296,190 on its cross-complaint for money it
had not received. We do not agree with this decision and we have appealed. PMNI
obtained a $5 million appellate bond secured by a letter of credit to enable us
to pursue this appeal. There can be no assurance that we will be successful with
this appeal or in other pending litigation. Additional damage awards at the
levels the plaintiffs have demanded could have a material adverse effect on our
ongoing operations.

         In addition, we and PrimeCare have been named in litigation involving
PrimeCare operations that were not transferred to us when we acquired PrimeCare.
In one such case in Oklahoma, the plaintiff is alleging that a former PrimeCare
subsidiary (which we did not acquire) is guilty of breach of contract,
conversion, and fraud, and is seeking damages in excess of $2 million plus
punitive damages. Since filing the litigation, the plaintiff has filed for
bankruptcy relief. In the other such case in Florida, the plaintiff is seeking
approximately $250,000 in damages. Although we did not own PrimeCare at the time
of the alleged incidents, we may have liability for the actions of these
entities and may not have indemnity rights against Dr. Reddy, the former owner
who is also a co-defendant. Because PrimeCare is not part of the Bankruptcy
Filings, these actions are not stayed. It is not possible to determine the
amount of our exposure or that of our subsidiaries in these cases, but a large
judgment against us could have a material adverse effect on our ongoing
operations.

         Certain litigation is pending against our formerly affiliated physician
groups and certain of our managed IPAs. We have not assumed any liability in
connection with such litigation. Claims against the physician groups and IPAs
could result in substantial damage awards to the claimants which may exceed
applicable insurance coverage limits. Although we may not be parties to such
litigation, a substantial financial obligation of the physician group or IPA
could threaten its viability or its ability to pay our fees. While there can be
no assurance that the physician groups and IPAs will be successful in any such
litigation, at this time, we do not believe any such litigation will have a
material adverse effect on our operations.

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

         Not applicable.



                                       14
<PAGE>

                                     PART II

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

         Our common stock is traded on the Over-the-Counter Market under the
symbol PHYCQ.

<TABLE>
<CAPTION>
               2000                                           HIGH         LOW
               ----                                           ----         ---
<S>                                                           <C>         <C>
               First Quarter..............................    $2.75       $0.53
               Second Quarter.............................     1.13        0.44
               Third Quarter..............................     0.72        0.08
               Fourth Quarter.............................     0.17        0.03

               2001
               ----
               First Quarter..............................     0.14        0.03
               Second Quarter.............................     0.18        0.03
               Third Quarter..............................     0.12        0.03
               Fourth Quarter.............................     0.07        0.02

               2002
               ----
               First Quarter..............................     0.05        0.00
               Second Quarter (through April 10, 2002)....     0.01        0.00(1)
</TABLE>
               -----------------

               (1) The common stock has traded at levels ranging from .0050 to
                   .0053 since April 1, 2002.

         As of April 10, 2002, we had approximately 23,500 shareholders,
including 3,496 shareholders of record and approximately 20,000 persons or
entities holding common stock in nominee name. We have never declared any cash
dividends and do not anticipate the payment of any dividends in the foreseeable
future. On August 25, 2000, our common stock was delisted from the NASDAQ Stock
Market, Inc. ("NASDAQ") because of our failure to maintain certain of the
continued listing requirements of NASDAQ. Our common stock currently trades on
the OTC Bulletin Board under the ticker symbol PHYCQ. Under the terms of the
Plan, all outstanding and authorized shares of our common stock will be
cancelled and shareholders will not receive any consideration, either in cash or
newly issued stock. Finally, under the terms of the Plan, we anticipate that
there will be fewer than 300 shareholders of record upon consummation. If that
is the case, the securities of the reorganized company will not be publicly
traded and the reorganized company will be a privately-held company not subject
to the reporting obligations of the SEC.


                                       15
<PAGE>

         ITEM 6.   SELECTED FINANCIAL DATA (1)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                                2001            2000             1999             1998             1997
----------------------                              ---------      -----------      -----------      -----------      -----------
                                                                  (000'S EXCEPT FOR EARNINGS PER SHARE)
<S>                                                 <C>            <C>              <C>              <C>              <C>
Statement of Operations Data:
Net revenue                                         $ 298,319      $   914,195      $ 1,516,195      $ 1,512,499      $ 1,119,594
Operating expenses:
   Cost of provider services                          186,256          227,177          204,202          134,302               --
   Salaries, wages and benefits                        53,335          280,159          490,738          513,646          421,716
   Supplies                                             4,602          112,799          222,007          227,440          181,565
   Purchased medical services                             312           17,289           36,403           37,774           31,171
   Other expenses                                      50,955          157,473          235,165          218,359          171,480
   General corporate expenses                          13,630           22,213           32,305           29,698           26,360
   Rents and lease expense                              7,012           61,349          118,104          126,453          100,170
   Depreciation and amortization                        7,895           50,818           90,435           90,238           62,522
   Provision for (recovery of) asset
     revaluation, restructuring and
     refinancing(2)                                    (5,046)         559,878          430,965          224,900           83,445
Merger expenses                                            --               --               --           14,196               --
                                                    ---------      -----------      -----------      -----------      -----------
     Net operating expenses                           318,951        1,489,155        1,860,324        1,617,006        1,078,429
                                                    ---------      -----------      -----------      -----------      -----------
     Earnings (loss) from operations                  (20,632)        (574,960)        (344,129)        (104,507)          41,165
Interest income                                        (3,625)          (6,059)          (5,022)          (3,032)          (3,323)
Interest expense                                       18,157           35,739           40,031           36,266           23,507
                                                    ---------      -----------      -----------      -----------      -----------
     Earnings (loss) before income taxes,
       minority interest and extraordinary item       (35,164)        (604,640)        (379,138)        (137,741)          20,981
Income tax expense (benefit)                               33            1,029           53,318          (39,890)           6,098
Minority interest in earnings of consolidated
     partnerships                                         559            2,715           13,088           13,596           11,674
                                                    ---------      -----------      -----------      -----------      -----------
     Earnings (loss) before extraordinary item        (35,756)        (608,384)        (445,544)        (111,447)           3,209
Extraordinary item - gain from early
     extinguishment of convertible subordinated
     debentures                                            --               --            1,018               --               --
                                                    ---------      -----------      -----------      -----------      -----------
     Net earnings (loss)                            $ (35,756)     $  (608,384)     $  (444,526)     $  (111,447)     $     3,209
                                                    =========      ===========      ===========      ===========      ===========
Earnings (loss) per share:
   Basic - Continuing operations                    $   (0.49)     $     (8.30)     $     (5.92)     $     (1.55)     $       .05
           Extraordinary item                              --               --             0.01               --               --
                                                    ---------      -----------      -----------      -----------      -----------
                                                    $   (0.49)     $     (8.30)     $     (5.91)     $     (1.55)     $       .05
                                                    =========      ===========      ===========      ===========      ===========
   Diluted - Continuing operations                  $   (0.49)     $     (8.30)     $     (5.92)     $     (1.55)     $       .05
             Extraordinary item                            --               --             0.01               --               --
                                                    ---------      -----------      -----------      -----------      -----------
                                                    $   (0.49)     $     (8.30)     $     (5.91)     $     (1.55)     $       .05
                                                    =========      ===========      ===========      ===========      ===========
Weighted average shares outstanding
   Basic                                               73,239           73,281           75,179           71,822           62,899
   Diluted                                             73,239           73,281           75,179           71,822           66,934

DECEMBER 31,
------------
Balance Sheet Data:
Working capital (deficit)                           $(341,833)     $  (306,229)     $   197,780      $   187,854      $   203,301
Total assets                                          121,009          145,014        1,194,925        1,879,285        1,562,776
Long-term debt                                          1,024            3,036          555,490          651,209          501,107
Total shareholders' equity (deficit)                 (300,745)        (264,989)         343,503          804,410          710,488
</TABLE>

-------------------
(1)    See Item 7. "Management's Discussion and Analysis of Financial Condition
       and Results of Operations" for information relating to dispositions of
       business operations that effect the comparability of the information
       reflected herein and information regarding the uncertainty of our future
       financial condition.

(2)    Provision for asset revaluation, restructuring and refinancing relates to
       revaluation of assets of certain of our affiliated clinics and IPAs.



                                       16
<PAGE>

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

OVERVIEW

         We are a medical network management company incorporated in Tennessee
in 1988 that develops and manages IPAs, manages PHOs, provides contract
management services to physician networks owned by health systems, and provides
management and consulting services to independent medical organizations.

         NAMM through its subsidiaries, manages IPAs in northern and southern
California, Kansas, and Tennessee and manages eight PHOs in Illinois. NAMM
California manages our IPAs in California, and its affiliate, PMNI, owns certain
of these IPAs. PMNI holds a limited Knox-Keene license in California. This
license allows PMNI to contract with payors to assume risk under certain managed
care contracts and then delegate risk to certain of our IPAs. Through NAMM
California, effective March 1, 2002, we acquired management contracts of seven
additional IPAs from Medical Pathways. Finally, through our PhySys division, we
provide management and support services to two of our formerly affiliated
multi-specialty clinics and to the physician networks of two health systems. In
addition, PhySys offers consulting services to independent medical organizations
through limited engagements.

RECENT DEVELOPMENTS

         On the Petition Date, the Debtors filed the Bankruptcy Filings with the
Bankruptcy Court (Case No. 02-40278 (PCB)). On that date, we also filed the
Plan, which sets forth the manner in which claims against, and interests in, us
will be treated following our emergence from bankruptcy, as well as a disclosure
statement. The disclosure statement has not yet been approved by the Bankruptcy
Court. Our IPA management operating subsidiaries are not part of the Bankruptcy
Filings and have continued paying, in the ordinary and normal course of
business, all wages, benefits and other employee obligations as well as all
outstanding and ongoing accounts payable to their contractors and vendors. We
elected to seek Chapter 11 protection to attempt to realign our capital
structure and to preserve the value of our remaining businesses for our
creditors. We had been in negotiations regarding the reorganization with certain
representatives of the Bondholders and Warburg, Pincus. We filed the Plan with
the support of certain of these creditors, which collectively hold approximately
two-thirds of our outstanding indebtedness. The Plan is subject to a number of
conditions, including approval by certain of our creditors and confirmation by
the Bankruptcy Court. Creditors who do not vote in favor of the Plan may
challenge its confirmation. Resolution of such challenges could result in delays
and increased expenses as well as failure of the Plan.

         If the Plan is confirmed, our general unsecured creditors, including
the Bondholders and Warburg, Pincus, will receive shares of the reorganized
company's common stock or, in certain instances, cash in an amount equal to
approximately 11.9% of their claims in full satisfaction of their claims. Under
the terms of the Plan, our outstanding and authorized common stock, options,
warrants and rights to purchase preferred stock will be cancelled and holders of
these securities will not receive any consideration, either in cash or in newly
issued stock. Finally, under the terms of the Plan, we anticipate that there
will be fewer than 300 shareholders of record upon consummation. If that is the
case, the securities of the reorganized company will not be publicly traded and
the reorganized company will be a privately-held company not subject to the
reporting obligations of the SEC.

OPERATIONS

         IPAs And PHOs

         Through our IPAs and PHOs, we provided healthcare-related services to
approximately 593,000 CEMs in four states at December 31, 2001. As of such date,
approximately 188,000 of these CEMs were enrolled in Medicare+ Choice Plans
offered by payors to individuals who qualified for Medicare benefits. As of such
date, we operated 16 IPAs in California. Our California operations included
439,000 CEMs and constituted approximately 86% of our total revenue in 2001. Our
next largest market is Chicago, Illinois where we provided services to 121,000
CEMs. In 2001, revenue from IPA and PHO operations constituted approximately 92%
of our total revenue.


                                       17
<PAGE>

         NAMM. Through its subsidiaries, NAMM manages 23 IPAs in California, one
IPA in Kansas and, two IPAs in Tennessee and manages eight PHOs in Illinois.
Seven of the IPA contracts in California were acquired, effective March 1, 2002,
from Medical Pathways. The Medical Pathways acquisition expanded our service
area into Los Angeles, Orange and San Luis Obispo counties. Eight of the
California IPAs are owned by PMNI and a few are owned by a physician who also
serves as medical director of our California operations. These IPAs contract
with PMNI to have access to payor contracts. In addition, the management
agreements for the IPAs which contract with PMNI provide for NAMM California to
receive a percentage of revenue that is no less than NAMM's cost to manage plus
the surplus remaining after distributions to physicians.

         The payor contracts entered into on behalf of our IPAs are based on
capitated fee arrangements. Under capitation arrangements, healthcare providers
bear the risk, subject to certain loss limits, that the aggregate costs of
providing medical services to members will exceed the payments received. The
management agreements for the IPAs and PHOs which do not contract with PMNI
provide for the NAMM subsidiary to receive fees based upon either a percentage
of revenue collected by the IPAs or a per member per month payment, plus a share
of surplus, if any, of capitated revenue of the IPAs or PHOs in excess of any
healthcare claims expense. Incurred but not reported claims payable represent
the liability for covered services that have been performed by physicians for
enrollees of various medical plans. The estimated claims incurred but not
reported are based on our historical claims data, current enrollment, health
service utilization statistics and other related information. The profitability
of the managed IPAs is dependent upon the rates negotiated, the ability of the
providers to effectively manage the costs of providing medical services and the
level of utilization of medical services. These IPAs contract with payors, and
these contracts typically provide that the payor may terminate the agreement
without cause on 120 days notice. The loss by an IPA or PHO of any significant
payor contract would have a material adverse effect on the revenue and financial
condition of the NAMM managing entity and potentially on our ongoing operations
as a whole.

         Our affiliated IPAs derived approximately 41% of their 2001 net revenue
from payment for services provided to approximately 188,000 CEMs that qualified
for Medicare benefits. In the past two years, many payors have discontinued
enrollment in Medicare+ Choice plans or abandoned markets altogether because
rate increases provided to the payors by the federal government have not kept
pace with inflation and the rising utilization of healthcare services. Although
this trend has not yet affected our operations in California, our Chicago market
has lost approximately 15,000 senior CEMs to date in 2002. Our dependence on the
viability of Medicare+ Choice products offered by payors is a key factor in the
assessment of our business strength and is central to the development of our
long-term business strategy.

         The table below indicates the number of physicians affiliated with our
IPAs and PHOs and provides certain information relating to our IPA and PHO
operations at the end of each of the years indicated:

<TABLE>
<CAPTION>
                                                 2001           2000         1999          1998          1997
                                               -------        -------       -------       -------       -------
<S>                                            <C>            <C>           <C>           <C>           <C>
Number of markets......................              9             14            25            35            28
Number of physicians...................          8,000         16,600        24,400        22,900        19,000
Number of commercial members...........        405,000        472,000       767,000       730,000       420,000
Number of Medicare members.............         63,000        114,000       215,000       171,000        99,000
</TABLE>

         The table below indicates the payor mix of the aggregate revenue earned
by our affiliated IPAs and PHOs for the years indicated.


<TABLE>
<CAPTION>
                                        2001          2000          1999           1998          1997
                                        ----          ----          ----           ----          ----
<S>                                      <C>           <C>           <C>            <C>           <C>
Commercial........................       58%           48%           49%            51%           51%
Medicare..........................       41            51            49             47            47
Medicaid..........................        1             1             2              2             2
                                        ---           ---           ---            ---           ---
                                        100%          100%          100%           100%          100%
                                        ===           ===           ===            ===           ===
</TABLE>

         PMNI. In connection with certain of our California operations, PMNI
contracts with payors primarily on a capitated basis, receiving a fixed payment
per payor plan member per month. Payors delegate to PMNI the administrative and
financial responsibility for credentialing, medical management, capitation
management, and claims adjudication and payment. PMNI contracts with the IPAs we
own to perform physician services.


                                       18
<PAGE>

Contractually, PMNI is at risk if the cost of physician professional services
exceeds the capitated payments received from payors. Through its contracts with
various hospitals, PMNI also assumes limited risk for the institutional
(hospital) costs.

         Although PMNI contracts with several payors, its contracts with
Pacificare of California represented approximately 30% of our revenue from IPA
operations or approximately 24% of our total revenue in 2001. PMNI's payor
contracts are renewed annually on a calendar basis, and the payor contracts for
2002 were renewed. Loss of any significant payor contract, however, would have a
material adverse effect on our operations.

         Service, Management and Consulting Agreements

         Through our PhySys division, we provide support services to health
systems and independent medical organizations. Our strategy is to assist these
organizations to improve the operations of their physician networks by offering
them a range of services to address their needs. Pursuant to these affiliations,
we provide management services to physician networks for a fee but do not
acquire the assets or employ the personnel of the physician groups, except
certain key employees, and do not have any ongoing obligation to provide capital
to the affiliated groups, except for our agreement with the Harbin Clinic. We
may choose to negotiate an investment in these groups in the future, and may do
so through a joint venture. This modified structure enables the physician group
or health system to benefit from our management expertise while retaining
control of its employees and decisions regarding future capital investment.

         We have support services contracts with two of our formerly affiliated
multi-specialty clinics: the Harbin Clinic in Rome, Georgia and the Lakeview
Medical Center in Suffolk, Virginia. Our fee under each of the Rome and Suffolk
agreements is a fixed monthly fee plus reimbursement of certain expenses. We do
not employ the personnel at these clinics and do not own any of the assets of
either clinic. Under the Rome agreement, we are obligated to provide lease
financing of up to $750,000 annually through September 30, 2005 for the
acquisition of equipment to be used in the group's operation. The lease rate is
the prime rate, and the group has the sole discretion whether to use us as its
source of capital for leased equipment. No such financing has been requested to
date. The Rome agreement terminates on September 30, 2007, subject to earlier
termination for various reasons. The Suffolk agreement terminates on November
30, 2005, subject to earlier termination without cause upon 90 days notice and
payment of a termination fee. Under the Suffolk agreement, the physician group
may offset, against any obligation it has to us, amounts that we owe to the
physician group under a promissory note, dated January 1, 1998, in the principal
amount of $173,783. We assigned the obligations under this note to our
wholly-owned subsidiary, SynerPhy of Suffolk, Inc. Our subsidiary which
contracts with the Harbin Clinic is part of the bankruptcy proceeding, however,
our Suffolk subsidiary is not. We do not anticipate that the Bankruptcy Filings
will negatively impact these relationships.

         We also provide management services to the physician networks of
certain health systems. Currently, this division provides management and support
services to a 110-physician group affiliated with the Rockford Health System, a
healthcare delivery system serving northern Illinois and southern Wisconsin. We
are obligated to provide Rockford with an executive director, a controller, and
an analyst to perform the required management and support services. The Rockford
agreement terminates on December 31, 2002 and we will receive a termination fee.
Under an April 2001 agreement, PhySys also provides services to MedClinic of
Sacramento, a 120-member physician group affiliated with the Mercy Health System
in Sacramento, California, which can be terminated for any reason by either
party. Finally, through PhySys, we offer consulting services to independent
medical organizations through limited engagements.

         In April 2001, we completed the sale of our six remaining
multi-specialty clinics which were held for sale. We sold our healthcare
decision-support services subsidiary, CareWise, on May 25, 2001. In the second
quarter of 2001, the liquidation of Advantage Care, Inc., our Kentucky HMO
operation was substantially complete, and we no longer operate any HMOs.



                                       19
<PAGE>

RESULTS OF OPERATIONS

         The following table shows the percentage of net revenue represented by
various expenses and other income items reflected in our Consolidated Statements
of Operations.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                                                     2001            2000            1999
-----------------------                                                     ----            ----            ----
<S>                                                                        <C>             <C>             <C>
Net revenue.....................................................           100.0%          100.0%          100.0%
Operating expenses:
    Cost of provider services...................................            62.4            24.9            13.5
    Salaries, wages and benefits................................            17.9            30.7            32.4
    Supplies....................................................             1.5            12.3            14.6
    Purchased medical services..................................             0.1             1.9             2.4
    Other expenses..............................................            17.1            17.2            15.5
    General corporate expenses..................................             4.6             2.4             2.1
    Rents and lease expense.....................................             2.3             6.7             7.8
    Depreciation and amortization...............................             2.7             5.6             6.0
    Provision for (recovery of) asset revaluation,
      restructuring and refinancing.............................            (1.7)           61.2            28.4
                                                                           -----           -----           -----
Net operating expenses..........................................           106.9           162.9           122.7
    Loss from operations........................................            (6.9)          (62.9)          (22.7)
Interest income.................................................            (1.2)           (0.7)           (0.3)
Interest expense................................................             6.1             3.9             2.6
                                                                           -----           -----           -----
    Loss before income taxes, minority interest and
      extraordinary item........................................           (11.8)          (66.1)          (25.0)
Income tax expense..............................................              --             0.1             3.5
Minority interest...............................................             0.2             0.3             0.9
                                                                           -----           -----           -----
    Loss before extraordinary item..............................           (12.0)          (66.5)          (29.4)
    Extraordinary item - gain from early extinguishment
      of convertible subordinated debentures....................              --              --             0.1
                                                                           -----           -----           -----
    Net loss....................................................           (12.0)%         (66.5)%         (29.3)%
                                                                           =====           =====           =====
</TABLE>

2001 COMPARED TO 2000

         Net revenue decreased $615.9 million, or 67.4%, to $298.3 million for
2001 from $914.2 million for 2000. Net revenue from IPAs ("IPA Net Revenue")
decreased $46.6 million, or 14.5%, to $274.6 million for 2001 from $321.2
million for 2000. This decrease in IPA Net Revenue is comprised of an
approximate $88.7 million decrease in 2001 primarily as a result of the
decisions to restructure and close certain IPA markets, including those in
Houston and Dallas in 2000, and to place our HMO in Kentucky in voluntary
rehabilitation with the Commonwealth of Kentucky Department of Insurance during
the fourth quarter of 2000. IPA Net Revenue from the IPA markets operating
during both 2000 and 2001 increased by $42.1 million, or 18.5%, primarily as a
result of increased enrollment and rates in NAMM California's IPAs in 2001.

         Net revenue from clinics ("Clinic Net Revenue") decreased $528.6
million, or 98.5%, to $8.2 million for 2001 from $536.8 million for 2000. The
decrease was comprised of (i) a $442.9 million decrease in our service fees for
reimbursement of clinic expenses and (ii) a $85.7 million decrease in our fees
from clinic operating income and net physician group revenue. The decrease in
Clinic Net Revenue for 2001 of $531.6 million resulted from the sale of the
remaining clinic operations in the latter half of 2000 and 2001. Fees from
clinic management contracts, however, increased $3.0 million.

         Comparing operating expense ratios between 2001 and 2000 is difficult
given the large decrease in, and the change in composition of, net revenue
between the periods. IPA Net Revenue was 92% of our total net revenue for 2001
compared to 35% for 2000. As a result, our cost of provider services as a
percentage of net revenue significantly increased during 2001 compared to 2000
because our cost of provider services relates primarily to our IPA operations.
The cost of provider services represents medical expenses paid to non-IPA
affiliated healthcare


                                       20
<PAGE>

providers. Conversely, salaries, wages and benefits decreased dramatically as a
percentage of net revenue because our multi-specialty clinic operations, which
required more personnel to operate than our IPA management operations, comprised
only 3% of our total net revenue for 2001 compared to 59% in 2000. Rent expense,
depreciation and amortization decreased as a percentage of net revenue for 2001
compared to 2000 due to the disposal of all of our clinic operations which were
more capital and property intensive than our IPA management operations.

         On behalf of certain of our affiliated IPAs, we have underwritten
letters of credit to managed care payors to help ensure payment of healthcare
costs for which the affiliated IPAs have assumed responsibility. As of December
31, 2001, a letter of credit for $0.4 million was outstanding for the benefit of
a managed care payor. We experienced losses on letters of credit issued for the
benefit of managed care payors totaling approximately $0.8 million in 2001.

         We recovered $5.0 million of asset revaluation, restructuring and
refinancing charges taken in prior years for the year ended December 31, 2001.
In 2001, we completed the sale of our remaining six clinics whose assets were
classified as held for sale as of December 31, 2000. See discussion of these net
recoveries in "Asset Revaluation, Restructuring and Refinancing" below.

         We recognized state income tax expense of $33,000 in 2001 compared to
$1.0 million in 2000. We have recorded a full valuation allowance on net
deferred tax assets because realization of such assets in the future is
uncertain.

2000 COMPARED TO 1999

         Net revenue decreased $602.0 million, or 39.7%, to $914 million for
2000 from $1.516 billion for 1999. Clinic Net Revenue decreased in 2000 from
1999 by $566.5 million, comprised of (i) a $477.9 million decrease in our
service fees for reimbursement of clinic expenses and (ii) a $88.6 million
decrease in our fees from clinic operating income and net physician group
revenue. Decreases in Clinic Net Revenue for the year included reductions of
$5.1 million from clinics whose assets were held for sale at December 31, 2000
and reductions of $567.3 million as a result of clinic operations disposed of in
2000. Fees from management contracts consummated in the fourth quarter of 1999
totaling $5.9 million in 2000 partially offset these decreases. The decrease in
Clinic Net Revenue was also affected by declining reimbursement for services
rendered by the physician groups. Specifically, the provision for doubtful
accounts and contractual adjustments as a percentage of gross physician group,
hospital and other revenue increased to 46.2% for 2000 from 43.1% for 1999.

         IPA Net Revenue decreased $37.1 million, or 10.3%, to $321.2 million
for 2000 from $358.3 million for 1999. IPA Net Revenue decreased approximately
$64.8 million in 2000 primarily as a result of the decisions to restructure and
close certain IPA markets, including those in Houston and Dallas and the 1999
closing of The Morgan Health Group, Inc., an IPA in Atlanta operated by us. In
addition, IPA Net Revenue during 2000 included an increase of approximately $1.6
million from an IPA market and a management agreement entered into subsequent to
the third quarter of 1999. Additionally, IPA Net Revenue increased $44.6 million
for 2000 as a result of our acquisition of the remaining interest in the
Kentucky HMO in late 1999. The liquidation of this HMO was substantially
completed in the second quarter of 2001. IPA Net Revenue from the IPA markets in
effect for both 2000 and 1999 decreased by $18.5 million, or 7.2%, primarily as
a result of unfavorable hospital and payor contract renegotiations in 2000 for
the PrimeCare-managed IPAs.

         During 2000, most categories of operating expenses were relatively
stable as a percentage of net revenue when compared to 1999. The cost of
provider services increased as a result of our acquiring the remaining 50%
interest in the Kentucky HMO in late 1999. In an effort to obtain prepayment of
several notes receivable from formerly affiliated physician groups, we
negotiated discounts totaling $3.0 million which were recorded as other expenses
in the third and fourth quarter of 2000. In addition, other notes receivables
were written down $5.6 million to expected net realizable value in the third and
fourth quarters of 2000 and recorded as other expenses. The increase in interest
expense as a percentage of net revenue was primarily because of decreased net
revenue and amendments to our now terminated credit facility with Citicorp
("Citicorp Credit Facility") that increased interest rates.



                                       21
<PAGE>

         The provision for asset revaluation, restructuring and refinancing for
the year ended December 31, 2000 totaled $559.9 million, consisting of a net
charge of $23.8 million in the first quarter, a net charge of $407.3 million in
the second quarter, a net charge of $54.2 million in the third quarter and a net
charge of $74.6 million in the fourth quarter. At December 31, 2000, we had
disposed of the assets of all but six clinics whose assets were classified as
held for sale.

SUMMARY OF OPERATIONS BY QUARTER

         The following table presents unaudited quarterly operating results for
2001 and 2000. We believe that all necessary adjustments have been included in
the amounts stated below to present fairly the quarterly results when read in
conjunction with the Consolidated Financial Statements. Results of operations
for any particular quarter are not necessarily indicative of results of
operations for a full year or predictive of future periods.

<TABLE>
<CAPTION>
                                                                         2001 QUARTER ENDED
                                                     --------------------------------------------------------
                                                        MAR 31        JUNE 30        SEPT 30        DEC 31
                                                     -----------    -----------    -----------    -----------
<S>                                                  <C>            <C>            <C>            <C>
Net revenue.....................................     $    85,284    $    70,886    $    70,680    $    71,469
Loss before taxes and minority interest.........         (19,439)        (4,646)        (4,062)        (7,017)
Net loss........................................         (20,097)        (4,371)        (3,948)        (7,340)
Loss per share--diluted.........................     $     (0.27)   $     (0.06)   $     (0.05)   $     (0.11)
</TABLE>

<TABLE>
<CAPTION>
                                                                         2000 QUARTER ENDED
                                                     --------------------------------------------------------
                                                        MAR 31        JUNE 30        SEPT 30        DEC 31
                                                     -----------    -----------    -----------    -----------
<S>                                                  <C>            <C>            <C>            <C>
Net revenue.....................................     $   309,496    $   258,010    $   211,976    $   134,713
Loss before taxes and minority interest.........         (23,709)      (426,539)       (63,038)       (91,354)
Net loss........................................         (25,573)      (426,824)       (64,375)       (91,612)
Loss per share--diluted.........................     $     (0.35)   $     (5.80)   $     (0.87)   $     (1.28)
</TABLE>

ASSET REVALUATION, RESTRUCTURING AND REFINANCING

         General

         We have divested the assets of all of the multi-specialty clinics with
which we were previously affiliated. We entered into management agreements to
provide certain support services to two of the clinics that repurchased their
assets during 2000.

         As part of the sale of the stock of one of our subsidiaries, we were
entitled to receive additional consideration if the affiliated medical group
participated in a certain transaction before the third anniversary of our stock
sale. In the fourth quarter of 2001, this contingent event occurred, accordingly
we received $5.0 million in additional consideration, offsetting certain of the
asset revaluation, restructuring and refinancing charges taken in previous
years.

         Assets Held for Sale

         At December 31, 2001, we had no significant assets held for sale. At
December 31, 2000, net assets held for sale primarily consisted of the net
assets of our remaining six clinics; the operations of several IPA markets,
including the PrimeCare and NAMM California-managed IPAs; CareWise; our one
remaining hospital; and certain real estate holdings. These assets totaled
approximately $72.7 million, including $3.2 million of real estate, and
consisted of current assets, property and equipment, intangible assets and other
assets less liabilities which were expected to be assumed by the purchasers. In
2001, we completed the disposition of the assets of all six clinics, CareWise,
the hospital and certain real estate and received proceeds totaling $64.9
million in cash and $13.8 million in notes receivable in addition to the
assumption of certain liabilities by the purchasers. These dispositions
represented $63.7 million of the net assets held for sale at December 31, 2000.
In the fourth quarter of 2000, we decided to solicit bids for the sale of
PrimeCare. After reviewing these bids, and after certain other assets were sold


                                       22
<PAGE>

which helped to alleviate our short-term cash flow problems, we decided to
retain PrimeCare in June 2001. Accordingly, PrimeCare is not accounted for as an
asset held for sale on December 31, 2001 as it was on December 31, 2000.
PrimeCare accounted for approximately 86% of our consolidated revenue in 2001.

         In 2000, we recorded an asset revaluation and restructuring charge of
approximately $559.9 million. This charge included a net pre-tax asset
revaluation charge of approximately $509.1 million, which was comprised of a
$549.3 million asset revaluation charge and a $3.4 million financing charge less
recovery of $43.6 million of certain asset revaluation charges recorded in
previous years, and a $50.8 million restructuring charge. This charge related to
the asset impairment of all remaining clinic operations, CareWise, certain IPA
markets and certain real estate classified as held for sale at December 31, 2000
and the disposition of the assets of 34 clinic operations, certain IPA
operations and certain real estate during the year.

         In 1999, we recorded an asset revaluation and restructuring charge of
approximately $431.0 million. This charge included a net pre-tax asset
revaluation charge of approximately $409.3 million, which was comprised of a
$416.4 million asset revaluation charge less recovery of $7.1 million of certain
asset revaluation charges recorded in the first quarter of 1998 and the third
quarter of 1999, and a $21.7 million restructuring charge. This charge related
to the asset impairment of 11 clinic operations classified as held for sale at
December 31, 1999 and the disposition of the assets of 15 clinic operations
during the year.

         In summary, net revenue and pre-tax income (losses) from operations
disposed of or closed as of December 31, 2001 were $16.8 million and $(13.3)
million for the year ended December 31, 2001, compared to $664.6 million and
$(30.1) million for the year ended December 31, 2000, and $1.2 billion and $36.0
million for the year ended December 31, 1999, respectively.

         Asset Impairments

         Excluding the $5.0 million asset impairment recovery discussed above,
there was an additional net asset impairment recovery of approximately $0.1
million in 2001. Impairment charges consisted of asset impairments relating to
the disposition of our remaining six clinics, CareWise, and fixed assets at our
corporate offices offset by recoveries of accounts receivable and other assets
written off in prior years.

         In 2000, we recorded asset revaluation charges of approximately $156.3
million related to the impairment of long-lived assets of certain of our
operating units and at our corporate office. Approximately $65.3 million of this
asset revaluation charge related to our managed IPA operations in Houston, $84.8
million related to clinic operations and $6.2 million related to the impairment
of certain long-lived assets at our corporate office.

         We divested the assets related to our managed IPAs in Houston in the
fourth quarter of 2000 and recovered approximately $2.3 million of the asset
impairment charge and $0.6 million of the restructuring charge, respectively,
recorded in the second quarter of 2000.

         The 2000 asset revaluation charges related to clinic operations of
$84.8 million were based on our decisions to restructure our service agreements
and to reduce our investment in the assets of the clinics. In connection with
this decision, we recorded charges in the year 2000 to reduce the carrying value
of the assets associated with these operations to their net realizable value.
Approximately $6.2 million of these charges related to the impairment of certain
long-lived assets at our corporate office because of the consolidation of
administrative office space and the expected disposition of certain long-lived
assets.

         In 1999, we recorded approximately $192.5 million of asset revaluation
charges related to the impairment of long-lived assets of certain of our
operating units. Approximately $172.5 million of these charges related to
certain clinic operations with the remainder related to the operations of PhyCor
Management Corporation ("PMC"), an IPA management company acquired in the first
quarter of 1998. We determined to exit the most significant market in which PMC
operated as a result of a variety of factors, including the loss of
relationships with physicians in that market. These events were expected to
impair the estimated future cash flows from the PMC acquisition and resulted in
an asset impairment charge of approximately $20.0 million.


                                       23
<PAGE>

         Refinancing Costs

         In 2000, we recorded approximately $3.4 million of refinancing charges
related to the amendment and restatement of our now terminated Citicorp Credit
Facility. These charges represented unamortized costs that were expensed as a
result of the reduced commitment amounts and the acceleration of the maturity
date of the Citicorp Credit Facility.

         Restructuring Charges

         In 2001, we adopted and implemented restructuring plans and recorded
net pre-tax restructuring charges of approximately $0.1 million. These charges
included approximately $1.9 million in gross charges comprised of $1.1 million
in severance costs, $0.5 million in facility and lease termination costs and
$0.3 million in other exit costs offset by the recovery of $1.8 million in
restructuring charges recorded in prior years that we determined would not be
utilized. These charges are detailed below.

         In the fourth quarter of 2001, we adopted and implemented restructuring
plans and recorded net pre-tax restructuring charges of approximately $1.4
million. These charges were comprised of approximately $1.1 million in severance
costs and $0.3 million in other exit costs relating to the closure of a medical
office in California.

         In the first quarter of 2001, we adopted and implemented restructuring
plans and recorded a net pre-tax restructuring reserve recovery of approximately
$1.3 million. This recovery was comprised of a $0.5 million restructuring charge
related to the sale of one of our multi-specialty clinics and the recovery of
approximately $1.8 million related to restructuring charges recorded in prior
years which will not be utilized.

         In 2000, we adopted and implemented restructuring plans and recorded
pre-tax restructuring charges of approximately $50.8 million, of which
approximately $3.6 million, $35.9 million, $10.5 million, and $0.8 million were
recorded in the first, second, third and fourth quarters, respectively. These
charges included approximately $16.2 million in severance costs, $24.8 million
in facility and lease termination costs and $9.8 million in other exit costs.
These restructuring plans included the involuntary termination of 934 clinic,
IPA management, business office and corporate personnel.

         In 1999, we adopted and implemented restructuring plans and recorded
net pre-tax restructuring charges totaling approximately $21.8 million with
respect to operations that were being sold or shut down, of which approximately
$9.5 million was recorded in the first quarter, $0.7 million was recorded in the
second quarter, a net $3.1 million was recorded in the third quarter and $8.5
million was recorded in the fourth quarter. These net charges were comprised of
approximately $4.4 million in facility and lease termination costs, $5.1 million
in severance costs and $12.3 million in other exit costs. These restructuring
plans included the involuntary termination of 382 local clinic and IPA
management and business office personnel.

         In summary, during 2001 we paid approximately $2.1 million in severance
costs, $0.7 million in facility and lease termination costs, and $2.1 million in
other exit costs related to 2000, 1999 and 1998 charges. At December 31, 2001,
the accrued restructuring reserves for disposed operations totaled approximately
$22.1 million, which included $18.1 million in facility and lease termination
costs, $1.7 million in severance costs and $2.3 million in other exit costs.
Substantially all obligations related to the accrued restructuring reserves are
subject to compromise as a result of the Bankruptcy Filings.

LIQUIDITY AND CAPITAL RESOURCES

         Bankruptcy

         As previously described herein, on the Petition Date, the Debtors filed
the Bankruptcy Filings and the Plan, which sets forth the manner in which claims
against, and interests in, us will be treated following our emergence from
bankruptcy, as well as a disclosure statement. The disclosure statement has not
yet been approved by the Bankruptcy Court. We elected to seek Chapter 11
protection in an attempt to realign our capital structure and to preserve the
value of our remaining businesses for our creditors. We filed the Plan with the
support of certain


                                       24
<PAGE>

creditors, which collectively hold approximately two-thirds of our outstanding
indebtedness. The Plan is subject to a number of conditions, including approval
by certain of our creditors and confirmation by the Bankruptcy Court. Creditors
who do not vote in favor of the Plan may challenge its confirmation. Resolution
of any such challenges could result in delays and increased expenses as well as
failure of the Plan.

         If the Plan is confirmed, our general unsecured creditors, including
the Bondholders and Warburg, Pincus, will receive shares of the reorganized
company's common stock or, in certain instances, cash in an amount equal to
approximately 11.9% of their claims in full satisfaction of their claims. Under
the terms of the Plan, our outstanding and authorized common stock, options,
warrants and rights to purchase preferred stock will be cancelled and holders of
these securities will not receive any consideration, either in cash or in newly
issued stock. Finally, under the terms of the Plan, we anticipate that there
will be fewer than 300 shareholders of record upon consummation. If that is the
case, the securities of the reorganized company will not be publicly traded and
the reorganized company will be a privately-held company not subject to the
reporting obligations of the SEC.

         The Debtors are currently operating as debtors-in-possession subject to
the jurisdiction of the Bankruptcy Court. On February 1, 2002, the Bankruptcy
Court granted authority to the Debtors, among other things, to pay prepetition
and post-petition employee wages, salaries, benefits and other employee
obligations. The Bankruptcy Court also entered an order approving the rejection
of certain executory contracts and lease obligations. The Debtors continue to
pay post-petition obligations in the ordinary course of business.

         Under the Bankruptcy Code, actions to collect prepetition indebtedness,
including pending litigation against the Debtors, are stayed and other
contractual obligations may not be enforced against the Debtors. In addition,
the Debtors may reject executory contracts and lease obligations. Parties
affected by these rejections may file claims with the Bankruptcy Court in
accordance with the reorganization process. If the Debtors are able to
reorganize successfully, substantially all unsecured liabilities as of the
Petition Date would be discharged under the Plan.

         General

         As a result of our failure to make interest payments on the Notes
during 2001, we are in default on the Notes. The Notes and Zero Coupon Notes are
classified as current liabilities at December 31, 2001. As a result of the
Bankruptcy Filings, the principal and interest due under the Notes and the Zero
Coupon Notes are subject to compromise. At December 31, 2001, current
liabilities exceeded our current assets by $341.8 million, compared to $305.8
million at December 31, 2000. As of December 31, 2001, we had $51.7 million in
cash and cash equivalents, including $30.3 million of restricted cash and cash
equivalents, compared to $0.9 million and $0.6 million, respectively, at
December 31, 2000. Restricted cash and cash equivalents primarily include
amounts held by PMNI, the use of which is restricted to operations of PMNI to
meet regulatory deposit requirements.

         Our operations used $2.4 million of cash flow in 2001 compared to
providing $5.6 million of cash flows in 2000, a decrease of $8.0 million. The
decrease in cash flow from operations resulted primarily from a decrease of
$63.9 million from clinics closed or disposed of at December 31, 2001 and an
$0.8 million decrease from CareWise, which was sold in May 2001. These decreases
in cash flow from operations during 2001 were partially offset by a $38.3
million increase for 2001 compared to 2000 primarily because of reduced interest
costs of $26.7 million under our Citicorp Credit Facility and the failure to pay
accrued interest on our Notes. In addition, cash flow from operations increased
because of the continued downsizing of our corporate office in 2001, although
these savings were partially offset by approximately $3.0 million in
reorganization costs. Cash flow from operations for our NAMM subsidiaries
increased $18.4 million to $4.2 million in 2001 from $(14.2) million in 2000
primarily because we ceased operations in 11 underperforming IPA markets in
2000, thereby eliminating a substantial use of cash in 2001.

         The former employment agreements with Mr. Dent and Mr. Tarpley B.
Jones, our Chief Executive Officer and President, provided for the payment of
bonuses aggregating up to a maximum of $2.25 million upon the repayment of
borrowings under the Citicorp Credit Facility. Approximately $0.2 million of the
bonuses was earned in 2000, and the remainder was earned during the first
quarter of 2001, of which all amounts were paid in 2001. On the Petition Date,
these agreements were superseded by Mr. Dent's separation agreement and Mr.
Jones' new employment agreement. On February 25, 2002, a creditor filed a motion
to reconsider the February 15, 2002 order


                                       25
<PAGE>

of the Bankruptcy Court authorizing us to assume the Dent Separation Agreement
and the Jones Employment Agreement. We have opposed this motion as we believe
that the assumption of these agreements was a proper exercise of our business
judgment. See Part III, Item 11 - Executive Compensation.

         Capital expenditures during 2001 totaled $0.4 million. We expect to
make approximately $1.5 million in capital expenditures in 2002, which we
anticipate will be funded from operating cash flow and unrestricted cash
reserves.

         During 1999, we favorably resolved outstanding Internal Revenue Service
("IRS") examinations for the years 1988 through 1995. The IRS had proposed
adjustments relating to the timing of recognition for tax purposes of certain
revenue and deductions related to accounts receivable, our relationship with
affiliated physician groups and various other timing differences. In August
1999, we received a $13.7 million tax refund as a result of applying the 1998
loss carryback to recover taxes paid in 1996 and 1997. During 2000, we resolved
the outstanding IRS examination for the years 1996 through 1998. The IRS
examination resulted in an adjustment to the 1998 loss carryback and
accordingly, we repaid approximately $1.2 million plus interest, as a result of
revisions in the alternative minimum tax calculation. The tax years 1988 through
1998 have been closed with respect to all issues without a material financial
impact. Additionally, two subsidiaries are currently under examination for the
1995 and 1996 tax years. We acquired the stock of these subsidiaries during
1996. We have agreed to settle the audit of one of these subsidiaries for
approximately $27,000 plus interest, subject to approval by the Bankruptcy
Court. For the years under audit, and potentially, for subsequent years, any
such adjustments could result in material cash payments by us. We cannot
determine at this time the resolution of these matters, however, we do not
believe the resolution of these matters will have a material adverse effect on
our financial condition, although there can be no assurance as to the outcome of
these matters.

         As of December 31, 2001, we had approximately $702.4 million in net
federal operating loss carryforwards ("NOLs"). It is expected that the NOLs will
be reduced by the amount of indebtedness discharged under the Plan, estimated to
be approximately $311 million as of December 31, 2001. In addition, the NOLs
will be reduced by approximately $17.9 million which equaled the amount of
interest paid during the past three years to creditors who will become
shareholders of the reorganized company under the Plan. Our ability to utilize
the remaining NOLs will be subject to limitations because of the ownership
change that will result from the Plan unless "qualified creditors," as defined
in the Tax Code, will own 50% or more of the stock of the reorganized company.
Although we expect that qualified creditors will own 50% or more of the
reorganized company and intend to file our tax returns consistent with this
belief, there can be no assurance that an audit of one or more tax returns filed
for 1999 and later tax years would not result in a reduction in the amount or
complete elimination of the remaining NOLs available for future use. In
addition, our ability to utilize our NOLs could also be limited or eliminated in
the event of certain future mergers or acquisitions.

         Capital Resources

         Our sources of capital are extremely limited. Our sole sources of
capital are unrestricted cash reserves, cash flow from operations, and certain
notes receivable from the acquirers of certain assets of our former clinics. We
do not expect to have access to any outside sources of capital until the
bankruptcy is completed. We have no assurance that any capital will be available
at terms acceptable to us at such time or at any time in the future.

         In October 2001, we entered into a one-year credit agreement with
AmSouth Bank (the "AmSouth Facility") which provides for the issuance of letters
of credit up to an aggregate of $2.65 million to replace those outstanding at
that time under the Citicorp Credit Facility. To date in 2002, a letter of
credit for $0.4 million expired and letters of credit totaling $0.4 million were
drawn. At April 10, 2002, letters of credit aggregating $1.85 million were
outstanding under the AmSouth Facility and were collateralized with $2.4 million
cash. Reimbursement to AmSouth for the letter of credit draws is pending
approval by the Bankruptcy Court. During the first quarter of 2001, all
borrowings under the Citicorp Credit Facility were repaid and during the second
quarter of 2001, outstanding letters of credit were fully collateralized with
cash held by the agent bank. The Citicorp Credit Facility terminated December
31, 2001.

         Our common stock was delisted as of August 25, 2000 because of our
failure to satisfy certain of the minimum NASDAQ listing criteria. Our common
stock immediately began trading on the OTC Bulletin Board.



                                       26
<PAGE>

Under terms of the Plan, all outstanding common stock and related securities
will be cancelled and holders will receive no consideration.

         Market Risks Associated with Financial Instruments

         As previously discussed, the Debtors filed the Bankruptcy Filings on
January 31, 2002. Consequently, principal and interest due under the Notes and
the Zero Coupon Notes and capital lease obligations of the Debtors are subject
to compromise. While the fair value of our debt obligations declined
significantly in 2001 as a result of our financial condition, such amounts do
not reflect the adjustments expected to result from resolution of the bankruptcy
proceedings. Under the Bankruptcy Code, actions to collect prepetition
indebtedness against the Debtors are subject to an automatic stay and other
prepetition contractual obligations of the Debtors may not be enforced.

         The table below presents information about our market-sensitive
financial instruments as of December 31, 2001. For debt obligations, the table
presents principal cash flows and related weighted-average interest rates by
expected maturity dates. The fair values of long-term debt were determined based
on quoted market prices at December 2001 for the same or similar debt issues and
do not reflect adjustments expected to result from resolution of the bankruptcy
proceedings.

<TABLE>
<CAPTION>
                                                                                                           FAIR
EXPECTED MATURITY DATE      2002     2003         2004       2005       2006     THEREAFTER    TOTAL       VALUE
----------------------      ----     ----         ----       ----       ----     ----------    -----       -----
                                                              (IN THOUSANDS)
<S>                         <C>    <C>            <C>        <C>        <C>       <C>         <C>         <C>
Long-term debt:
Fixed rate.............     $518   $196,589        $94       $104       $737      $266,390    $464,432    $32,825
Average interest
   rate(1).............     8.32%      4.50%      9.75%      9.75%      6.75%         5.81%
Variable rate..........       --         --         --         --         --            --          --         --
Average interest
   rate(1).............       --         --         --         --         --            --          --         --
</TABLE>

--------------
(1)  Average interest rates exclude deferred loan costs and debt offering costs.

         Summary

         As described throughout this document, the Debtors filed for Chapter 11
protection on the Petition Date. On that date, we also filed the Plan to
reorganize the company and a disclosure statement, which has not yet been
approved by the Bankruptcy Court. Our Plan is subject to a number of conditions,
including approval by certain of our creditors and confirmation by the
Bankruptcy Court. Creditors who do not vote in favor of the Plan may challenge
its confirmation. Resolution of any such challenges could result in delays and
increased expenses as well as failure of the Plan. If our Plan is confirmed, our
general unsecured creditors, including the Bondholders and Warburg, Pincus, will
receive shares of the reorganized company's common stock or, in certain
instances, cash in an amount equal to 11.9% of their claims in full satisfaction
of their claims. Under the terms of the Plan, our outstanding and authorized
common stock, options, warrants and rights to purchase preferred stock will be
cancelled and holders of these securities will not receive any consideration,
either in cash or in newly issued stock. At December 31, 2001, we had cash and
cash equivalents of approximately $51.7 million, including $30.2 million of
restricted cash and cash equivalents, and we have no availability under the
AmSouth Credit Facility.

         We do not anticipate having access to any outside sources of capital
until after we emerge from bankruptcy and there is no assurance that capital
will be available on agreeable terms at such time or at any time in the future.
In the event cash flow from operations, unrestricted cash reserves and
collections on certain notes receivable are not sufficient to fund our ongoing
operations, our financial condition and our ability to emerge as a viable entity
from bankruptcy may be doubtful.

CRITICAL ACCOUNTING POLICIES

         Financial Reporting Release No. 60, recently released by the SEC,
requires all companies to include a discussion of critical accounting policies
or methods used in the preparation of financial statements. Note 1 of the


                                       27
<PAGE>

Notes to the Consolidated Financial Statements includes a summary of the
significant accounting policies and methods used in preparation of our
Consolidated Financial Statements. The following is a brief discussion of our
more significant accounting policies.

         Revenue Recognition

         In 2001, 92% of our revenue was derived from our IPA management
operations. IPA Management Revenue consists of fees paid by IPAs to us for
management services, and is recognized in the month that management services are
provided. In addition, we may receive a share of surplus, if any, of the
capitated revenue of the IPAs in excess of healthcare claims expense. Revenue
from such surpluses is recognized at the time that we can readily determine the
amount of those surpluses, which usually occurs when the surplus is paid to us.

         Incurred But Not Reported Medical Claims

         At December 31, 2001, we had $26.5 million accrued for medical claims
incurred but not reported under our managed care contracts. We are also
responsible for determining the amount of incurred, but not reported claims for
IPAs that we manage but do not own. We estimate the medical claims reserve using
historical claims experience (including severity and payment lag time) and other
actuarial data including current enrollment, health service utilization
statistics and other related information to predict the cost of healthcare
services provided to enrollees during any given period. Although we believe that
our estimation methodology effectively captures trends in medical claims costs,
actual payments could differ from our estimates if there are changes in the
healthcare cost structure or adverse experience.

         Valuation of Intangible Assets and Goodwill

         We assess the impairment of identifiable intangibles and goodwill
whenever events or changes in our operating environment indicate that the
carrying value of such intangibles may not be recoverable. We measure any
impairment based on a projected discounted cash flow method using a discount
rate determined by management to be commensurate with the risk inherent in our
current business model. Net intangible assets and goodwill amounted to $32.7
million at December 31, 2001.

         Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill
and Other Intangible Assets" became effective in 2002 and as a result, we will
cease to amortize approximately $19.9 million of net goodwill. We recorded
approximately $2.0 million of amortization related to goodwill during 2001 and
would have recorded approximately $1.4 million in 2002. In lieu of amortization,
we performed an initial impairment review of our goodwill in 2002 and will
perform an annual impairment review thereafter. We have performed the initial
impairment review and have determined we will have no initial impairment charge
resulting from the adoption of SFAS No. 142. In 2002, we expect to record
amortization of approximately $1.1 million in contract service agreement rights,
which have predictable cash flows and a defined term.

RISK FACTORS

         Our disclosure and analysis in this report contain some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. These statements do not relate solely to historical
or current facts and can be identified by the use of words such as "may,"
"believe," "will," "expect," "project," "estimate," "anticipate," "plan,"
"should" or "continue." From time to time, we also may provide oral or written
forward-looking statements in other materials we release to the public.

         Any of our forward-looking statements in this report and in any other
public statements we make may turn out to be incorrect. These statements can be
affected by inaccurate assumptions we might make or by known or unknown risks
and uncertainties. Many factors mentioned in the discussion including our
ability to consummate the Plan as amended on substantially the terms proposed;
actions which may be taken by creditors and the outcome of various
administrative matters in the Chapter 11 proceeding; the possibility of delays
in the effective date of the proposed Plan; our inability to access capital
markets given our current financial condition; the excessive amount of time and
effort that our senior management must devote to dealing with our financial
condition, thereby reducing


                                       28
<PAGE>

time spent directly on the operations of our businesses; we may be unable to
retain top management and other key personnel; competition and general economic,
demographic and business conditions, both nationally and in the regions in which
we operate; existing government regulations and changes in legislative proposals
for healthcare reform, including changes in Medicare and Medicaid reimbursement
levels; our ability to operate IPAs and other physician organizations
profitably; the ability of the IPAs to negotiate acceptable contracts with
payors and the possibility of decreases in federal reimbursement; changes in
contractual relationships; competition in the healthcare industry; regulatory
developments and changes; the nature of capitated fee arrangements and other
methods of payment for medical services; the risk of professional liability
claims; and the outcome of pending litigation will be important in determining
future results. Actual future results may vary materially from those reflected
in the forward-looking statements.

         We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosures we make on related
subjects in our 10-Q, 8-K and 10-K reports to the SEC. In addition, we include
the following discussion of cautions, risks and uncertainties relevant to our
businesses.

         Our Common Stock Has No Value

         As a result of the Bankruptcy Filings, we anticipate that all
outstanding and authorized shares of our common stock, and all warrants and
options to acquire shares of our common stock and rights to acquire preferred
stock will be cancelled and the holders of such securities will receive no
consideration in stock of the reorganized company or cash.

         Our Plan May Not Be Confirmed

         Our Bankruptcy Filings are expected to facilitate our reorganization.
As debtors-in-possession, we are authorized to operate our business, subject to
the supervision of the Bankruptcy Court. No assurance can be given that we will
remain debtors-in-possession and that a trustee will not be appointed to operate
our business. In addition, no assurance can be given that the Bankruptcy Court
will confirm our Plan. The Bankruptcy Filings may affect our ability to maintain
certain present business arrangements and may also affect our ability to
negotiate successfully future business arrangements. Among the relationships
that may be materially affected by our bankruptcy cases are our relationships
with our managed IPAs and PHOs. If these relationships are materially adversely
affected, we may be unable to emerge from the bankruptcy proceedings as a viable
entity. In addition, in the event the Plan is not approved, we may be unable to
retain our employees.

         IPAs May Not Be Profitable

         Our IPA business constitutes over 90% of our revenue. Our IPA
management revenue is contingent upon the payments from payors and, in most
cases, the IPAs ability to create a surplus by managing healthcare utilization.
In addition, our IPAs are subject to losses to the extent to which they share
risk. In the event the IPAs' capitated fees do not exceed the cost of services,
the IPAs will suffer losses. In the event the IPAs are not profitable, we may
not receive fees owed to us and our results of operations will be materially
adversely affected.

         Our Revenue is Dependent on the Continuation of the Pacificare
         Contracts.

         Contracts with Pacificare of California, a managed care payor in
California, represented over 24% of our total revenue in 2001. PMNI and each of
our managed California IPAs contracts with Pacificare, each of which is renewed
on an annual basis. If these contracts were terminated or failed to be renewed,
our operating revenue would be materially adversely affected.

         Our Revenue is Highly Dependent on Medicare Reimbursement

         Approximately 41% of the 2001 revenue of our affiliated IPAs and PHOs
was derived from members who qualified for Medicare benefits. In the event the
government lowers reimbursement rates for procedures, our revenue will be
negatively impacted. In addition, many payors have discontinued enrollment in
Medicare+ Choice


                                       29
<PAGE>

Plans or abandoned markets altogether because of the failure of the government
reimbursement rates to keep pace with inflation and the rising costs of
healthcare. In the event additional payors withdraw from our markets, our
revenue will be adversely affected and the success of our long-term business
strategy will be jeopardized.

         Our PhySys Model May Not Be Profitable.

         Through PhySys, we currently provide management services to physician
networks of health systems and independent physician groups, including multi-
and single-specialty groups, and are currently seeking additional affiliations
with such groups. To date we are providing services to only two physician groups
and two health systems based on this model and there can be no assurance that
these affiliations will be successful, or that additional affiliations will
develop. In addition, PhySys seeks to provide limited consulting services to
medical organizations. There can be no assurance that new contracts will be
obtained or, if obtained, that such arrangements will be profitable.

         The Outcome of Litigation May Adversely Affect Our Business and
         Financial Results.

         Claims have been brought against us and our operating subsidiaries
which are not stayed as a result of the Bankruptcy Filings. The ultimate
disposition of these matters could have a material adverse effect on our
financial condition, cash flow and results of operations, as described in the
discussions of such matters in "Legal Proceedings" in Item 3 in this report.

         Industry Competition May Increase.

         Managing physician organizations is a competitive business. We compete
with many businesses to manage medical clinics and physicians and to provide
services to IPAs. These competitors include:

              - IPA management companies;
              - hospitals and health systems;
              - multi-specialty clinics;
              - single-specialty clinics;
              - healthcare service companies; and
              - insurance companies and HMOs.

         Our competitors may have longer operating histories, greater financial
resources and more reliable cash flow. We may not be able to compete
successfully with existing or new competitors.

         PMNI is Highly Regulated

         PMNI holds a limited Knox-Keene license in the State of California and,
as a result, is subject to significant state oversight, including tangible net
equity requirements by the DMHC. During the third quarter of 2000, we reached an
agreement with the DMHC regarding the funding of certain cash reserve
requirements for claims payment. Our operations would be adversely affected if
we failed to maintain compliance with this agreement or any other regulations
applicable to Knox-Keene licenses and the California regulators took corrective
action.

         Under California law, PMNI also is responsible for monitoring the
financial viability of the IPAs with which it contracts. If the information
submitted indicates financial deficiencies that need to be corrected, PMNI and
the affected IPA are required to develop a corrective action plan and
contingency plans in order to ensure the delivery of healthcare services if the
corrective action fails. Our operations would be adversely affected if we failed
to comply with these provisions and the DMHC took corrective action.

         Insurance Regulations May Adversely Affect Our Business.

         Our managed IPAs that do not contract through PMNI and managed
physician groups typically enter into contracts and joint ventures with licensed
insurance companies, such as HMOs, pursuant to which these IPAs and physician
groups may be paid on a capitated fee basis. Under capitation arrangements,
healthcare providers bear the


                                       30
<PAGE>

risk, subject to certain loss limits, that the total costs of providing medical
services to members will exceed the premiums received. To the extent that the
IPAs and affiliated physician groups subcontract with physicians or other
providers for their services on a fee-for-service basis, the managed IPAs and
affiliated physician groups may be deemed, under state law, to be in the
business of insurance. If the IPAs and physician groups are deemed to be
insurers, they will be subject to a variety of regulatory and licensing
requirements applicable to insurance companies or HMOs, resulting in increased
costs and corresponding lower revenue for us.

         Fixed Fee Patient Arrangements May Not Be Profitable.

         As indicated above, under capitation arrangements, healthcare providers
receive a fixed fee per plan member per month, and providers bear the risk,
generally subject to certain loss limits, that the total costs of providing
medical services to the members will exceed the fixed fee. The IPA management
fees are based, in part, upon a share of the portion, if any, of the fixed fee
that exceeds actual costs incurred. Some agreements with payors also contain
"shared risk" provisions under which, through the IPA, the IPA and its manager
can share additional fees or additional costs, depending on the utilization
rates of the members and the success of the IPAs. Any significant costs that
exceed the fixed fee could have a material adverse effect on our operations.

         The healthcare provider's ability to manage effectively the costs and
utilization of medical services determines the profitability of capitated fee
arrangements. The management fees are also based upon a percentage of revenue
collected by the IPAs. Any loss of revenue by the IPAs because of the loss of
affiliated physicians, the termination of third party payor contracts, or other
changes in plan membership or capitated fees may reduce our revenue. Like other
managed care management entities, we are often subject to liability claims
arising from the incentives inherent in capitated fee arrangements and
activities such as quality assurance and utilization management, which are
designed to control costs through more efficient utilization of healthcare
services. A successful claim on this basis against us, a physician group, health
system, physician network, or IPA with whom we contract to provide services
could have a material adverse effect on our operations.

         There are Numerous Regulatory Risks Associated with Our Business and
         Industry.

         The state and federal governments highly regulate the healthcare
industry and physicians' medical practices. All states restrict the unlicensed
practice of medicine. In addition, many states prohibit physicians from
splitting or sharing fees with nonphysician entities. Most of the states with
fee-splitting laws only prohibit a physician from sharing fees with a referral
source. Because we do not refer business to our managed groups, the
fee-splitting laws in most states should not restrict the physician
organizations from paying our management fee. If courts determined that we
violated the corporate practice of medicine or fee-splitting statutes, courts
could also hold the contracts between us and our managed physicians invalid.

         Federal antitrust law prohibits conduct that may result in price fixing
or other anticompetitive conduct. Additionally, there is increasing scrutiny of
arrangements between healthcare providers, potential referral sources, and
entities in a position to increase or decrease utilization by (i) law
enforcement authorities, (ii) the Office of Inspector General of the Department
of Health and Human Services, (iii) the courts and (iv) the Congress. Although
we are not aware of any investigations of us that would negatively affect our
business, we may be investigated in the future.

         There are currently numerous legislative and regulatory initiatives at
the federal and state levels addressing patient privacy concerns. In particular,
HIPAA contains provisions that may require us to acquire and implement expensive
new computer systems and to adopt business procedures designed to protect the
privacy of patients' individual health information. We intend to comply fully
with the HIPAA regulations, once implemented, although such compliance may
increase operating costs and adversely affect performance standards. Our actions
may be reviewed or challenged by the authorities having responsibility for HIPAA
enforcement. If we violate HIPAA, we could be subject to monetary fines and
penalties, criminal sanctions, and civil causes of action. We cannot predict how
further modifications to the final regulations will impact our ability to comply
or the costs of compliance.

         Federal law also prohibits offering, paying, soliciting or receiving
payment for referrals, or arranging for referrals of, Medicare or other federal
or state health program patients or patient care opportunities. The government
has adopted or proposed several different exceptions or safe harbors for
arrangements that will not be deemed to


                                       31
<PAGE>

violate the Anti-Kickback Statute. If we violate the Medicare or Medicaid
statutes, civil and criminal penalties could be assessed, and we could be
excluded from providing services to providers in such programs.

         Efforts to control healthcare costs are increasing. In many of the
payor agreements of our managed IPAs, the IPAs are paid on a capitated fee
basis. Therefore, the healthcare provider's ability to effectively manage the
costs and utilization of medical services determines the profitability of the
capitated fee. We, as well as our managed IPAs and affiliated providers, may be
subject to liability claims and government enforcement action resulting from
quality assurance and utilization review activities designed to control costs
through more efficient utilization of healthcare services. Because we derive our
revenue from the revenue generated by our managed IPAs, a higher than expected
cost of providing services or a higher than expected rate of utilization may
reduce our profitability.

         There Is a Risk of Tax Audit Adjustments.

         Two of our subsidiaries are currently under examination for the 1995
and 1996 tax years. We acquired the stock of these subsidiaries during 1996. We
have reached an agreement to settle the audit of one of the subsidiaries for
approximately $27,000 plus interest. For the years under audit and, potentially,
for subsequent years, any such adjustments could require material cash payments
by us. Any successful adjustment by the IRS would cause interest expense to be
incurred. We do not believe the resolution of these matters will have a material
adverse effect on our financial condition, although there can be no assurance as
to the outcome of these matters.

         Our Involvement in the Medical Services Business Exposes Us to Risk of
         Professional Liability Claims.

         As a result of the fact that the physician groups with whom we had
service agreements delivered medical services to the public and certain IPAs are
owned by PMNI or our medical director, there is a risk of professional liability
claims against us. Claims of this nature, if successful, could result in an
award of damages that exceeds the limits of our insurance coverage, if any.
Insurance against losses of this type can be expensive and varies from state to
state. We maintain a medical malpractice policy covering most of our California
operations. In some cases, we continue to be covered by insurance policies of
the formerly affiliated physician groups, but in many cases, we have no
insurance coverage. In the substantial majority of our markets, we did not
control our affiliated physicians' and physician groups' practice of medicine or
compliance with regulatory requirements and accordingly should not have
liability from these operations. Such cases, however, are costly to defend, and
successful malpractice claims brought against the physician groups, the managed
IPAs and physician members could have a material adverse effect on our
operations.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         See Item 7. "Management's Discussion and Analysis of Results of
Operations and Financial Condition - Liquidity and Capital Resources - Market
Risks Associated With Financial Instruments."



                                       32
<PAGE>

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                          PHYCOR, INC. AND SUBSIDIARIES
                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Independent Auditors' Report...........................................      34

Consolidated Balance Sheets............................................      35

Consolidated Statements of Operations..................................      36

Consolidated Statements of Shareholders' Equity (Deficit)..............      37

Consolidated Statements of Cash Flows..................................      38

Notes to Consolidated Financial Statements.............................      40
</TABLE>








                                       33
<PAGE>

                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Shareholders
PhyCor, Inc.:

We have audited the consolidated balance sheets of PhyCor, Inc. and subsidiaries
as of December 31, 2001 and 2000 and the related consolidated statements of
operations, shareholders' equity (deficit) and cash flows for each of the years
in the three-year period ended December 31, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PhyCor, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1(a) to
the consolidated financial statements, the Company has suffered recurring losses
from operations, has a net capital deficiency and has a net working capital
deficit that raise substantial doubt about its ability to continue as a going
concern. On January 31, 2002, the Company and 47 of its subsidiaries filed
voluntary petitions for relief under Chapter 11 of the United States Bankruptcy
Code. Management has developed a plan of reorganization for approval by the
Company's creditors and confirmation by the U.S. Bankruptcy Court. If the plan
of reorganization is accepted, continuation of the business thereafter is
dependent on the Company's ability to achieve successful future operations. The
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classifications of liabilities that might result from the
outcome of this uncertainty.

                                                 /s/ KPMG LLP


Nashville, Tennessee
April 11, 2002







                                       34
<PAGE>

                          PHYCOR, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2001 AND 2000
                    (ALL AMOUNTS ARE EXPRESSED IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                              2001             2000
                                                                           -----------      -----------
<S>                                                                        <C>              <C>
                                              ASSETS
Current assets:
    Cash and cash equivalents - unrestricted .........................     $    21,471      $       286
    Cash and cash equivalents - restricted ...........................          30,256              641
    Accounts receivable, less allowances of $1,117 in 2001 and $2,035
      in 2000 ........................................................           2,068            2,389
    Inventories, prepaid expenses and other current assets ...........          13,444            4,810
    Notes receivable, current installments ...........................           1,077            1,514
    Assets held for sale, net ........................................              --           72,704
                                                                           -----------      -----------
                     Total current assets ............................          68,316           82,344
Property and equipment, net ..........................................           5,793           10,024
Intangible assets, net ...............................................          32,710           18,754
Notes receivable, excluding current installments .....................          13,099           31,873
Other assets .........................................................           1,091            2,019
                                                                           -----------      -----------
                     Total assets ....................................     $   121,009      $   145,014
                                                                           ===========      ===========

                                 LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Current installments of long-term debt and capital leases ........     $       518      $    46,769
    Current installments of convertible subordinated notes and
      debentures .....................................................         313,020          305,500
    Accounts payable .................................................           2,003            2,403
    Due to physician groups ..........................................              --              113
    Salaries and benefits payable ....................................           3,797            1,909
    Incurred but not reported claims payable .........................          26,474            1,297
    Current portion of accrued restructuring reserves ................          12,817           11,277
    Other accrued expenses and current liabilities ...................          51,520           19,305
                                                                           -----------      -----------
                     Total current liabilities .......................         410,149          388,573

Long-term debt and capital leases, excluding current installments ....           1,024            3,036
Accrued restructuring reserves, excluding current portion ............           9,266           15,578
Deferred credits and other liabilities ...............................              --            2,183
                                                                           -----------      -----------
                     Total liabilities ...............................         420,439          409,370
                                                                           -----------      -----------

Minority interest in earnings of consolidated partnerships ...........           1,315              633

Shareholders' equity (deficit):
    Preferred stock, no par value, 10,000 shares authorized ..........              --               --
    Common stock, no par value; 250,000 shares authorized; issued and
      outstanding 73,234 shares in 2001 and 73,281 shares in 2000
                                                                               834,168          834,168
    Accumulated deficit ..............................................      (1,134,913)      (1,099,157)
                                                                           -----------      -----------
                     Total shareholders' deficit .....................        (300,745)        (264,989)
                                                                           -----------      -----------
Commitments and contingencies
                     Total liabilities and shareholders' deficit .....     $   121,009      $   145,014
                                                                           ===========      ===========
</TABLE>

          See accompanying notes to consolidated financial statements.



                                       35
<PAGE>

                          PHYCOR, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
     (ALL AMOUNTS ARE EXPRESSED IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)

<TABLE>
<CAPTION>
                                                           2001            2000             1999
                                                        ---------      -----------      -----------
<S>                                                     <C>            <C>              <C>
Net revenue .......................................     $ 298,319      $   914,195      $ 1,516,195
Operating expenses:
    Cost of provider services .....................       186,256          227,177          204,202
    Salaries, wages and benefits ..................        53,335          280,159          490,738
    Supplies ......................................         4,602          112,799          222,007
    Purchased medical services ....................           312           17,289           36,403
    Other expenses ................................        50,955          157,473          235,165
    General corporate expenses ....................        13,630           22,213           32,305
    Rents and lease expense .......................         7,012           61,349          118,104
    Depreciation and amortization .................         7,895           50,818           90,435
    Provision for (recovery of) asset revaluation,
      restructuring and refinancing ...............        (5,046)         559,878          430,965
                                                        ---------      -----------      -----------
           Net operating expenses .................       318,951        1,489,155        1,860,324
                                                        ---------      -----------      -----------
Loss from operations ..............................       (20,632)        (574,960)        (344,129)
Other (income) expense:
    Interest income ...............................        (3,625)          (6,059)          (5,022)
    Interest expense ..............................        18,157           35,739           40,031
                                                        ---------      -----------      -----------
           Loss before income taxes, minority
              interest and extraordinary item .....       (35,164)        (604,640)        (379,138)
Income tax expense ................................            33            1,029           53,318
Minority interest in earnings of consolidated
   partnerships ...................................           559            2,715           13,088
                                                        ---------      -----------      -----------
           Loss before extraordinary item .........       (35,756)        (608,384)        (445,544)
Extraordinary item - gain from early extinguishment
   of convertible subordinated debentures .........            --               --            1,018
                                                        ---------      -----------      -----------
           Net loss ...............................     $ (35,756)     $  (608,384)     $  (444,526)
                                                        =========      ===========      ===========

Earnings (loss) per share:
    Basic - Continuing operations .................     $   (0.49)     $     (8.30)     $     (5.92)
            Extraordinary item ....................            --               --             0.01
                                                        ---------      -----------      -----------
                                                        $   (0.49)     $     (8.30)     $     (5.91)
                                                        =========      ===========      ===========

    Diluted - Continuing operations ...............     $   (0.49)     $     (8.30)     $     (5.92)
              Extraordinary item ..................            --               --             0.01
                                                        ---------      -----------      -----------
                                                        $   (0.49)     $     (8.30)     $     (5.91)
                                                        =========      ===========      ===========
Weighted average number of shares and dilutive
    share equivalents outstanding:
    Basic .........................................        73,239           73,281           75,179
    Diluted .......................................        73,239           73,281           75,179
                                                        =========      ===========      ===========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       36
<PAGE>

                          PHYCOR, INC. AND SUBSIDIARIES
            CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
                    (ALL AMOUNTS ARE EXPRESSED IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                    RETAINED
                                                                                    EARNINGS
                                                         COMMON STOCK             (ACCUMULATED
                                                     SHARES         AMOUNT          DEFICIT)          TOTAL
                                                     ------       ---------       -----------       ---------
<S>                                                  <C>          <C>             <C>               <C>
Balances at December 31, 1998 ................       75,824         850,657           (46,247)        804,410
   Issuance of common stock, net of offering
     expenses totaling $46 ...................          348             797                --             797
   Repurchase of common stock ................       (2,861)        (13,486)               --         (13,486)
   Cancellation of common stock and warrants .          (30)         (4,316)               --          (4,316)
   Conversion of subordinated notes payable
     to common stock .........................            1              22                --              22
   Stock options exercised ...................          197             602                --             602
   Net loss ..................................           --              --          (444,526)       (444,526)
                                                     ------       ---------       -----------       ---------
Balances at December 31, 1999 ................       73,479         834,276          (490,773)        343,503
   Issuance of common stock, net of offering
     expenses totaling $1 ....................          295             182                --             182
   Refund of stock purchase plan contributions           --            (290)               --            (290)
   Cancellation of common stock ..............         (493)             --                --              --
   Net loss ..................................           --              --          (608,384)       (608,384)
                                                     ------       ---------       -----------       ---------
Balances at December 31, 2000 ................       73,281       $ 834,168       $(1,099,157)      $(264,989)
   Cancellation of common stock ..............          (47)             --                --              --
   Net loss ..................................           --              --           (35,756)        (35,756)
                                                     ------       ---------       -----------       ---------
Balances at December 31, 2001 ................       73,234       $ 834,168       $(1,134,913)      $(300,745)
                                                     ======       =========       ===========       =========
</TABLE>

          See accompanying notes to consolidated financial statements.





                                       37


<PAGE>

                          PHYCOR, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
                    (ALL AMOUNTS ARE EXPRESSED IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                          2001            2000            1999
                                                                       ---------      ---------      ---------
Cash flows from operating activities:
<S>                                                                    <C>            <C>            <C>
    Net loss .....................................................     $ (35,756)     $(608,384)     $(444,526)
    Adjustments to reconcile net loss to  net cash provided
       (used) by operating activities:
       Depreciation and amortization .............................         7,895         50,818         90,435
       Deferred income taxes .....................................            --             --         51,355
       Minority interests ........................................           559          2,715         13,088
       Provision for (recovery of) asset revaluation,
         restructuring and refinancing ...........................        (5,046)       559,878        430,965
       Write down of notes receivable ............................         4,564             --             --
       Accretion of convertible subordinated notes ...............         7,520          6,750          2,250
       Increase (decrease) in cash, net of effects of acquisitions
         and dispositions due to changes in:
           Accounts receivable, net ..............................         5,593         31,770         16,323
           Inventories, prepaid expenses and other current
             assets ..............................................         7,627         16,336        (16,125)
           Accounts payable ......................................        (4,432)       (10,888)         5,079
           Due to physician groups ...............................           282         (4,892)       (11,017)
           Incurred but not reported claims payable ..............         7,771         14,279         (8,771)
           Accrued restructuring reserves ........................        (4,890)       (29,814)       (18,982)
           Other accrued expenses and current liabilities ........         5,885        (23,014)         5,312
                                                                       ---------      ---------      ---------
              Net cash (used) provided by operating activities ...        (2,428)         5,554        115,386
                                                                       ---------      ---------      ---------
Cash flows from investing activities:
    Dispositions, net ............................................        68,381        210,528         33,648
    Purchase of property and equipment ...........................          (447)       (18,337)       (51,719)
    Proceeds from (payments for) other assets ....................         4,912         14,649        (17,221)
    Restricted cash held for sale ................................        30,378        (30,378)            --
                                                                       ---------      ---------      ---------
              Net cash provided (used) by investing activities ...       103,224        176,462        (35,292)
                                                                       ---------      ---------      ---------
Cash flows from financing activities:
    Net proceeds from issuance of convertible subordinated
      notes ......................................................            --             --         92,533
    Net proceeds from issuance of common stock and warrants ......            --            165          1,759
    Refund of stock purchase plan contributions ..................            --           (290)            --
    Repurchase of common stock ...................................            --             --        (13,486)
    Repayment of long-term borrowings ............................       (47,994)      (228,542)      (151,398)
    Repayment of obligations under capital leases ................           (85)        (3,148)        (6,200)
    Distributions of minority interests ..........................        (1,917)        (4,482)       (15,586)
    Loan costs incurred ..........................................            --         (5,504)        (1,318)
                                                                       ---------      ---------      ---------
             Net cash used by financing activities ...............       (49,996)      (241,801)       (93,696)
                                                                       ---------      ---------      ---------
Net increase (decrease) in cash and cash equivalents .............        50,800        (59,785)       (13,602)
Cash and cash equivalents - beginning of year ....................           927         60,712         74,314
                                                                       ---------      ---------      ---------
Cash and cash equivalents - end of year ..........................     $  51,727      $     927      $  60,712
                                                                       =========      =========      =========
</TABLE>

          See accompanying notes to consolidated financial statements.



                                       38
<PAGE>

                          PHYCOR, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
                    (ALL AMOUNTS ARE EXPRESSED IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                           2001           2000          1999
                                                                         --------      ---------      ---------
<S>                                                                      <C>           <C>            <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid (received) during the year for:
   Interest ........................................................     $    881      $  28,138      $  40,593
   Income taxes, net of refunds ....................................         (883)           611        (13,560)
                                                                         ========      =========      =========
SUPPLEMENTAL SCHEDULE OF INVESTING ACTIVITIES:
Effects of dispositions and acquisitions, net:
   Assets acquired, net of cash ....................................           --      $  (1,694)     $ (21,722)
   Liabilities paid, including deferred purchase price payments ....          (67)        (7,262)       (33,193)
   Issuance (cancellation) of convertible subordinated notes payable           --             --         (9,806)
   Issuance (cancellation) of common stock and warrants ............           --             --         (4,676)
   Cash received from disposition of clinic assets, net ............       68,448        219,484        103,045
                                                                         --------      ---------      ---------
Dispositions (acquisitions), net ...................................     $ 68,381      $ 210,528      $  33,648
                                                                         ========      =========      =========

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations incurred to acquire equipment ............     $     --      $     220      $     399
                                                                         ========      =========      =========
Conversion of subordinated notes payable to common stock ...........     $     --      $      --      $      22
                                                                         ========      =========      =========
</TABLE>



See accompanying notes to consolidated financial statements.










                                       39
<PAGE>
                          PHYCOR, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2001, 2000 AND 1999

(1)           ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
              PRACTICES

              (a) BASIS OF PRESENTATION, GOING CONCERN AND LIQUIDITY ISSUES

              The accompanying consolidated financial statements have been
              prepared assuming that the Company will continue as a going
              concern with the realization of assets and the settlement of
              liabilities and commitments in the normal course of business. The
              Company has suffered recurring losses from operations, has a net
              capital deficiency and has a net working capital deficit that
              raise substantial doubt about its ability to continue as a going
              concern. On January 31, 2002, the Company and 47 of its
              subsidiaries filed voluntary petitions for relief under Chapter 11
              of the United States Bankruptcy Code (the "Bankruptcy Filings")
              with the United States Bankruptcy Court for the Southern District
              of New York (the "Bankruptcy Court") (Case No. 02-40278 (PCB)). On
              that date, the Company also filed a joint plan of reorganization
              (as and to the extent subsequently amended, the "Plan"), which
              sets forth the manner in which claims against, and interests in,
              the Company will be treated following its emergence from
              bankruptcy, as well as a disclosure statement. The disclosure
              statement has not yet been approved by the Bankruptcy Court. The
              IPA management operating subsidiaries are not part of the Chapter
              11 case and have continued paying, in the ordinary and normal
              course of business, all wages, benefits and other employee
              obligations as well as all outstanding and ongoing accounts
              payable to their vendors.

              The Company elected to seek Chapter 11 protection to attempt to
              realign its capital structure and to preserve the value of its
              remaining businesses for its creditors. The Company had been in
              negotiations regarding the reorganization with an informal
              committee of holders of the Company's 4.5% convertible
              subordinated debentures ("Notes") and Warburg, Pincus Equity
              Partners, L.P. ("Warburg, Pincus"), which through its affiliates
              holds all of our zero coupon convertible subordinated notes ("Zero
              Coupon Notes"). The Company filed the Plan with the support of
              certain of these creditors, which collectively hold approximately
              two-thirds of its outstanding indebtedness. The Plan is subject to
              a number of conditions, including approval by certain of the
              Company's creditors and confirmation by the Bankruptcy Court.
              Creditors who do not vote in favor of the Plan may challenge its
              confirmation. Resolution of any such challenges could result in
              delays and increased expenses as well as failure of the Plan.

              If the Plan is confirmed, the Company's general unsecured
              creditors, including the holders of the Notes ("Bondholders") and
              Warburg, Pincus, will receive shares of the reorganized Company's
              common stock or, in certain instances, cash in an amount equal to
              approximately 11.9% of their claims in full satisfaction of their
              claims. Under the terms of the Plan, the Company's outstanding
              common stock, options, warrants and rights to purchase preferred
              stock will be cancelled and holders of these securities will not
              receive any consideration, either in cash or in newly issued
              stock. The Company currently has outstanding approximately
              73,000,000 shares of common stock and options and warrants to
              purchase approximately 2,506,000 and 348,000 shares of common
              stock, respectively, all of which will be cancelled for no
              consideration.

              Except as may be otherwise determined by the Bankruptcy Court
              overseeing the Bankruptcy Filings, the automatic stay protection
              afforded by the Bankruptcy Filings prevents any creditor or other
              third parties from taking any action in connection with any
              defaults under prepetition obligations of the Company and those of
              its subsidiaries which are debtors in the Bankruptcy Filings.

              The consolidated financial statements do not include adjustments
              to reflect the possible future effects on the recoverability and
              classification of recorded assets or the amounts and
              classifications of liabilities that may result from the outcome of
              this uncertainty. In addition, because the Company filed the
              Bankruptcy Filings subsequent to December 31, 2001, the
              accompanying consolidated financial statements have not been
              prepared in accordance with Statement of Position 90-7 "Financial
              Reporting




                                       40
<PAGE>

              by Entities in Reorganization Under the Bankruptcy Code" ("SOP
              90-7"), and do not include comprehensive disclosures of
              liabilities subject to compromise. Financial statements prepared
              subsequent to the filing date under Chapter 11 will be prepared
              reflecting such amounts subject to compromise.

              The Company's ability to continue as a going concern is dependent
              upon, among other things, future profitable operations, the
              ability to generate sufficient cash flow from operations,
              financing arrangements to meet obligations and confirmation of the
              Plan.

              During 2001, the Company incurred approximately $3.0 million of
              legal, accounting, consulting and other fees in connection with
              the Company's financial reorganization.

              (b) DESCRIPTION OF BUSINESS

              The Company is a medical network management company that develops
              and manages independent practice associations ("IPAs"), manages
              physician hospital organizations ("PHOs"), provides contract
              management services to physician networks owned by health systems,
              manages certain medical organizations and provides consulting
              services to independent medical organizations. Historically, the
              Company, through wholly-owned subsidiaries, had acquired certain
              assets of and operated clinics under long-term service agreements
              with affiliated physician groups that practiced exclusively
              through such clinics. The Company provided administrative and
              technical support for professional services rendered by the
              physician groups under service agreements. In 2001, the Company
              divested the assets related to its remaining affiliated physician
              groups and used the proceeds to fully repay borrowings under its
              bank credit facility with Citicorp (the "Citicorp Credit
              Facility"). Through the CareWise, Inc. subsidiary ("CareWise"),
              which was sold in May 2001, the Company also provided healthcare
              decision-support services to managed care organizations,
              healthcare providers, employers and other group associations.

              The Company manages IPAs which are networks of independent
              physicians. Fees earned from managing the IPAs are based upon a
              percentage of revenue collected by the IPAs and also upon a share
              of surplus, if any, of capitated revenue of the IPAs (See Note 3).
              These IPAs included approximately 8,000 and 16,600 physicians in
              nine and 14 markets at December 31, 2001 and 2000, respectively.
              Affiliated physicians provided medical services under capitated
              contracts to approximately 468,000 members, including
              approximately 63,000 Medicare eligible members at December 31,
              2001.

              (c) PRINCIPLES OF CONSOLIDATION

              The consolidated financial statements include the accounts of the
              Company and its majority owned subsidiaries, partnerships and
              other entities in which the Company has more than a 50% ownership
              interest or exercises control. All significant intercompany
              balances and transactions are eliminated in consolidation.
              Historically, the Company did not consolidate the physician
              practices it provided management services to because it did not
              have operating control over these practices. The IPAs and the few
              remaining physician practices which are owned and operated by the
              Company are consolidated.

              (d) USE OF ESTIMATES

              Management of the Company made certain estimates and assumptions
              relating to the reporting of assets and liabilities and the
              disclosure of contingent assets and liabilities to prepare these
              consolidated financial statements in conformity with generally
              accepted accounting principles. Actual results could differ from
              those estimates.


                                       41
<PAGE>

              (e) CASH AND CASH EQUIVALENTS

              The Company considers all highly liquid investments with a
              maturity of three months or less when purchased to be cash
              equivalents. Restricted cash and cash equivalents as of December
              31, 2001, included amounts held to meet regulatory requirements,
              amounts restricted to the operations of certain IPA partnerships
              and collateral for letter of credit obligations.

              (f) ACCOUNTS RECEIVABLE

              At December 31, 2001, accounts receivable primarily represented
              current IPA surplus receivables. In prior years, accounts
              receivable predominately represented receivables from patients and
              third-party payors for medical services provided by physician
              groups. Under terms of the former clinic service agreements, the
              Company purchased receivables generated by the physician groups on
              a monthly basis with recourse. The amount of receivables that
              relate to receivables purchased from physician groups was
              approximately $0.2 million and $1.1 million at December 31, 2001
              and 2000, respectively. Such amounts were recorded net of
              contractual allowances and estimated bad debts and were a function
              of net clinic revenue rather than net revenue of the Company (See
              Note 3).

              (g) INVENTORIES

              Prior to 2001, inventories were comprised primarily of medical
              supplies, medications and other materials used in the delivery of
              healthcare services by the physician groups at the Company's
              clinics and hospitals. The Company valued inventories at the lower
              of cost or market with cost determined using the first-in,
              first-out (FIFO) method. At December 31, 2001, the Company had no
              inventory due to the divestiture of the remaining physician clinic
              and hospitals assets.

              (h) PROPERTY AND EQUIPMENT

              Property and equipment are stated at cost. Equipment held under
              capital leases is stated at the present value of minimum lease
              payments at the inception of the related leases. Depreciation of
              property and equipment is calculated using the straight-line
              method over the estimated useful lives of the assets. Equipment
              held under capital leases and leasehold improvements are amortized
              on a straight line basis over the shorter of the lease term or
              estimated useful life of the assets.

              (i) INTANGIBLE ASSETS

              CLINIC SERVICE AGREEMENTS

              Historically, costs of obtaining clinic service agreements were
              amortized using the straight-line method over the periods during
              which the agreements were effective, up to a maximum of 25 years.
              Clinic service agreements represented the exclusive right to
              operate the Company's clinics in affiliation with the related
              physician groups during the term of the agreements. In the event
              of termination of a service agreement, the related physician group
              was obligated to purchase all clinic assets, including the
              unamortized portion of intangible assets, generally at net book
              value.

              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 a period not to
              exceed 25 years. See Discussion of FASB Statement No. 142,
              Goodwill and Other Intangible Assets in Note 2.

              OTHER INTANGIBLE ASSETS

              Other intangible assets include costs associated with obtaining
              financing that are being amortized systematically over the terms
              of the related debt agreements.



                                       42
<PAGE>

              AMORTIZATION AND RECOVERABILITY

              Amortization of intangibles amounted to $4.1 million, $20.3
              million and $37.9 million for 2001, 2000 and 1999, respectively.

              The Company periodically reviews its intangible assets to assess
              their recoverability and impairments are recognized in the
              statement of operations if a permanent impairment is determined to
              have occurred. Recoverability of intangibles is determined based
              on undiscounted future operating cash flows from the related
              business unit or activity. The amount of impairment, if any, is
              measured based on discounted future operating cash flows using a
              discount rate determined by management to be commensurate with the
              risk inherent in the Company's current business model. The
              assessment of the recoverability of intangible assets will be
              impacted if estimated future operating cash flows are not
              achieved.

              (j) IMPAIRMENT OF LONG-LIVED ASSETS

              The Company reviews long-lived assets and certain identifiable
              intangibles for impairment whenever events or changes in
              circumstances indicate that the carrying amount of an asset may
              not be recoverable. Recoverability of assets to be held and used
              is measured by a comparison of the carrying amount of an asset to
              future net cash flows expected to be generated by the asset. If
              such assets are considered to be impaired, the impairment to be
              recognized is measured by the amount by which the carrying amount
              of the assets exceeds the fair value of the assets.

              (k) INCOME TAXES

              Income taxes are accounted for under the asset and liability
              method. Deferred tax assets and liabilities are recognized for the
              future tax consequences attributable to differences between the
              financial statement carrying amounts of existing assets and
              liabilities and their respective tax bases. Deferred tax assets
              and liabilities are measured using enacted tax rates expected to
              apply to taxable income in the years in which those temporary
              differences are expected to be recovered or settled. The effect on
              deferred tax assets and liabilities of a change in the tax rates
              is recognized in income in the period that includes the enactment
              date. A valuation allowance is provided against deferred tax
              assets to the extent that it is not more than likely they will be
              realized.

              (l) INCURRED BUT NOT REPORTED MEDICAL CLAIMS

              Incurred but not reported claims payable represent the liability
              for covered services that have been performed by physicians for
              enrollees of various medical plans. These liabilities include
              medical expense claims reported to the Company and an actuarially
              determined estimate of claims that have been incurred but not
              reported to the Company. The estimated claims incurred but not
              reported are based on the Company's historical claims data,
              current enrollment, health service utilization statistics and
              other related information.

              (m) REVENUE RECOGNITION

              North American Medical Management, Inc. ("NAMM"), a wholly-owned
              subsidiary of the Company, through its subsidiaries, manages IPAs
              and PHOs in four states. NAMM's California subsidiary, North
              American Medical Management California, Inc. ("NAMM California"),
              manages the Company's IPAs in California, and its affiliate,
              PrimeCare Medical Network, Inc. ("PMNI"), owns certain of these
              IPAs. Approximately 92% of the Company's revenue was derived from
              its IPA management operations in 2001. The management agreements
              for the IPAs which contract with PMNI provide for NAMM California
              to receive a percentage of revenue that is no less than NAMM's
              cost to manage plus the surplus remaining after distributions to
              physicians. The management agreements for the PHOs and IPAs which
              do not contract with PMNI provide for the NAMM subsidiary to
              receive fees based upon a percentage of either revenue collected
              by the IPAs or a per member per month payment plus a share of
              surplus, if any, of capitated revenue of the IPAs or PHOs in
              excess of any



                                       43
<PAGE>

              healthcare claims expense. These management fees are recognized in
              the month that management services are provided. Revenue from any
              surpluses is recognized at the time that the Company can readily
              determine that those surpluses have been earned. PMNI and the
              owned IPAs are exposed to losses if the cost of physician
              professional services exceeds the capitated payments received from
              healthcare payors. PMNI also assumes some risk for institutional
              (hospital) costs. Any loss on a capitated contract is recorded
              when the Company determines that such loss is probable and
              reasonably estimable. The remaining 8% of the Company's revenue
              derived in 2001 and revenue earned prior to 2001 is described in
              Note 3.

              (n) FINANCIAL INSTRUMENTS

              The Company terminated its interest rate swap agreements in July
              2000 and received payments totaling $2.2 million which were
              recorded as a deferred gain and amortized over the term of the
              Citicorp Credit Facility. The proceeds were used to reduce amounts
              outstanding under its Citicorp Credit Facility. These agreements
              were accounted for on the accrual method. The Company has
              historically not engaged in trading activities in its interest
              rate swap agreements and does not intend to so do in the future.

              The FASB has issued Statement of Financial Accounting Standards
              (SFAS) No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
              ACTIVITIES, as amended by SFAS No. 138 which the Company adopted
              in the first quarter of 2001 without any financial impact. If the
              Company had retained the swap agreements, adoption of SFAS No. 133
              would have required the Company to mark certain of its interest
              rate swap agreements to market due to lender optionality features
              included in those swap agreements.

              (o) STOCK OPTION PLANS

              The Company applies the intrinsic value-based method of accounting
              prescribed by Accounting Principles Board ("APB") Opinion No. 25,
              "Accounting for Stock Issued to Employees," and related
              interpretations including FASB Interpretation No. 44, "Accounting
              for Certain Transactions involving Stock Compensation an
              interpretation of APB Opinion No. 25" issued in March 2000, to
              account for its fixed plan stock options. Under this method,
              compensation expense is recorded on the date of grant only if the
              current market price of the underlying stock exceeded the exercise
              price. SFAS No. 123, "Accounting for Stock-Based Compensation,"
              established accounting and disclosure requirements using a fair
              value-based method of accounting for stock-based employee
              compensation plans. As allowed by SFAS No. 123, the Company has
              elected to continue to apply the intrinsic value-based method of
              accounting described above, and has adopted the disclosure
              requirements of SFAS No. 123.

              (p) EARNINGS (LOSS) PER SHARE

              Basic earnings (loss) per share is computed based on weighted
              average shares outstanding and excludes any potential dilution.
              Diluted earnings (loss) per share reflects the potential dilution
              from the exercise or conversion of all dilutive securities into
              common stock based on the average market price of common shares
              outstanding during the period.

              Options and warrants to purchase 2,829,000, 3,504,000 and
              17,476,000 shares of common stock were outstanding at December 31,
              2001, 2000 and 1999, respectively, but were not included in the
              computation of diluted EPS due to losses for all years and the
              options and warrants being antidilutive. Antidilutive securities
              at December 31, 1999 also included 151,000 shares of common stock
              to be issued at future dates related to clinic acquisitions.
              Additionally, subordinated notes payable convertible into 12,000,
              24,000 and 223,000 shares at December 31, 2001, 2000 and 1999,
              respectively, were antidilutive. In 2000 and 1999, interest paid
              on the convertible notes was offset by service agreement fees
              received by the Company of an equal amount.




                                       44
<PAGE>

              (q) COMPREHENSIVE INCOME (LOSS)

              Comprehensive income (loss) generally includes all changes in
              equity during a period except those resulting from investments by
              shareholders and distributions to shareholders. Net income (loss)
              was the same as comprehensive income (loss) for 2001, 2000 and
              1999.

              (r) RECLASSIFICATIONS

              Certain prior year amounts have been reclassified to conform to
              the 2001 presentation.

(2)           NEW ACCOUNTING PRONOUNCEMENTS

              In July 2001, the FASB issued Statement No. 141, BUSINESS
              COMBINATIONS, and Statement No. 142, GOODWILL AND OTHER INTANGIBLE
              ASSETS. Statement 141 requires that the purchase method of
              accounting be used for all business combinations initiated after
              June 30, 2001 as well as all purchase method business combinations
              completed after June 30, 2001. Statement 141 also specifies
              criteria intangible assets acquired in a purchase method business
              combination must meet to be recognized and reported apart from
              goodwill, noting that any purchase price allocable to an assembled
              workforce may not be accounted for separately. Statement 142 will
              require that goodwill and intangible assets with indefinite useful
              lives no longer be amortized, but instead tested for impairment at
              least annually in accordance with the provisions of Statement 142.
              Statement 142 will also require that intangible assets with
              definite useful lives be amortized over their respective estimated
              useful lives to their estimated residual values, and reviewed for
              impairment in accordance with SFAS No. 144, ACCOUNTING FOR
              IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS as discussed below.

              The Company's adoption of SFAS No. 142, as of January 1, 2002, did
              not result in any impairment charges. Since adoption, goodwill
              existing at June 30, 2001, is no longer amortized but instead will
              be assessed for impairment at least annually. Goodwill
              amortization expense for 2001 was approximately $2.0 million.

              In August 2001, the Financial Accounting Standards Board issued
              FASB Statement No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL
              OF LONG-LIVED ASSETS (Statement 144), which supersedes both FASB
              Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
              ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF (Statement 121)
              and the accounting and reporting provisions of APB Opinion No. 30,
              REPORTING THE RESULTS OF OPERATIONS--REPORTING THE EFFECTS OF
              DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL
              AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS (Opinion 30),
              for the disposal of a segment of a business (as previously defined
              in that Opinion). Statement 144 retains the fundamental provisions
              in Statement 121 for recognizing and measuring impairment losses
              on long-lived assets held for use and long-lived assets to be
              disposed of by sale, while also resolving significant
              implementation issues associated with Statement 121. For example,
              Statement 144 provides guidance on how a long-lived asset that is
              used as part of a group should be evaluated for impairment,
              establishes criteria for when a long-lived asset is held for sale,
              and prescribes the accounting for a long-lived asset that will be
              disposed of other than by sale. Statement 144 retains the basic
              provisions of Opinion 30 on how to present discontinued operations
              in the income statement but broadens that presentation to include
              a component of an entity (rather than a segment of a business).
              Unlike Statement 121, an impairment assessment under Statement 144
              will never result in a write-down of goodwill. Rather, goodwill is
              evaluated for impairment under Statement No. 142, GOODWILL AND
              OTHER INTANGIBLE ASSETS.

              The Company is required to adopt Statement 144 no later than the
              year beginning after December 15, 2001, and adopted its provisions
              for the quarter ending March 31, 2002. Management does not expect
              the adoption of Statement 144 for long-lived assets held for use
              to have a material impact on the Company's financial statements
              because the impairment assessment under Statement 144 is largely
              unchanged from Statement 121.



                                       45
<PAGE>

(3)           NET REVENUE

              Net revenue of the Company is comprised of IPA management revenue
              ("IPA Management Revenue"), net clinic service agreement revenue,
              other operating revenue and prior to 2001, net hospital revenue.
              As a result of the Company's divestiture of its remaining
              multi-specialty medical clinic assets in April 2001 and CareWise
              in May 2001, net revenue, in 2001, primarily is comprised of IPA
              Management Revenue.

              IPA Management Revenue consists of fees paid by IPAs to the
              Company for management services and payments for healthcare costs,
              usually made under capitated arrangements, and is recognized in
              the month that management services are provided. In addition, the
              Company may receive a share of surplus, if any, of capitated
              revenue of the IPAs in excess of healthcare claims expense.
              Revenue from such surpluses is recognized at the time that the
              Company can readily determine the amount of those surpluses, which
              usually occurs when the surplus is received. PMNI and the owned
              IPAs are exposed to losses if the cost of physician professional
              services exceeds the capitated payments received from healthcare
              payors. PMNI also assumes some risk for institutional (hospital)
              costs. Any loss on a capitated contract is recorded when the
              Company determines that such loss is probable and reasonably
              estimable.

              Clinic service agreement revenue is equal to the net revenue of
              the clinics, less amounts retained by physician groups. Net clinic
              revenue recorded by the physician groups is recorded at
              established rates reduced by provisions for doubtful accounts and
              contractual adjustments. Contractual adjustments arise as a result
              of the terms of certain reimbursement and managed care contracts.
              Such adjustments represent the difference between charges at
              established rates and estimated recoverable amounts and are
              recognized in the period the services are rendered. Any
              differences between estimated contractual adjustments and actual
              final settlements under reimbursement contracts are recognized as
              contractual adjustments in the year final settlements are
              determined.

              Hospital revenue for inpatient and outpatient services are
              recorded when services were rendered, net of provisions for
              contractual allowances and other adjustments. The Company sold its
              remaining hospital effective January 1, 2001; therefore, no
              hospital revenue was recorded during 2001. Other operating revenue
              consists of revenue relating to the Company's demand management
              subsidiary, CareWise, which was sold in May 2001 and revenue from
              contract management services. Revenue from contract management
              services are recorded when the services are provided in accordance
              with a fee schedule contractually determined.

              The following represent amounts included in the determination of
net revenue (in thousands):

<TABLE>
<CAPTION>

                                                                      2001             2000            1999
                                                                    ----------      ----------      ----------
<S>                                                                 <C>             <C>             <C>
              Gross physician group, hospital and other             $   40,177      $1,761,621      $3,309,195
              revenue
              Less:
                   Provisions for doubtful accounts and
                   contractual adjustments ...................          10,334         814,377       1,425,570
                                                                    ----------      ----------      ----------
                       Net physician group, hospital and
                         other revenue .......................          29,843         947,244       1,883,625
              IPA revenue: ...................................         520,221         912,415       1,120,843
                                                                    ----------      ----------      ----------
                       Net  physician group, hospital, IPA
                         and other revenue ...................         550,064       1,859,659       3,004,468
              Less amounts  retained by  physician  groups and
              IPAs:
                   Physician groups ..........................           5,311         311,672         641,480
                   Clinic technical employee compensation ....             815          42,617          84,232
                   IPAs ......................................         245,619         591,175         762,561
                                                                    ----------      ----------      ----------
                       Net revenue ...........................      $  298,319      $  914,195      $1,516,195
                                                                    ==========      ==========      ==========

</TABLE>



                                       46
<PAGE>

              In 2001, the Company derived most of its net revenue from those
              affiliated IPAs with which it had management agreements. The
              Company's affiliated IPAs derived approximately 41%, 51% and 49%
              of their net revenue from services provided under the Medicare
              program for the years ended December 31, 2001, 2000 and 1999,
              respectively. Contracts with Pacificare of California, a managed
              care payor in California, represented over 24% of net revenue in
              2001.

(4)           ACQUISITIONS

              (a) INDEPENDENT PRACTICE ASSOCIATIONS (IPAS)

              Effective January 1, 1995, the Company completed its merger with
              North American Medical Management, Inc. (NAMM), an operator and
              manager of IPAs. During 1999, the Company recorded goodwill of
              approximately $3.5 million primarily related to additional
              investments in an IPA market and the acquisition of the remaining
              interest in its Kentucky HMO. At December 31, 2001, unamortized
              goodwill of approximately $1.9 million remains on the Company's
              balance sheet relating to the NAMM acquisition.

              Subsequent to December 31, 2001, NAMM California, a wholly-owned
              subsidiary of NAMM, acquired certain California-based assets and
              management contracts of seven IPAs managed by Medical Pathways,
              Inc. The IPAs provide healthcare services for approximately
              230,000 commercial equivalent members.

              (b) PRIMECARE INTERNATIONAL, INC. ("PrimeCare")

              In May 1998, the Company acquired PrimeCare, a medical network
              management company serving southern California's Inland Empire
              area, in a purchase business combination for approximately 4.0
              million shares of common stock, assumed liabilities and cash for
              an aggregate purchase price of approximately $187.2 million.
              PrimeCare's delivery network was comprised of an integrated
              campus, including the Desert Valley Medical Group, Desert Valley
              Hospital and Apple Valley Surgery Center, as well as the Inland
              Empire area IPA network. Goodwill of approximately $143.4 million
              was recorded in conjunction with the purchase. The Desert Valley
              Medical Group, Desert Valley Hospital and Apple Valley Surgery
              Center were sold in January, 2001. The Inland Empire area IPA
              network was not sold and is a critical component to the Company's
              IPA operations in the California market. At December 31, 2001,
              unamortized goodwill of approximately $17.9 million remains on the
              Company's balance sheet relating to the PrimeCare acquisition. In
              2001, PrimeCare's employees and substantially all of its
              management contracts were transferred to NAMM California.

              (c) CAREWISE

              In July 1998, the Company acquired Seattle-based CareWise, a
              provider of healthcare decision-support services for approximately
              3.1 million shares of common stock and assumed liabilities for an
              aggregate purchase price of approximately $67.1 million. The
              acquisition was accounted for as a purchase. Goodwill of
              approximately $59.5 million was recorded in conjunction with the
              purchase. CareWise was sold in May 2001 for approximately $8.4
              million in cash in addition to the assumption of certain
              liabilities.

              (d) MULTI-SPECIALTY MEDICAL CLINICS

              The Company did not affiliate with any multi-specialty medical
              clinics during 2001 or 2000. In 2001, the Company terminated
              service agreements with its remaining multi-specialty medical
              clinics. Effective November 1, 1999, the Company affiliated with
              the Rockford Health System located in Rockford, Illinois. The
              Company's contract with the Rockford Health System will expire on
              December 31, 2002.


                                       47
<PAGE>

              Historically, the Company acquired certain operating assets of
              various individual physician practices and single specialty groups
              which were merged into clinics already operated by the Company. In
              1999, service agreement rights of approximately $2.1 million were
              recorded in conjunction with mergers. The Company acquired
              operating assets and liabilities in exchange for cash. Such
              consideration for the above mergers was approximately $2.6 million
              for 1999. The acquisitions were accounted for as purchases, and
              the accompanying consolidated financial statements include the
              results of their operations from the dates of their respective
              acquisitions. The physicians as employees of the clinics became
              subject to the terms of the applicable service agreement.

              (e) FIRST PHYSICIAN CARE, INC. ("FPC")

              In July 1998, the Company acquired Atlanta-based FPC, a
              privately-held physician practice management company that operated
              in six markets in Texas, Florida, Illinois, New York and Georgia,
              and provided practice management services to approximately 140
              physicians. The acquisition was made for approximately 2.9 million
              shares of common stock and assumed liabilities for an aggregate
              purchase price of approximately $60.4 million, and was accounted
              for as a purchase. Goodwill of approximately $43.4 million was
              recorded in conjunction with the purchase in 1998. The operations
              of First Physician Care, Inc. were sold, liquidated or
              discontinued as of December 31, 2000 and no related goodwill
              remained on the Company's balance sheet at December 31, 2001.

(5)           BUSINESS SEGMENTS

              As a result of the sale of its remaining multi-specialty clinic
              assets in 2001, the Company only has one reportable segment which
              meets the quantitative thresholds based on the way management has
              organized its operations. Presentation of two business segments in
              2001 is provided solely for comparison with prior year business
              segment information. The Company derives its revenue primarily
              from operating and managing IPAs (See Note 3). In addition, the
              Company provided healthcare decision-support services through May
              2001 that do not meet the quantitative thresholds for reportable
              segments and have therefore been aggregated within the corporate
              and other category.


                                       48
<PAGE>

              The accounting policies of the segments are the same as those
              described in the summary of significant accounting policies. The
              Company evaluates performance based on earnings from operations
              before asset revaluation, restructuring and refinancing charges,
              merger expenses, minority interest and income taxes. The following
              is a financial summary by business segment for the periods
              indicated (in thousands):

<TABLE>
<CAPTION>

                                                                            2001                2000                1999
                                                                         -----------         -----------         -----------
<S>                                                                      <C>                 <C>                 <C>
              IPAs:
              Net revenue .......................................        $   274,602         $   321,240         $   358,282
              Operating expenses(1) .............................            273,050             339,924             338,970
              Interest income ...................................               (746)             (2,389)             (2,505)
              Interest expense ..................................              1,308               9,798              10,674
              Earnings (loss) before taxes and minority
                interest(1) .....................................                990             (26,093)             11,143
              Depreciation and amortization .....................              3,477              12,775              13,750
              Segment assets ....................................             77,399              71,590             286,979

              Multi-specialty clinics:
              Net revenue .......................................              8,243             536,889           1,103,350
              Operating expenses(1) .............................              8,123             504,810           1,001,394
              Interest income ...................................                 (7)             (5,928)             (3,283)
              Interest expense ..................................                230              33,872              75,406
              Earnings (loss) before taxes and minority
                interest(1) .....................................               (103)              4,135              29,833
              Depreciation and amortization .....................                311              25,992              67,576
              Segment assets ....................................                 --              37,703             789,344

              Corporate and other(2):
              Net revenue .......................................             15,474              56,066              54,563
              Operating expenses(1) .............................             42,824              84,543              88,995
              Interest income ...................................             (2,872)              2,258                 766
              Interest expense ..................................             16,619              (7,931)            (46,049)
              Earnings (loss) before taxes, minority interest and
                extraordinary item(1) ...........................            (41,097)            (22,804)             10,851
              Depreciation and amortization .....................              4,107              12,051               9,109
              Segment assets ....................................             43,610              35,721             118,602

</TABLE>

--------------
              (1)   Amounts exclude provision for asset revaluation,
                    restructuring and refinancing.
              (2)   This segment includes all corporate costs as well as the
                    results for CareWise through May 2001, and in 2000 and 1999,
                    hospitals managed by the Company and real estate holdings.

(6)           NOTES RECEIVABLE

              The Company accepted notes receivable as partial consideration for
              the disposition of the assets of several clinics. The sale of
              these clinics were to, and the notes received are from, unrelated
              parties. The notes receivable at December 31, consist of the
              following (in thousands):

<TABLE>
<CAPTION>

                                                                                        2001              2000
                                                                                      ---------        ---------
<S>                                                                                   <C>              <C>
             Notes receivable..............................................           $  18,664        $  37,325
             Less: discount to fair value (rates approximating 16%)........               4,488            3,938
                                                                                      ---------        ---------
               Notes receivable, net.......................................              14,176           33,387
               Less current installments...................................               1,077            1,514
                                                                                      ---------        ---------
               Notes receivable, excluding current installments............           $  13,099        $  31,873
                                                                                      =========        =========

</TABLE>


                                       49
<PAGE>

              In January 2001, the Company accepted a $7.2 million prepayment
              for a $15.1 million long-term note receivable included in notes
              receivable above. The resulting charge to earnings was recorded in
              the first quarter of 2001.

(7)           PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>

                                                                                        2001              2000
                                                                                      --------         --------
<S>                                                                                   <C>              <C>
             Buildings and leasehold improvements.............................        $  3,689         $  5,024
             Equipment........................................................           9,645           12,406
             Construction in progress.........................................              --               42
                                                                                      --------         --------
                                                                                        13,334           17,472
             Less accumulated depreciation and amortization...................           7,541            7,448
                                                                                      --------         --------
               Property and equipment, net.................................           $  5,793         $ 10,024
                                                                                      ========         ========
</TABLE>

             At December 31, 2001 equipment with a cost of approximately
             $300,000, and accumulated amortization of approximately $275,000,
             respectively, was held under capital leases. At December 31, 2000
             equipment held under capital leases were related to entities
             classified as held for sale in the accompanying consolidated
             balance sheet.

(8)          INTANGIBLE ASSETS

              Intangible assets at December 31, net of accumulated amortization,
              consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                         2001            2000
                                                                                       --------        --------
<S>                                                                                    <C>             <C>
           Clinic service agreements........................................           $  6,178        $  7,544
           Excess of cost of acquired assets over fair value................             19,856           2,000
           Loan issuance costs..............................................              6,676           9,210
                                                                                       --------        --------
             Intangible assets, net......................................              $ 32,710        $ 18,754
                                                                                       ========        ========

</TABLE>

             At December 31, 2000, intangible assets related to PrimeCare
operations were classified as held for sale.

(9)          FAIR VALUE OF FINANCIAL INSTRUMENTS

             At December 31, 2001 and 2000, the fair value of the Company's cash
             and cash equivalents, accounts receivable, accounts payable 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 Company's Zero Coupon Notes was
             approximately $11.7 million and $12.5 million as of December 31,
             2001 and 2000, respectively. The carrying value of the Zero Coupon
             Notes was approximately $116.5 million and $109.0 million at
             December 31, 2001 and 2000, respectively. The estimated fair value
             of these convertible securities is based on the greater of their
             yield to maturity and quoted market prices for similar debt issues
             or the closing market value of the common shares into which they
             could have been converted at the respective balance sheet date. The
             estimated fair value of the Company's Notes was approximately $19.6
             million and $22.6 million as of December 31, 2001 and 2000,
             respectively, compared to a carrying value of $196.5 million at
             December 31, 2001 and 2000. The estimated fair value of the Notes
             is based on quoted market prices at these dates.



                                       50
<PAGE>
(10)         CONVERTIBLE SUBORDINATED NOTES AND DEBENTURES

             At December 31, 2001 and 2000, $196.5 million in principal was
             outstanding under the Notes which mature in 2003. Failure by the
             Company to make the interest payments in 2001 on the Notes resulted
             in an event of default under the terms of the related indenture.
             The Notes and accrued interest of $12.4 million at December 31,
             2001 are classified as current liabilities.

             The Notes were originally priced at par with a coupon rate of 4.5%
             and are convertible into the Company's common stock at $38.67 per
             share. During the third quarter of 1999, the Company purchased $3.5
             million of the Notes for a total consideration of approximately
             $2.5 million, resulting in an extraordinary gain of approximately
             $1.0 million.

             In September 1999, the Company issued the Zero Coupon Notes to
             funds managed by Warburg Pincus resulting in net proceeds of $92.5
             million. The terms of the Zero Coupon Notes provide for a 6.75%
             yield, conversion at an initial conversion price of $6.67 at the
             option of the holder into approximately 15.0 million shares of the
             Company's common stock and accretion to a maturity value of
             approximately $266.4 million at the 15-year maturity date. The
             carrying value of the Zero Coupon Notes was $116.5 million and
             $109.0 million at December 31, 2001 and 2000, respectively.

             Both the Notes and the Zero Coupon Notes are subject to compromise
             as result of the Company's Chapter 11 bankruptcy filing.

(11)         LONG-TERM DEBT

              Long-term debt at December 31, consists of the following (in
              thousands):

<TABLE>
<CAPTION>

                                                                                        2001             2000
                                                                                       -------        -------
<S>                                                                                    <C>            <C>
              Bank credit facility, bearing interest at a weighted average rate
                 of 11.33% at December 31, 2000 ...............................        $    --        $44,733
              Mortgages payable, bearing interest at 9.75%, secured by
                 real property ................................................          1,097          4,012
              Capital lease obligations .......................................            127            121
              Other notes payable .............................................            318            939
                                                                                       -------        -------
                Total long-term debt ..........................................          1,542         49,805
              Less current installments .......................................            518         46,769
                                                                                       -------        -------
                Long-term debt, excluding current installments ................        $ 1,024        $ 3,036
                                                                                       =======        =======

</TABLE>

             The Company modified its Citicorp Credit Facility and its synthetic
             lease facility several times in 2000 and 2001. The Citicorp Credit
             Facility, as amended August 25, 2000, provided for the conversion
             of outstanding balances under the previous revolving credit and
             synthetic lease facilities and outstanding letters of credit to a
             term loan ("Term Loan") and a $25 million revolving loan
             ("Revolving Loan"). Amounts were available under this Revolving
             Loan only to the extent repayments were made from excess cash flows
             of the Company. Under the terms of this amended Citicorp Credit
             Facility, net cash proceeds from asset sales were required to be
             prepaid against outstanding borrowings under the Term Loan, the
             Revolving Loan and then to cash collateralize outstanding letters
             of credit. Pursuant to the March 30, 2001 amendment, irrespective
             of asset sales, the aggregate balance of these loans and
             uncollateralized letters of credit were required to be reduced on
             an established timetable until maturity on December 31, 2001.
             During the first quarter of 2001, all borrowings under the Citicorp
             Credit Facility had been repaid and during the second quarter of
             2001, outstanding letters of credit were fully collateralized with
             cash held by the agent bank. The Citicorp Credit Facility
             terminated December 31, 2001.

             Outstanding borrowings and letters of credit issued under the
             Citicorp Credit Facility were secured by the capital stock of the
             Company's significant subsidiaries (as defined in the Citicorp
             Credit Facility), certain real property of the Company and the
             personal property held by the significant subsidiaries.




                                       51
<PAGE>

             In October 2001, the Company entered into a one-year credit
             agreement with AmSouth Bank (the "AmSouth Facility") which provides
             for the issuance of letters of credit up to an aggregate of $2.65
             million to replace those outstanding at that time under the
             Citicorp Credit Facility. To date in 2002, a letter of credit for
             $0.4 million expired and letters of credit totaling $0.4 million
             were drawn. At April 10, 2002, letters of credit aggregating $1.85
             million are outstanding under the AmSouth Facility and are
             collateralized with $2.4 million cash. Reimbursement to AmSouth for
             the letter of credit draws is pending approval by the Bankruptcy
             Court. The Company does not anticipate having any additional access
             to capital until it emerges from bankruptcy although there can be
             no assurance that funds will be available on terms acceptable to
             the Company at such time or any time in the future.

             The Company's synthetic lease facility, as amended in January 2000,
             provided off balance sheet financing with an option to purchase the
             leased facilities at the end of the lease term. The August 2000
             amendment resulted in the conversion of $19.3 million of amounts
             outstanding under the synthetic lease facility into the term loan
             under the Citicorp Credit Facility. In November 2000, all remaining
             amounts outstanding under the synthetic lease facility were repaid
             using asset sale proceeds and the synthetic lease facility was
             terminated.

             The Company recorded approximately $3.4 million of refinancing
             charges related to the amendment and restatement of the Citicorp
             Credit Facility in 2000. This charge represented unamortized costs
             that were expensed as a result of the reduced commitment amounts
             and the acceleration of the maturity date of the Citicorp Credit
             Facility.

             The aggregate maturities of long-term debt at December 31, 2001 are
as follows (in thousands):

                    2002.................................   $   518
                    2003.................................        89
                    2004.................................        94
                    2005.................................       104
                    2006.................................       737
                    Thereafter...........................        --
                                                            -------
                                                            $ 1,542
                                                            =======
(12)         LEASES

             The Company has entered into operating leases for commercial
             property and equipment with third parties. Commercial properties
             under operating leases include clinic buildings, satellite
             operations, and administrative facilities.

             The future minimum lease payments under noncancelable operating
             leases net of sublease income at December 31, 2001 are as follows
             (in thousands):

                    2002....................................    $10,055
                    2003....................................      4,876
                    2004....................................      3,853
                    2005....................................      2,715
                    2006....................................      2,531
                    Thereafter..............................      7,666
                                                                -------
                    Total minimum lease payments                $31,696
                                                                =======

             Generally, in the event of a service agreement termination with our
             formerly affiliated medical groups, any related lease obligations
             were also terminated. Operating leases with remaining payments
             totaling $18.1 million at December 31, 2001 were not terminated in
             conjunction with the sale or closure of various operations. Such
             liabilities are included in accrued restructuring reserves at
             December 31, 2001.



                                       52
<PAGE>

             The Chairman of, and a director of, the Company, is a shareholder
             of Healthcare Realty Trust, Incorporated ("HRT"), a real estate
             investment trust, and was a director of HRT from 1993 until
             February 2001. Property previously occupied by the Doctors' Clinic
             is leased from HRT by PhyCor of Vero Beach, Inc., one of our
             wholly-owned subsidiaries, at a base rental of approximately $1.2
             million per year until 2008. First Physician Care of South Florida,
             Inc., another wholly-owned subsidiary, leases property from HRT at
             a base rental of approximately $0.4 million per year pursuant to a
             lease which terminates in 2009. The Company has guaranteed the
             lease obligations of its formerly affiliated Roanoke, Virginia
             physician group Lewis-Gale Clinic, LLC to HRT. Lewis-Gale Clinic,
             LLC leases properties under a 15-year agreement with HRT which
             includes rent and certain operating expenses. We ceased making
             payments on these leases in 2001. HRT provided notice of default
             and accelerated the obligations thereunder. On February 1, 2002,
             the Bankruptcy Court entered an order approving the rejection of
             certain executory contracts and lease obligations including the
             Company's obligations to HRT under the leases and related
             subleases. HRT has filed a substantial claim with the Bankruptcy
             Court relating to these lease obligations. Additional creditors
             have also filed claims with the Bankruptcy Court relating to
             certain rejected executory contracts and leases.

(13)         SHAREHOLDERS' EQUITY

             Under the terms of the Plan, the Company's outstanding and
             authorized common stock, options, warrants and rights to purchase
             preferred stock will be cancelled and current holders of these
             securities will not receive any consideration, either in cash or in
             newly issued stock.

             (A)  COMMON AND PREFERRED STOCK

             The Company repurchased approximately 2.9 million shares of its
             common stock in 1999 for approximately $13.5 million. The Company's
             amended Citicorp Credit Facility prohibited additional securities
             repurchases.

             The Company has 10,000,000 shares of authorized but unissued
             preferred stock. The Company has reserved for issuance 500,000
             shares of Series A Junior Participating Preferred Stock issuable in
             the event of certain change-in-control events.

             (B)  WARRANTS

             The following represents a summary of all warrants outstanding at
December 31, 2001 (shares in thousands):

<TABLE>
<CAPTION>

                                                                                                     Exercisable
                                                                  Number of                          At December
              Grant Date                      Expiration Date      Shares        Exercise Price        31, 2001
              ----------                      ---------------     ---------      --------------     --------------
<S>                                                <C>               <C>          <C>                    <C>
              February 1992                        2002                2            $  4.74                2
              June 1995                            2005              348              15.40              348
                                                                     ---                                 ---
                                                                     350                                 350
                                                                     ===                                 ===
</TABLE>

             (C)  STOCK OPTION PLANS AND DIRECTORS' STOCK PLAN

             The Company has three stock option plans. Under the 1999 Incentive
             Stock Plan ("1999 Plan"), the Company has reserved 4,500,000 shares
             of its common stock for issuance pursuant to option and stock
             grants to employees and directors. No additional options or stock
             will be granted under the Amended 1988 Incentive Stock Plan ("1988
             Plan") which terminated in 1999. Under the Amended 1992
             Non-Employee Directors' Stock Plan ("Directors Plan"), 637,500
             shares of common stock are reserved. Under all plans, stock options
             are granted with an exercise price equal to the estimated fair
             market value of the Company's common stock on the date of grant.
             Most options under the 1999 Plan and the 1988 Plan have a term of
             ten years and are exercisable in installments over periods ranging
             up to five years. Options under the Directors Plan have a term of
             ten years and are exercisable when granted. At December 31, 2001,
             there were approximately 4,100,000 and 339,000 additional shares
             available for grant under the 1999 Plan and the Directors Plan,
             respectively.




                                       53
<PAGE>

             During the third quarter of 2000, option holders voluntarily
             surrendered options to purchase 6,449,000 shares of common stock to
             the Company for no consideration.

             The per share weighted-average fair value of stock options granted
             during 2001, 2000 and 1999 was $0.03, $1.63, and $2.78 on the date
             of grant using the Black Scholes option-pricing model with the
             following assumptions: an expected dividend yield of 0.0% for all
             years, expected volatility of 150% in 2001, 167% in 2000 and 116%
             in 1999, risk-free interest rate of 5.00% in 2001, 5.88% in 2000
             and 4.25% to 6.00% in 1999 and an expected life of five years for
             all years.

             The Company applies APB Opinion No. 25 in accounting for its stock
             option plans and, accordingly, no compensation cost has been
             recognized for its stock options in the consolidated financial
             statements. Had the Company determined compensation cost based on
             the fair value at the grant date for its stock options under SFAS
             No. 123, the Company's net loss and per share amounts would have
             been changed to the pro forma amounts indicated below (in thousands
             except for loss per share):

<TABLE>
<CAPTION>

                                                                          2001             2000            1999
                                                                        --------         ---------      ---------
           <S>                                      <C>                 <C>              <C>            <C>
           Net loss                                 As reported         $(35,756)        $(608,384)     $(444,526)
                                                    Pro forma            (34,471)         (593,066)      (458,101)
           Basic loss per share                     As reported            (0.49)           (8.30)         (5.91)
                                                    Pro forma              (0.47)           (8.09)         (6.09)
           Diluted loss per share                   As reported            (0.49)           (8.30)         (5.91)
                                                    Pro forma              (0.47)           (8.09)         (6.09)

</TABLE>

             Stock option activity during the periods indicated is as follows
(shares in thousands):

<TABLE>
<CAPTION>

                                                                          Number of              Weighted-Average
                                                                            Shares                Exercise Price
                                                                          ---------              ----------------
<S>                                                                         <C>                     <C>
           Balance at December 31, 1998                                     13,414                  $   10.24
                Granted                                                      6,190                       3.36
                Exercised                                                     (187)                      3.16
                Forfeited                                                   (3,335)                      9.49
                                                                            ------                  ---------
           Balance at December 31, 1999                                     16,082                       6.72
                Granted                                                        367                       1.69
                Forfeited                                                   (6,846)                      7.16
                Surrendered                                                 (6,449)                      6.90
                                                                            ------                  ---------
           Balance at December 31, 2000                                      3,154                      10.62
                Granted                                                         47                       0.03
                Forfeited                                                     (722)                      5.66
                                                                            ------                  ---------
           Balance at December 31, 2001                                      2,479                  $   11.76
                                                                            ======                  =========

</TABLE>

             At December 31, 2001, the range of exercise prices and
             weighted-average remaining contractual life of outstanding options
             were $0.03 - $31.50 and 5.58 years, respectively. At December 31,
             2001, 2000 and 1999, the number of options exercisable was
             2,024,000, 2,625,000 and 8,035,000, respectively, and the
             weighted-average exercise price of those options was $14.68, $11.18
             and $10.42, respectively.

             (d)  STOCK PURCHASE PLANS

             The Company terminated its employee and affiliate stock purchase
             plans effective June 30, 2000. During 2000 and 1999, approximately
             111,000 and 152,000 shares, respectively, were issued pursuant to
             the employee stock purchase plan. Shares issued under the employee
             stock purchase plan were generally priced at the lower of 85% of
             the fair market value of the Company's common stock on the first or
             the last trading days of the plan year.




                                       54
<PAGE>

             Under the affiliate stock purchase plan, eligible participants
             generally included physicians and other employees of medical
             clinics with which the Company had a management or service
             agreement and employees of limited liability companies and
             partnerships in which the Company had an equity interest of at
             least 50%. Shares issued under the affiliate plan to employees of
             limited liability companies and partnerships in which the Company
             had an equity interest of at least 50% were priced using a method
             similar to that of the employee stock purchase plan. Shares issued
             under the affiliate plan to other participants were priced equal to
             95% of the market price on the purchase date. During 2000 and 1999,
             approximately 92,000 and 162,000 shares, respectively, were issued
             under this affiliate plan.

             Pro forma compensation expense included in the pro forma
             calculation above is recognized for the fair value of each stock
             purchase right estimated on the date of grant using the Black
             Scholes pricing model. The following assumptions were used for
             stock purchases: an expected dividend yield of 0.0% for both years,
             expected volatility of 167% in 2000 and 116% in 1999, risk-free
             interest rate of 6.13% to 6.38% in 2000 and 4.5% to 5.75% in 1999,
             and an expected life of three months to one year for both years.

(14)         ASSET REVALUATION, RESTRUCTURING AND REFINANCING

             In 2001, the Company recorded net pre-tax asset revaluation and
             restructuring recoveries of approximately $5.0 million. This
             recovery included a net pre-tax asset impairment recovery of
             approximately $5.1 million. Recoveries of $10.8 million for certain
             asset impairment charges previously recorded were offset by $5.7
             million in asset impairment charges for certain other operating
             units. These net impairment recoveries consisted of asset
             impairment charges relating to the disposition of the Company's
             remaining six clinics, CareWise, and fixed assets at its corporate
             offices offset by recoveries of accounts receivable and other
             assets from subsidiaries whose assets were written off in a prior
             year. The net impairment recovery is principally the receipt of a
             $5.0 million contingent payment due upon the sale of a certain
             operating unit formerly owned by the Company. The net recovery also
             included a net pre-tax restructuring charge of approximately $0.1
             million, which was comprised of a $1.9 million restructuring charge
             for operations determined to be closed or sold in 2001 less a $1.8
             million restructuring reserve recovery due to certain liabilities
             being settled for amounts less than reserved amounts for operations
             closed or sold in prior years.

             In 1999, the Company recorded asset revaluation and restructuring
             charges of approximately $431.0 million. These charges included a
             net pre-tax asset revaluation charge of approximately $409.3
             million, which was comprised of a $416.4 million asset revaluation
             charge less recovery of $7.1 million of certain asset revaluation
             charges recorded in the first quarter of 1998 and the third quarter
             of 1999 and a $21.7 million restructuring charge. These charges
             related to asset impairment of eleven clinic operations classified
             as held for sale at December 31, 1999 and the disposition of the
             assets of fifteen clinic operations during 1999.

             Net revenue and pre-tax income (losses) from operations disposed of
             or closed as of December 31, 2001 were $16.8 million and $(13.3)
             million for the year ended December 31, 2001, compared to $664.6
             million and $(30.1) million for the year ended December 31, 2000,
             and $1.2 billion and $36.0 million for the year ended December 31,
             1999, respectively.

             The Company completed the disposition of the assets of its six
             remaining clinics, a hospital, CareWise and certain real estate
             during 2001 and received proceeds totaling $69.9 million in cash
             and $13.8 million in notes receivable, in addition to certain
             liabilities assumed by the purchasers. These dispositions
             represented $63.7 million of the net assets held for sale at
             December 31, 2000. The Company had no significant assets classified
             as held for sale at December 31, 2001. The Company completed the
             disposition of the assets of 34 clinics, certain real estate
             holdings and other assets during 2000 and received consideration
             consisting of $219.5 million in cash and $24.7 million in notes
             receivable and deferred payments, in addition to certain
             liabilities assumed by the purchasers.

             In 1999, the Company adopted and implemented restructuring plans
             and recorded net pre-tax restructuring charges totaling
             approximately $21.8 million with respect to operations that were
             being sold or shut down. These restructuring plans included the
             involuntary termination of 382 local clinic




                                       55
<PAGE>
              and IPA management and business office personnel. In 2000, the
              Company adopted and implemented restructuring plans and recorded
              net pre-tax restructuring charges totaling approximately $50.8
              million with respect to operations that were being sold or shut
              down. These restructuring plans included the involuntary
              termination of 933 clinic, IPA management, business office and
              corporate personnel. In 2001, the Company adopted and implemented
              restructuring plans and recorded net pre-tax restructuring charges
              totaling approximately $1.9 million. Substantially all obligations
              relating to the accrued restructuring reserves are subject to
              compromise as a result of the Bankruptcy Filings.

              The following table summarizes the restructuring accrual and
              payment activity for 2001 and 2000 (in thousands):

<TABLE>
<CAPTION>

                                                              Facility &
                                                                 Lease         Severance &        Other
                                                              Termination        Related           Exit
                                                                 Costs            Costs            Costs            Total
                                                              -----------      -----------        --------         --------
<S>                                                             <C>              <C>              <C>              <C>
              Balances at December 31, 1999                     $  2,644         $  2,381         $  2,970         $  7,995
                  2000 charges                                    24,764           16,249            9,833           50,846
                  Payments                                        (8,134)         (13,701)          (7,979)         (29,814)
                  Non-utilized charges taken into income            (104)          (1,288)            (780)          (2,172)
                  Other reallocations                               (289)            (179)             468               --
                                                                --------         --------         --------         --------
              Balances at December 31, 2000                       18,881            3,462            4,512           26,855
                  2001 charges                                       500            1,108              342            1,950
                  Payments                                          (680)          (2,136)          (2,074)          (4,890)
                  Non-utilized charges taken into income            (391)             (51)          (1,390)          (1,832)
                  Other reallocations                               (167)            (698)             865               --
                                                                --------         --------         --------         --------
              Balances at December 31, 2001                     $ 18,143         $  1,685         $  2,255         $ 22,083
                                                                ========         ========         ========         ========

</TABLE>

(15)         INCOME TAX EXPENSE

             Income tax expense (benefit) for the years ended December 31, 2001,
             2000 and 1999, consists of (in thousands):

<TABLE>
<CAPTION>

                                                                2001            2000            1999
                                                              --------        --------        --------
<S>                                                           <C>             <C>             <C>
              Current:
                  Federal.............................        $     --        $     --        $     --
                  State ..............................              33           1,029           1,963
              Deferred:
                  Federal ............................              --              --          52,585
                  State ..............................              --              --          (1,230)
                                                              --------        --------        --------
                                                              $     33        $  1,029        $ 53,318
                                                              ========        ========        ========

</TABLE>

             Total income tax expense (benefit) differed from the amount
             computed by applying the U.S. federal income tax rate of 35 percent
             in 2001, 2000 and 1999 to loss before income taxes as a result of
             the following (in thousands):

<TABLE>
<CAPTION>

                                                                                      2001             2000              1999
                                                                                    --------         ---------         ---------
<S>                                                                                 <C>              <C>               <C>
              Computed "expected" tax expense (benefit) ...................         $(12,504)        $(212,574)        $(136,923)
              Increase (reduction) in income taxes resulting from:
                   Change in valuation  allowance charged to federal income
                     tax expense ..........................................           12,504           138,226           146,634
                   State income taxes, net of federal income tax benefit ..               33             1,029               477
                   Amortization of nondeductible goodwill .................               --             3,472             5,737
                   Nondeductible goodwill written off .....................               --            71,236            32,034
                   Other, net .............................................               --              (360)            5,359
                                                                                    --------         ---------         ---------
                          Total income tax expense ........................         $     33         $   1,029         $  53,318
                                                                                    ========         =========         =========

</TABLE>



                                       56
<PAGE>

              The tax effects of temporary differences that give rise to
              significant portions of the deferred tax assets and deferred tax
              liabilities at December 31 are presented below (in thousands):

<TABLE>
<CAPTION>

                                                                                              2001            2000
                                                                                            ---------      ---------
<S>                                                                                         <C>            <C>
              Deferred tax assets:
                   Clinic service agreements............................................    $   3,056      $  18,735
                   Reserves (including incurred but not reported claims)................       99,911         79,101
                   Operating loss carryforwards.........................................      284,417        243,108
                   Cash to accrual adjustment...........................................           --          7,778
                   Other................................................................        3,273          1,598
                                                                                           ---------      ---------
                       Total gross deferred tax assets..................................      390,657        350,320
              Valuation allowance.......................................................      359,022        328,379
                                                                                            ---------      ---------
                   Net deferred tax assets..............................................       31,635         21,941
                                                                                            ---------      ---------
             Deferred tax liabilities:
                  Plant  and  equipment,  principally  due to  differences  in
                    depreciation..............................................                  (565)         2,827
                  Capital leases.......................................................           41          2,369
                  Prepaid expenses.....................................................          893            437
                  Income from partnerships.............................................       30,051         14,719
                  Other................................................................        1,215          1,589
                                                                                           ---------      ---------
                      Total gross deferred tax liabilities.............................       31,635         21,941
                                                                                           ---------      ---------
                      Net deferred tax assets..........................................    $      --      $      --
                                                                                           =========      =========

</TABLE>

              The significant components of the deferred tax expense (benefit)
              as of December 31, 1999 were as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                                           1999
                                                                                                         ---------
<S>                                                                                                      <C>
             Change in net deferred tax assets........................................                   $  32,746
             Expense resulting from tax benefits allocated to reduce intangible assets                      35,221
             Benefit  resulting  from release of reserves upon  settlement of Internal
               Revenue Service exams..................................................                      (3,697)
             Utilization of net operating loss carryback..............................                     (13,666)
             Other....................................................................                         751
                                                                                                         ---------
                     Deferred tax expense.............................................                   $  51,355
                                                                                                         =========

</TABLE>

             The net change in the total valuation allowance for the year ended
             December 31, 2001, which primarily related to federal and state net
             operating loss carryforwards and expenses relating to the provision
             for asset revaluation and restructuring charges not expected to be
             deductible for federal and state tax purposes, was an increase of
             $30.6 million. As of December 31, 2001, the Company had
             approximately $702.4 million of federal and $729.7 million of state
             net operating loss carryforwards ("NOLs") which begin to expire in
             2007. The utilization of these NOLs is subject to the future level
             of taxable income of the Company and its applicable subsidiaries.
             It is expected that the federal NOLs will be reduced by the amount
             of indebtedness discharged under the Plan, estimated to be
             approximately $311 million as of December 31, 2001. In addition,
             the NOLs will be reduced by approximately $17.9 million which
             equals the amount of interest paid during the past three years to
             creditors who will become shareholders under the Plan. The
             Company's ability to utilize the remaining NOLs will also be
             subject to limitations because of the ownership change that will
             result from the Plan unless "qualified creditors," as defined in
             the Tax Code, will own 50% or more of the stock of the reorganized
             Company. Although the Company expects that qualified creditors will
             own 50% or more of the reorganized Company and intends to file its
             tax returns consistent with this belief, there can be no assurance
             that an audit of one or more tax returns filed for 1999 and later
             tax years would not result in a reduction in the amount or complete
             elimination of the remaining NOLs available for future use. In
             addition, the Company's ability to utilize the NOLs could also be
             limited or eliminated in the event of certain future mergers or
             acquisitions.



                                       57
<PAGE>

             During 1999, the Company favorably resolved its outstanding
             Internal Revenue Service ("IRS") examinations for the years 1988
             through 1995. The IRS had proposed adjustments relating to the
             timing of recognition for tax purposes of certain revenue and
             deductions related to accounts receivable, the Company's
             relationship with affiliated physician groups, and various other
             timing differences. The tax years 1988 through 1998 have been
             closed with respect to all issues without a material financial
             impact. Two subsidiaries are currently under examination for the
             1995 and 1996 tax years. The Company acquired the stock of these
             subsidiaries during 1996. The Company has reached an agreement to
             settle the audit of one of these subsidiaries for approximately
             $27,000 plus interest, subject to approval by the Bankruptcy Court.
             For the years under audit, and potentially, for subsequent years,
             any such adjustments could result in material cash payments by the
             Company. Any successful adjustment by the IRS would cause interest
             expense to be incurred. PhyCor does not believe the resolution of
             this matter will have a material adverse effect on its financial
             condition, although there can be no assurance as to the outcome of
             this matter. In August 1999, the Company received a $12.5 million
             tax refund as a result of applying the 1998 loss carryback to
             recover taxes paid in 1996 and 1997. During 2000, the IRS adjusted
             the 1998 loss carryback and accordingly, we repaid approximately
             $1.2 million plus interest as a result of revisions in the
             alternative minimum tax calculation.

(16)         EMPLOYEE BENEFIT PLANS

             As of January 1, 1989, the Company adopted the PhyCor, Inc. Savings
             and Profit Sharing Plan. This plan is a defined contribution plan
             covering the majority of employees. Company contributions are based
             on specified percentages of employee compensation. The Company
             funds contributions as accrued. The plan expense for 2001, 2000 and
             1999 amounted to $0.2 million, $7.0 million, and $15.4 million,
             respectively.

             In connection with certain of the Company's acquisitions, the
             Company adopted defined contribution employee retirement plans
             previously sponsored solely by the affiliated physician groups. The
             Company had no expense in 2001 related to these plans because the
             Company terminated its adoption of these plans at the time it
             divested the assets of the related operations. The Company
             recognized as expense its required contributions to be made to the
             plans of approximately $4.1 million and $7.7 million relative to
             its employees for 2000 and 1999, respectively.

(17)         COMMITMENTS AND CONTINGENCIES

             (a)  EMPLOYMENT AGREEMENTS

             The employment agreements in effect prior to the Petition Date with
             two of the Company's executive officers provided for the payment of
             bonuses aggregating up to a maximum of $2.25 million upon the
             repayment of borrowings under the Citicorp Credit Facility.
             Approximately $0.2 million of the bonuses was earned in 2000 and
             the remainder was earned during the first quarter of 2001, of which
             all amounts were paid in 2001.

             The employment agreement effective on the Petition Date with the
             Company's CEO and President and employment agreements with certain
             of its management employees, include, among other terms, various
             non-competition provisions and salary and benefits continuation.

             (b)  LITIGATION

             As a result of the Bankruptcy Filings, all current litigation
             against the Debtors is stayed. Litigation is continuing, however,
             against the Company's subsidiaries that did not seek protection
             under Chapter 11. All judgments against the Debtors will be treated
             as claims under the Plan. Additional information regarding the
             Bankruptcy Filings and the Plan is set forth in Note 1(a).


                                       58
<PAGE>

                  STAYED LITIGATION

             The Company and certain of its current and former officers and
             directors, Joseph C. Hutts, Derril W. Reeves, Thompson S. Dent,
             Richard D. Wright and John K. Crawford (only Mr. Dent and Mr. Hutts
             currently serve as the Company's directors) have been named
             defendants in 10 securities fraud class actions filed in state and
             federal courts in Tennessee between September 8, 1998 and June 24,
             1999. The factual allegations of the complaints in all 10 actions
             are substantially identical and assert that during various periods
             between April 22, 1997 and September 22, 1998, (the "Class Period")
             the defendants issued false and misleading statements which
             materially misrepresented the Company's earnings and financial
             condition and the Company's clinic operations and misrepresented
             and failed to disclose various other matters concerning the
             Company's operations in order to conceal the alleged failure of the
             Company's business model. Plaintiffs further assert that the
             alleged misrepresentations caused the Company's securities to trade
             at inflated levels while the individual defendants sold shares of
             the Company's stock at such levels.

             In each of the actions, the plaintiff seeks to be certified as the
             representative of a class of all persons similarly situated who
             were allegedly damaged by the defendants' alleged violations during
             the Class Period. Each of the actions seeks damages in an
             indeterminate amount, interest, attorneys' fees and equitable
             relief, including the imposition of a trust upon the profits from
             the individual defendants' trades. The federal court actions have
             been consolidated in the United States District Court for the
             Middle District of Tennessee. Defendants' motion to dismiss was
             denied. The state court actions were consolidated in Davidson
             County, Tennessee. The plaintiffs' original consolidated class
             action complaint in state court was dismissed for failure to state
             a claim. Plaintiffs, however, were granted leave to file an amended
             complaint. The amended complaint filed by plaintiffs asserted, in
             addition to the original Tennessee Securities Act claims, that
             Defendants had also violated Section 11 and 12 of the Securities
             Act of 1933 for alleged misleading statements in a prospectus
             released in connection with the CareWise acquisition. The amended
             complaint also added KPMG LLP ("KPMG"), the Company's independent
             public auditors, as a defendant. KPMG removed this case to federal
             court and its motion to dismiss was denied. On October 20, 2000,
             this case was consolidated with the original federal consolidated
             action and a new consolidated complaint was filed. On May 30, 2001,
             the court granted plaintiffs' motion for class certification.

             The Company and the individual defendants have reached a settlement
             with the plaintiff class which will resolve all of the claims in
             the consolidated actions. On March 12, 2002, the parties filed with
             the district court a Memorandum of Understanding which outlines the
             proposed settlement, the terms of which include the payment of $3.4
             million to be paid by insurance proceeds in exchange for complete
             releases of all defendants and dismissal of the consolidated cases
             with prejudice. A preliminary hearing on the appropriateness of the
             settlement is scheduled in the district court for April 19, 2002.
             In connection with the Bankruptcy Filings, an Amended Stipulation
             and Order of the Bankruptcy Court lifting the automatic stay for
             purposes of allowing the settlement process to proceed in the
             district court was entered on April 12, 2002.

             The same Class Period and the same factual allegations made in the
             federal court consolidated class actions are alleged in a separate
             derivative action filed in the Chancery Court for Davidson County,
             Tennessee, PARUL PATEL V. JOSEPH C. HUTTS, ET. AL., Case No.
             99-2353-I. By Order entered October 14, 1999, the derivative action
             was stayed pending the outcome of the federal consolidated class
             actions. Mr. Patel has not agreed to settle his claim as a part of
             the proposed federal court settlement. Under the terms of the Plan,
             which is subject to creditor and court approval, Mr. Patel's
             interest as a common stockholder will be cancelled, his litigation
             claim will be discharged and he will receive no consideration. In
             addition, the Company will not pursue any alleged claims made in
             the PATEL action against the Company's current and former officers
             and directors. Finally, under the terms of the Plan, the Company is
             releasing any claims it may have against its current and former
             officers and directors.

             On August 31, 1999, two relators brought an action in the United
             States District Court for the District of Hawaii under the False
             Claims Act and for employment related claims against Straub Clinic
             and Hospital, Inc. ("Straub"), PhyCor of Hawaii, Inc., and the
             Company. This matter had been under seal



                                       59
<PAGE>

             until September 2000. On September 20, 2000, the United States
             government declined to intervene in the matter. The Company sold
             PhyCor of Hawaii, Inc. to Straub in November 2000 and Straub is
             defending the claims against PhyCor of Hawaii, Inc. The Company
             lost its motion to dismiss the claims against PhyCor, Inc. and it
             is defending itself in the litigation. Trial was set for June 12,
             2002, however, as a result of the Bankruptcy Filings, the case is
             stayed.

             As a result of the Company's decision to exit its IPA market in
             Houston, Texas, a number of providers in the market have brought
             actions naming several parties, including one of the Company's
             IPA-management subsidiaries and the Company, alleging breach of
             contract, breach of fiduciary duty, and fraud, among other matters.
             Several million dollars have been claimed in these cases. The
             Company believes the plaintiffs have sued the wrong party and that
             the claims are generally excessive. In addition, as a result of the
             Company's financial condition, the Company has been unable to meet
             certain contractual obligations including, but not limited to,
             certain ongoing lease obligations and severance obligations to
             former employees. There can be no assurance that we will meet
             existing or additional contractual obligations in the future.
             Several parties have sent the Company letters alleging breach of
             contract and threatening to bring claims, and several suits have
             been filed. The litigation has been stayed and the claims will be
             handled through the bankruptcy process.

             In a case which was filed in the Circuit Court of the 11th Judicial
             Circuit in and for Miami-Dade County, Florida, Busch Drive Ltd. and
             Lime Street Ltd., the landlords of the Company's formerly
             affiliated physician group, First Coast Medical Group, P.A.,
             claimed the Company guaranteed the lease obligations of the
             physician group. The judge in that case has entered judgments in
             favor of the landlords in the aggregate amount of $2,474,510. The
             Company has recorded a liability equal to the amount of the
             judgment at December 31, 2001. This judgment will be dealt with as
             a claim under the Plan.

                  ACTIVE LITIGATION

             The following is a summary of material litigation to which certain
             of the Company's ongoing operating subsidiaries are parties, and
             accordingly, this litigation is not stayed.

             As previously disclosed in the case of UNITED STATES OF AMERICA EX
             REL. WILLIAM R. BENZ V. PRIMECARE INTERNATIONAL, INC. AND PREM
             REDDY, in the United States District Court, Central District of
             California, the jury returned a verdict in favor of the plaintiff
             in the amount of $4.6 million. The judgment of $4.6 million was
             recorded as other operating expenses in the second quarter of 2000.
             The Company entered into a settlement agreement with Mr. Benz which
             subsequently received court approval. In exchange for PrimeCare
             paying Mr. Benz $2.7 million (of which $0.7 million was paid during
             the second quarter of 2001 and the remainder was paid during July
             2001), all claims were dropped by Mr. Benz against the Company and
             our affiliates. Mr. Benz has not settled with Dr. Reddy, and Dr.
             Reddy continues to maintain that PrimeCare and several of its
             managed IPAs has an indemnification obligation to him. In March
             2002, the Company was granted a demurrer with respect to Dr.
             Reddy's claim for indemnity, and accordingly, his claim will be
             dismissed with prejudice. Dr. Reddy has not appealed this decision
             as of the date hereof.

             The IPAs managed by PrimeCare, the physicians employed by those
             IPAs, and in some cases PMNI, are parties to several medical
             malpractice and/or managed care liability cases which the Company
             believes will be adjudicated within applicable insurance coverage
             limits. In addition, many of our California subsidiaries and
             affiliated IPAs have been sued on business claims such as breach of
             contract, misrepresentation, fraud, and deceit. The plaintiffs in
             these suits are seeking millions of dollars in damages, and the
             Company is vigorously defending these suits. Because these
             subsidiaries are not part of the Bankruptcy Filings, these actions
             are not stayed. One such case was recently tried in the Superior
             Court of the State of California for the County of Riverside. On
             December 31, 2001, the jury awarded the plaintiff damages jointly
             against PrimeCare and PMNI in the amount of $3 million based upon
             its breach of contract claim; $208,189 against PrimeCare on its
             constructive fraud claim; and $5,000 in punitive damages against
             PrimeCare. PrimeCare was awarded $296,190 on its cross-complaint
             for money it had not received. The Company does not agree with this
             decision and has appealed. PMNI




                                       60
<PAGE>

             obtained a $5 million appellate bond secured by a letter of credit
             to enable it to pursue the appeal. The Company has recorded a
             liability equal to the amount of this judgment at December 31,
             2001. There can be no assurance that the Company will be successful
             with this appeal or in other pending litigation. Additional damage
             awards at the levels the plaintiffs have demanded could have a
             material adverse effect on the Company's ongoing operations.

             In addition, the Company and PrimeCare have been named in
             litigation involving PrimeCare operations that were not transferred
             to the Company when the Company acquired PrimeCare. In one such
             case in Oklahoma, the plaintiff is alleging that a former PrimeCare
             subsidiary (which the Company did not acquire) is guilty of breach
             of contract, conversion, and fraud, and is seeking damages in
             excess of $2 million plus punitive damages. Since filing the
             litigation, the plaintiff has filed for bankruptcy relief. In the
             other such case in Florida, the plaintiff is seeking approximately
             $250,000 in damages. Although the Company did not own PrimeCare at
             the time of the alleged incidents, the Company may have liability
             for the actions of these entities and may not have indemnity rights
             against Dr. Reddy, the former owner (who is also a co-defendant).
             Because PrimeCare is not part of the Bankruptcy Filings, these
             actions are not stayed. It is not possible to determine the amount
             of the Company's exposure or that of its subsidiaries in these
             cases, but judgment against the Company could have a material
             adverse effect on the Company's ongoing operations.

             Certain litigation is pending against the Company's formerly
             affiliated physician groups and the Company's managed IPAs. The
             Company has not assumed any liability in connection with such
             litigation. Claims against the physician groups and IPAs could
             result in substantial damage awards to the claimants which may
             exceed applicable insurance coverage limits. Although we may not be
             parties to such litigation, a substantial financial obligation of
             the physician group or IPA could threaten its viability or its
             ability to pay our fees. While there can be no assurance that the
             physician groups and IPAs will be successful in any such
             litigation, at this time, the Company does not believe any such
             litigation will have a material adverse effect on its operations.

             (c)  INSURANCE

             The Company maintains managed healthcare errors and omissions
             insurance on a claims made basis for all of its managed care
             operations and officers' and directors' liability insurance. These
             policies expired on September 1 and September 11, 2001,
             respectively, but each was extended until September 1, 2002. Upon a
             change of control, including the change of control anticipated as a
             result of the approval of the Company's Plan by the Bankruptcy
             Court, these policies will terminate. Insurance coverage under such
             policies is contingent upon a policy being in effect when a claim
             is made, regardless of when the events which caused the claim
             occurred. In addition, the Company maintains a separate healthcare
             errors and omissions insurance policy and a medical malpractice
             insurance policy for most of its California operations. These
             policies expire August 18, 2003. The Company also maintains
             property and casualty, general liability, worker's compensation and
             some umbrella coverage on an occurrence basis. In addition, the
             Company is named as an additional insured on medical malpractice
             policies of some of its formerly affiliated physician groups. In
             other cases, however, the Company has no insurance for malpractice
             claims brought against such physician groups. There are known
             claims and incidents that may result in the assertion of additional
             claims, as well as claims from unknown incidents that may be
             asserted. The Company is not aware of any claims against management
             or its formerly affiliated physician groups which might have a
             material adverse impact on its financial position. The cost and
             availability of insurance coverage has varied widely in recent
             years. The Company believes its insurance policies are adequate in
             amount and coverage for its current operations. There can be no
             assurance, however, that the coverage is sufficient to cover all
             future claims or will continue to be available after the
             consummation of the Plan or at a reasonable cost. All claims
             against the Company and its subsidiaries which filed for bankruptcy
             will be barred after the effective date of the Plan (the "Effective
             Date").




                                       61
<PAGE>

             (d)  LETTERS OF CREDIT

             At December 31, 2001, letters of credit totaling $2.65 million were
             outstanding under the Company's AmSouth Facility. On behalf of an
             affiliated IPA, the Company had a $0.4 million letter of credit
             outstanding at December 31, 2001 for the benefit of a managed care
             payor to help ensure payment of healthcare costs for which the
             affiliated IPA has assumed responsibility. In 2001, losses of
             approximately $0.8 million were incurred from draws on letters of
             credit related to IPAs. The Company is exposed to losses if a
             letter of credit is drawn upon and the related IPA fails to satisfy
             its reimbursement obligation to the Company. The $1.85 million
             remaining letters of credit secure malpractice insurance
             deductibles and bonds required for third party administrator
             licenses. In addition, a $5.0 million letter of credit secures an
             appellate bond of the same amount. See Note 17(e) for further
             description of this letter of credit. Through April 10, 2002, a
             letter of credit for $0.4 million expired and letters of credit
             totaling $0.4 million were drawn.

             (e)  FINANCING OBLIGATIONS

             Currently, the Company is providing management services under
             management agreements that, generally, do not obligate the Company
             to provide capital. However, under one management agreement, the
             Company is obligated to provide lease financing for the acquisition
             of equipment to be used in the group's operation of up to $750,000
             annually through September 30, 2005. The lease rate is the prime
             rate, and the physician group has the sole discretion whether to
             use the Company as the source of capital for leased equipment. No
             such financing has been requested to date.

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

              NOT APPLICABLE.

                                    PART III

ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS

         Our current Charter provides that the Board of Directors shall be
divided into three classes of as nearly equal size as possible. Approximately
one-third of the directors are elected each year. Our Amended Bylaws provide
that the Board of Directors shall consist of not less than three nor more than
15 directors as established by the Board of Directors. The size of the Board of
Directors has been established at 13 directors, and currently consists of five
directors. Messrs. Joel Ackerman and Rodman W. Moorhead, III resigned effective
March 6, 2001. Ms. Kay Coles James resigned effective June 25, 2001. The
vacancies created by these departures have not yet been filled. On the
consummation date of the Plan, we will have a new Restated Charter, new Bylaws
and the terms of all current directors will expire. Pursuant to the Plan, the
reorganized company will have a board of directors comprised of five people. We
anticipate that the Bondholders will appoint four of the directors and Tarpley
B. Jones, our President and Chief Executive Officer, will be the fifth director
and Chairman of the Board.

CLASS I DIRECTORS

DR. WINFIELD DUNN
Age - 74
Director since 1988

         Dr. Dunn is a former Governor of the State of Tennessee. Dr. Dunn
served as Vice Chairman of the Board of Directors of Total eMed, Inc., a
provider of web-based electronic medical transcription services, from June 1998
until September 2000. From 1993 to 1998, Dr. Dunn served as Chairman of the
Board of MedShares Management Group, Incorporated, an owner and manager of home
healthcare agencies. From 1987 to 1991, Dr. Dunn served as




                                       62
<PAGE>

Chairman of the Board of First Cumberland Bank. From 1979 to 1985, Dr. Dunn
served as Senior Vice President, Government Affairs, for HCA. Dr. Dunn is a
director of Province Healthcare Company.

DR. JOSEPH A. HILL
Age - 61
Director since 1989

         Dr. Hill is a physician specializing in family practice at Vero Medical
Associates in Vero Beach, Florida. From 1973 until July 2001, Dr. Hill practiced
at Gold, Vann & White, P.A. (the "Doctors' Clinic"), a clinic we previously
managed that is also in Vero Beach, Florida. Dr. Hill served as the President of
the Doctors' Clinic from 1988 to 1991.

CLASS II DIRECTORS

THOMPSON S. DENT
Age - 51
Director since 1992

         Mr. Dent is our Chairman until the consummation of the Plan. Mr. Dent
had served as our Chairman and Chief Executive Officer since June 8, 2000 and as
our President from October 1998 until January 30, 2002. Mr. Dent served as our
Chief Operating Officer from October 1997 until his appointment as Chief
Executive Officer. From October 1997 to October 1998, Mr. Dent also served as
Executive Vice President. Mr. Dent served as our Executive Vice President,
Corporate Services, from our incorporation until October 1997 and served as our
Secretary from 1991 to October 1998. Mr. Dent also served as Vice President of
Development of EQUICOR - Equitable HCA Corporation ("EQUICOR") from 1986 until
1988. Prior to 1986, Mr. Dent served as Director of Mergers and Acquisitions for
Hospital Corporation of America ("HCA"). Mr. Dent is a director of HealthStream,
Inc., a web-based company providing continuing medical education on-line. Mr.
Dent also served on the board of directors of Healthcare Realty Trust
Incorporated ("HRT"), a real estate investment trust, from 1993 until February
2001.

CLASS III DIRECTORS

RONALD B. ASHWORTH
Age - 56
Director since 1992

         In 1991, Mr. Ashworth assumed the role of Executive Vice President and
Chief Operating Officer of the Sisters of Mercy Health System, St. Louis,
Missouri ("SMHS"), a system consisting of hospitals and affiliated healthcare
entities serving a seven-state area in the central and southwestern United
States. In July 1999, he became President and Chief Executive Officer of SMHS.
Mr. Ashworth has been a director of SMHS since its inception in 1986. From 1986
to 1990, Mr. Ashworth served as Vice Chairman of Specialized Industries and
Marketing for KPMG, our independent public auditors. From 1978 to 1985, Mr.
Ashworth served as the National Director of the healthcare practice of KPMG.

JOSEPH C. HUTTS
Age - 60
Director since 1988

         Mr. Hutts, one of our directors, is Chief Executive Officer of Surgis
Inc., a privately held surgery center company in Nashville, Tennessee. Mr. Hutts
served as our Chairman of the Board and Chief Executive Officer from our
incorporation until his resignation on June 8, 2000. Mr. Hutts also served as
our President from 1988 until the appointment of Mr. Dent as President in
October 1998. From 1977 to 1986, Mr. Hutts served in various positions with HCA,
including Vice President, Operations, Senior Vice President, Western Operations
and President of HCA Health Plans, a managed care subsidiary of HCA. Mr. Hutts
served as Vice Chairman and Chief Operating Officer of EQUICOR from 1986 to
1987. Mr. Hutts serves on the board of directors of Renal Care Group, Inc., a
provider



                                       63
<PAGE>

of nephrology services, and was a director of Quorum Health Group, Inc., an
owner and operator of hospitals, until its merger with Triad Hospitals, Inc. in
2000.

MEETINGS OF BOARD OF DIRECTORS AND ITS COMMITTEES

         The Board of Directors held ten meetings, including regular and special
meetings, and took action by written consent once during 2001. Each director,
except for Mr. Ackerman, attended at least 75% of the meetings of the Board of
Directors and its committees held during each such director's tenure on the
Board during 2001.

         During 2001, the Committees of the Board of Directors consisted of an
Audit Committee, on which Mr. Ashworth and Dr. Dunn served, and on which Mr.
Ackerman and Ms. James served until their resignations, and a Compensation
Committee, on which Mr. Ashworth, Dr. Dunn, and Dr. Hill served, and Mr.
Moorhead served until his resignation. During 2001, the Audit Committee met two
times and the Compensation Committee met once. The Audit Committee was
responsible for recommending auditors to the Board of Directors, reviewing audit
fees and supervising matters relating to audit functions and other financial
controls. The Compensation Committee was responsible for approving compensation
arrangements for our executive officers, reviewing compensation plans, granting
stock options, restricted stock and bonus stock awards and reviewing employee
compensation policies. In March 2002, because the Board of Directors only had
five members, the Board of Directors assumed the responsibilities of the Audit
Committee. The Board of Directors has no standing nominating committee.

INFORMATION REGARDING THE BOARD OF DIRECTORS AFTER CONSUMMATION OF THE PLAN

         Under the terms of the Plan, on the consummation date, the term of the
current Board of Directors will expire. The initial Board of Directors of the
reorganized company shall consist of five members, which shall include the
President and Chief Executive Officer of the reorganized company, Tarpley B.
Jones, who shall be the Chairman of the Board; one person designated by Warburg,
Pincus or its affiliates; and three people designated by the Bondholders'
Committee. Since Warburg, Pincus has indicated it will not exercise its right to
designate a board member, the Plan provides that the Bondholders will assume
Warburg, Pincus' right to designate a board member and thus will designate four
board members.

COMPENSATION OF DIRECTORS

         Directors who are our employees receive no additional compensation for
serving on the Board of Directors. Non-Employee Directors are entitled to
receive (i) a retainer equal to $7,000 times the number of years for which the
Non-Employee Director is elected, payable in restricted shares of common stock,
at a price per share equal to the closing sales price of the common stock as of
the date of the annual meeting of shareholders at which the director is elected
to serve, and (ii) options for the purchase of 6,750 shares of common stock,
pursuant to the Non-Employee Director Plan, automatically issued as of January 1
of each year during which the Non-Employee Director serves at a per share price
equal to the closing sales price of the common stock on the date of grant. Such
newly granted options are immediately exercisable for all shares subject to such
options. We hold the shares of restricted stock on behalf of the Non-Employee
Director, and each Non-Employee Director receives one-third of the shares upon
the completion of each year of his or her term. In addition, Non-Employee
Directors receive $2,500 in cash per regular and special meeting of the Board of
Directors, and $1,000 per committee meeting. Board members are reimbursed for
their expenses incurred in attending such meetings.





                                       64
<PAGE>

         The following table sets forth the number of shares of common stock
underlying outstanding options that have been granted to the current directors
throughout their tenure as directors pursuant to the Non-Employee Director Plan
as of March 31, 2002:

                                                        Number of Shares
                Name                                   Underlying Options
                ----                                   ------------------

                Ronald B. Ashworth                            57,243
                Dr. Winfield Dunn                             58,931
                Dr. Joseph A. Hill                            58,931
                Joseph C. Hutts                               13,500

EXECUTIVE OFFICERS OF THE COMPANY

         Our executive officers are as follows:

<TABLE>
<CAPTION>

                Name                     Age      Position
                ----                     ---      --------
<S>                                      <C>
                Tarpley B. Jones         44       Chief Executive Officer and President
                Rene P. Moret            47       Chief Executive  Officer and President of
                                                  NAMM California
</TABLE>

         Tarpley B. Jones is our Chief Executive Officer and President and also
serves in the capacity of chief financial officer at this time. Upon
consummation of the Plan, Mr. Jones shall also be Chairman of the Board. Mr.
Jones served as our Executive Vice President and Chief Financial Officer from
February 1, 2000 until January 30, 2002. From February 1997 until January 2000,
Mr. Jones served as President, Chief Executive Officer and a Director of
Cardiology Partners of America, Inc., a physician practice management company
that operated and managed cardiology physician practices and clinics. Mr. Jones
was President of the Surgery Center Division of HEALTHSOUTH Corporation from
January 1996 until January 1997. He was Senior Vice President and Chief
Financial Officer of Surgical Care Affiliates, Inc. ("SCA") from January 1, 1992
until its merger with HEALTHSOUTH in January 1996. Prior to joining SCA, he was
Executive Vice President and Chief Financial Officer of Comdata Holdings
Corporation and Comdata Network.

         Rene P. Moret has served as Chief Executive Officer and President of
NAMM California, since October 2001. In this position, he has responsibility for
the profitability, marketing and operations of NAMM California. Mr. Moret
previously served as Vice President, Operations of NAMM. Prior to joining NAMM,
he was the President of Quadren from April 1997 until May 1999. Also, he was
Executive Director of Humana's HMO in Alabama and Georgia from November 1987
until March 1997.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Exchange Act requires our officers, directors and
persons who own more than 10% of a registered class of our securities to file
reports of ownership and changes in ownership with the SEC.

         Based solely on a review of copies of reports filed with the SEC, all
reports required to be filed with the SEC by Section 16(a) of the Exchange Act
during the most recent fiscal year or prior fiscal years have been filed in a
timely manner.



                                       65
<PAGE>
ITEM 11.      EXECUTIVE COMPENSATION

         The following table sets forth summary information concerning
compensation paid or accrued by or on behalf of our Chief Executive Officer and
our two other most highly compensated executive officers whose total annual
salary and bonus exceeded $100,000 (hereinafter, collectively referred to as the
"Named Executive Officers") for services rendered in all capacities to us for
the years ended December 31, 1999, 2000 and 2001:

<TABLE>
<CAPTION>

                                                               Summary Compensation Table
                                     --------------------------------------------------------------------------------
                                                                                           All Other Compensation
                                     -------------------------------------------------  -----------------------------
                                                   Annual Compensation                               ($)
                                     ------------------------------------------------    ----------------------------

                                                                         Other Annual    Securities         All
                                                                         Compensation    Underlying        Other
Name and Principal Position          Year   Salary($)(1)    Bonus($)         (1)         Options (#)   Compensation($)
---------------------------          ----   ------------    --------     ------------    -----------   ---------------
<S>                                  <C>      <C>          <C>               <C>         <C>            <C>
Thompson S. Dent                     2001     $500,000     $1,750,000(3)      --               --          $8,500(4)
Chairman of the Board, Chief         2000      500,000             --         --               --       1,354,266(5)
Executive Officer and President(2)   1999      500,000             --         --          525,000          71,046(6)

Tarpley B. Jones                     2001      375,000        737,500(8)      --               --           8,500(4)
Executive Vice President and         2000      343,750             --         --               --              --
Chief Financial Officer (7)          1999           --             --         --               --              --

Rene P. Moret                        2001      169,997         90,000(10)     --               --          35,166(4)
Chief Executive Officer and          2000           --             --         --               --              --
President of NAMM California (9)     1999           --             --         --               --              --
</TABLE>

---------------
(1)      Except as otherwise noted, for 1999, 2000 and 2001 the perquisites and
         personal benefits paid to each of the Named Executive Officers was less
         than $50,000 or 10% of the total salary and bonus reported for the
         Named Executive Officers, and, therefore, the amount of such other
         annual compensation is not reported.

(2)      Mr. Dent resigned as President and Chief Executive Officer effective
         January 31, 2002. He will remain as Chairman of the Board until the
         consummation date of the Plan.

(3)      Mr. Dent's 2000 employment agreement provided that he would receive a
         bonus of $1.75 million upon the repayment of borrowings under the
         Citicorp Credit Facility. This bonus was earned and paid 2001.

(4)      Consists of the 2001 contribution of $8,500 to a defined contribution
         retirement plan for each of Messrs. Dent, Jones and Moret and an
         advance of severance due to Mr. Moret in the event of his termination
         without cause of $26,666.

(5)      Includes the 2000 contribution of $8,500 to a defined contribution
         retirement plan, a distribution of $936,766 and a transfer of $409,000
         equal to the cash surrender value of a life insurance policy held by us
         for the benefit of Mr. Dent in connection with the termination of the
         supplemental retirement plan described herein.

(6)      Includes the 1999 contribution of $8,000 to a defined contribution
         retirement plan, and $61,813 which equals the amount accrued in 1999
         pursuant to our former supplemental retirement plan. Also includes
         $1,233 which constitutes the reportable economic benefit in 1999 to Mr.
         Dent of his split dollar insurance policy.

(7)      Mr. Jones became our President and Chief Executive Officer on January
         31, 2002. He will become the Chairman of the Board on the consummation
         date of the Plan.

(8)      Mr. Jones 2000 employment agreement provided that he would receive a
         bonus of $500,000 upon the repayment of borrowings under the Citicorp
         Credit Facility. This bonus was earned and paid in 2001. In addition,
         in 2002 Mr. Jones was paid a performance bonus of $237,500 pursuant to
         his employment agreement effective as of the Petition Date.

(9)      Mr. Moret was named Chief Executive Officer and President of NAMM
         California in October 2001.

(10)     Mr. Moret received a $15,000 stay bonus in 2001 and a performance
         bonus of $75,000 for 2001 which was paid in 2002.

         No options were granted to the Named Executive Officers in 2001. The
Named Executive Officers do not hold any options to purchase our common stock.

RETIREMENT PLAN

         We do not have any retirement plans solely for the benefit of our Named
Executive Officers. The Named Executive Officers participate in our defined
contribution retirement plan as do all eligible employees.




                                       66
<PAGE>

EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

         On the Petition Date, Mr. Dent relinquished the positions of Chief
Executive Officer and President but remains as Chairman of the Board under the
terms of a Separation Agreement and General Release (the "Dent Separation
Agreement"). Mr. Dent's term as Chairman will cease on the effective date of the
Plan (the "Effective Date"), provided, however, that upon 30 days written
notice, Mr. Dent may accelerate his separation date (the "Separation Date") and
relinquish the position of Chairman. The Employment Agreement that Mr. Dent
signed on June 8, 2000 (the "Dent Employment Agreement") will be terminated
effective as of the Separation Date, except that the non-competition and
confidentiality provisions contained therein will remain in full force and
effect.

         Until the Separation Date, Mr. Dent will continue to receive his annual
base salary of $500,000 and the benefits set forth in the Dent Employment
Agreement including vacation and reimbursement of all reasonable expenses
incurred in the performance of his duties. Mr. Dent will not be entitled to any
additional severance or bonus payments as a result of the Dent Separation
Agreement. The Dent Employment Agreement provided that upon termination, Mr.
Dent would receive a severance amount of $1.75 million. However, such severance
amount was subject to offset against any bonus he received under the Dent
Employment Agreement. The Dent Employment Agreement provided that Mr. Dent would
be paid a bonus of up to $1.75 million upon the repayment of borrowings under
the Citicorp Credit Facility. The full amount of the bonus was earned during the
first quarter of 2001 and paid to Mr. Dent during the first and second quarters
of 2001. Accordingly, we are not required to make any additional payment of
severance under the Dent Separation Agreement.

         Mr. Dent has agreed that during the term of his Employment Agreement
and for a period of 24 months following the Petition Date, he will not (i)
operate, develop or own any interest in, other than the ownership of less than
5% of the equity securities of a publicly-traded company, any business which has
significant (viewed in relation to our business, our subsidiaries or affiliates)
or has announced intentions to focus significant resources, relating to the
ownership, management or operation of multi-specialty medical clinics, physician
group practices, IPAs, or other similar entities (each a "Business"), (ii)
compete with us or any of our subsidiaries and affiliates in the operation or
development of any Business within the United States, (iii) be employed by any
business which owns, manages or operates a Business, (iv) interfere with,
solicit, disrupt or attempt to disrupt any past, present or prospective
relationship, contractual or otherwise, between us, our subsidiaries or
affiliates and any customer, client, supplier or employee of ours, our
subsidiaries or affiliates, or (v) solicit any of our employees or the employees
of our subsidiaries or affiliates to leave their employment, or hire any such
employee to work for a Business. The definition of Business included in the Dent
Employment Agreement is intended to include entities that own, manage and
operate multiple clinics, practices, IPAs, physician organizations, etc., and
does not restrict Mr. Dent's employment (i) with a single clinic, group, IPA,
etc. provided such employment is not primarily focused upon the acquisition and
management of multiple physician organizations similar to our operations or (ii)
with an enterprise that owns, manages or operates multiple entities as a single
business enterprise in a single market.

         Pursuant to the Separation Agreement, we released Mr. Dent and Mr. Dent
released us from all claims, except those with respect to (i) obligations under
the Dent Separation Agreement and (ii) claims that Mr. Dent may have under the
Age Discrimination in Employment Act which arise after the date Mr. Dent signed
the Dent Separation Agreement. We will continue to provide a defense for Mr.
Dent and to indemnify him with respect to any costs, expenses, or losses
relating to his roles as an executive officer or director of us or any present
or future subsidiaries or affiliates to the extent allowed under our charter,
bylaws, and our insurance policy.

         On February 25, 2002, a creditor filed a motion to reconsider the
February 15, 2002 order of the Bankruptcy Court authorizing us to assume the
Dent Separation Agreement. We have opposed this motion as we believe that the
assumption of this agreement was a proper exercise of our business judgment.

         Pursuant to an employment agreement dated January 22, 2002 (the "Jones
Employment Agreement"), Mr. Jones became our Chief Executive Officer and
President on the Petition Date. The Jones Employment Agreement is for a
three-year term, with an automatic one year extension unless mutually agreed
otherwise prior to the third year. Pursuant to the Jones Employment Agreement,
Mr. Jones' 2002 compensation consists of an annual salary of $487,000, vacation,
a potential bonus which will not exceed 100% of his base salary, the additional
amounts




                                       67
<PAGE>

described below and reimbursement for all reasonable expenses incurred in the
performance of his duties. The amount of Mr. Jones' bonus will be tied to
objective criteria to be established by the Board of Directors of the
reorganized company upon agreement with Mr. Jones. Mr. Jones' base salary may be
increased each year by the Board of Directors. The Jones Employment Agreement
also provided for the payment to Mr. Jones of $8,333 per month in retroactive
pay beginning October 1, 2001 through the Petition Date and an incentive award
of $237,500 for his performance in 2001. Upon the Effective Date, Mr. Jones will
also receive a success bonus of $110,000.

         Furthermore, the Jones Employment Agreement provides that no later than
120 days after the Effective Date, the reorganized company will issue Mr. Jones
common stock equal to 3.5% of its outstanding common stock and grant him options
to purchase 1.5% of its outstanding common stock in accordance with the terms of
the Jones Employment Agreement.

         If his employment is terminated without cause, Mr. Jones may also be
entitled to receive a lump sum payment on or before his date of termination (the
"Severance Date") equal to (i) all earned but unpaid base salary and annual
incentive award that is owed to him through the Severance Date, (ii) 1/12 of the
sum of the then-current annual base salary plus the amount of his previous
year's annual incentive award, multiplied by the greater of the number of months
remaining in the term of the Jones Employment Agreement or 18 months. We will
also be obligated to contribute to our retirement plan for the account of Mr.
Jones for the first calendar year ending on or after the Severance Date the
entire amount that it would have contributed for that year in the absence of the
termination of Mr. Jones' employment, subject to certain minimum levels as set
forth in the Jones Employment Agreement.

         The Jones Employment Agreement provides that if Mr. Jones' employment
is terminated by us without cause within 24 months of a change of control, other
than as a result of the Bankruptcy Filings, or terminated by Mr. Jones within
six months of a change of control, we will pay to Mr. Jones the amounts
described in the preceding paragraph plus a retention bonus for services
actually rendered on and after the date of the change in control. The retention
bonus will be paid in a lump sum equal to 50% of the sum of his base salary on
the date of resignation or termination (or, if greater, on the date of the
change in control) and the greater of the most recent annual incentive award
earned by Mr. Jones or the current annual incentive award target in effect at
the time of such termination or resignation. In the event Mr. Jones becomes
subject to an excise tax under Section 4999 of the Internal Revenue Code as a
result of any payments or consideration received from us, we will provide
additional payments to Mr. Jones to avoid any adverse economic impact from such
excise tax. In addition, all stock options granted or issued to Mr. Jones will
become fully vested and remain exercisable for one year following the change in
control.

         Mr. Jones has agreed that during the term of the Jones Employment
Agreement and for a period of 12 months following the expiration or termination
thereof, other than termination without cause or for good reason (as defined
therein), Mr. Jones will not (i) make any statements or perform any acts
intended to advance the interest of any existing or prospective competitors of
ours in any way that will injure our interests, (ii) directly or indirectly own
or hold any legal or equitable ownership, whether through stock holdings or
otherwise, of a debt or equity interest (including options, warrants, rights and
convertible interest) in a business firm or entity, or ownership of more than 5%
of any class of equity interest in a publicly-held company, in or be employed by
or receive compensation from any party engaged in the same or any similar
business in the same geographic areas we do business, or (iii) solicit any of
our then-current clients for the purpose of diverting, soliciting or accepting
any business in competition with us or discuss with any of our employees
information or operation of any business intended to compete with us for the
purpose of terminating her or his employment to work for a competitor of ours.
In addition, for a period of 12 months after termination for any reason, Mr.
Jones will not directly or indirectly hire any of our employees to work for a
competitor of ours or solicit or encourage any such employee to leave our employ
for the purpose of working for a competitor of ours.

         On February 25, 2002, a creditor filed a motion to reconsider the
February 15, 2002 order of the Bankruptcy Court authorizing us to assume the
Jones Employment Agreement. We have opposed this motion as we believe that the
assumption of this agreement was a proper exercise of our business judgment.

         Mr. Moret was appointed President and Chief Executive Officer of NAMM
California in October 2001. Pursuant to an employment agreement effective
January 1, 2002 with NAMM California ("Moret Employment Agreement"), Mr. Moret's
compensation consists of an annual salary of $250,000 which can be increased
each year,



                                       68
<PAGE>

personal time off, a discretionary bonus not to exceed 50% of his base salary
and reimbursement for all reasonable business expenses. The Moret Employment
Agreement is for a two-year term, with automatic one year renewals. The Moret
Employment Agreement also provides for severance payments in the event he is
terminated without cause by the company.

         The Moret Employment Agreement provides that if Mr. Moret's employment
is terminated by us without cause within six months of a change of control,
other than as a result of the Bankruptcy Filings, or terminated by Mr. Moret
within six months of a change of control, we will pay to Mr. Moret all accrued
benefits and unreimbursed expenses owed to Mr. Moret but have not been paid as
of the date of his termination (the "Termination Date"). In addition, we shall
continue to pay Mr. Moret his base salary for a period equal to the greater of
(i) the remaining term of the Moret Employment Agreement or (ii) twelve months
after the Termination Date as well as continue to provide his health insurance
benefits for such period. If Mr. Moret is terminated without cause when there is
no change of control and his Termination Date is after the effective date of the
Plan, we shall continue to pay Mr. Moret his base salary for six months after
the Termination Date and continue to provide his health insurance benefits for
such period. In addition, we will pay Mr. Moret all accrued benefits and
unreimbursed expenses that have not been paid as of his Termination Date. Our
obligation to continue paying Mr. Moret's base salary and continue providing his
health insurance benefits will cease upon notification by Mr. Moret that he has
commenced employment with another employer.

         Mr. Moret has agreed that during the term of the Moret Employment
Agreement and for a period of 18 months following the expiration or termination
thereof, Mr. Moret will not (i) operate, develop or own any interest in, other
than the ownership of less than 5% of the equity securities of a publicly-traded
company, be employed by, serve as a consultant to, or compete with us, our
subsidiaries or affiliates in the operation or development of, any business
which (A) involves the ownership, management or operation of IPAs, (B) owns,
operates or manages an entity which holds a limited Knox-Keene license in the
State of California or any entity which has operations similar to an entity
which holds a limited Knox-Keene license or (C) provides management and
consulting services to medical clinics, physician group practices, IPAs, health
system based medical groups, independently-owned clinics or other similar
entities; (ii) interfere with, solicit, disrupt or attempt to disrupt any past,
present or prospective relationship, contractual or otherwise, between us, our
subsidiaries or affiliates and any physician, IPA, employer, insuror, customer,
client, supplier or employee of ours, our subsidiaries or affiliates, including
soliciting any physician under contract with an IPA associated with or managed
by us, our subsidiaries or affiliates; or (iii) solicit any of our employees or
the employees of our subsidiaries or affiliates to leave their employment with
us, our subsidiaries or affiliates, as the case may be, or hire any such
employee.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         During 2001 and until March 19, 2002, the Compensation Committee of the
Board of Directors consisted of Mr. Ashworth, Drs. Dunn and Hill, and until his
resignation, Mr. Moorhead. The Audit Committee was disbanded and its
responsibilities assumed by the Board of Directors on March 19, 2002. No member
of our former Compensation Committee was at any time one of our officers or
employees or an officer or employee of any of our subsidiaries, nor has any
member had any relationship with us requiring disclosure, except for Dr. Hill
whose relationship is described under the caption "Certain Relationships and
Related Transactions."




                                       69
<PAGE>

ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information regarding beneficial
ownership as of March 31, 2002 (unless otherwise indicated) by (i) all
directors, nominees for directors and executive officers, (ii) each person known
by us to be the beneficial owner of more than 5% of our common stock, and (iii)
all directors and officers as a group. Except as otherwise indicated, the
beneficial owners listed below have sole voting and investment power with
respect to all shares owned by them, except to the extent such power is shared
by a spouse under applicable law.

<TABLE>
<CAPTION>

                                                                  Shares Beneficially            Percentage of
Name and Address of Beneficial Owner(1)                                 Owned(2)              Outstanding Shares
---------------------------------------                           -------------------         ------------------
<S>                                                                      <C>                       <C>
Thompson S. Dent (3)                                                     165,907                           *
Joseph C. Hutts (4)                                                    2,150,851                        2.9%
Ronald B. Ashworth (5)                                                   142,862                           *
Dr. Winfield Dunn (6)                                                    103,228                           *
Dr. Joseph A. Hill (7)                                                   128,540                           *
Tarpley B. Jones                                                              --                           *
Rene P. Moret                                                              5,000                           *
Warburg, Pincus Equity Partners, L.P. (8)                              9,032,206                       12.3%
All directors and officers as a group (7 persons) (9)                  2,691,388                        3.6%
</TABLE>

---------------
*        Less than 1%.
(1)      Except as otherwise indicated, the addresses for each director, nominee
         for director, executive officer and beneficial owner is: care of
         PhyCor, Inc., 30 Burton Hills, Suite 400, Nashville, Tennessee 37215.
(2)      Includes shares of common stock subject to options which may be
         exercised within 60 days of March 31, 2002. Such shares are deemed to
         be outstanding for the purposes of computing the percentage ownership
         of the individual holding such shares, but are not deemed outstanding
         for purposes of computing the percentage of any other person shown in
         the table.
(3)      Of Mr. Dent's 165,907 shares, 14,950 are owned by his wife, Joy
         Griffith Dent, and 141,977 shares are held in four trusts by Mr. Dent
         for the benefit of members of his immediate family.
(4)      Includes options to acquire 2,047,180 shares of common stock.
(5)      Includes options to purchase 95,750 shares of common stock and 44,775
         shares of restricted common stock.
(6)      Includes options to purchase 97,438 shares of common stock and 436
         shares of restricted common stock.
(7)      Includes options to purchase 97,438 shares of common stock and 436
         shares of restricted common stock.
(8)      Warburg, Pincus Equity Partners, L.P., including three related limited
         partnerships ("WPEP"), is an investment fund. Warburg, Pincus is the
         sole general partner of WPEP. WPEP is managed by E.M. Warburg, Pincus &
         Co., LLC ("EMW LLC"). Lionel I. Pincus is the managing partner of
         Warburg, Pincus and the managing member of EMW LLC, and may be deemed
         to control both entities. The address of the Warburg, Pincus entities
         is 466 Lexington Avenue, New York, NY 10017.
(9)      Includes options to purchase 2,337,806 shares of common stock and
         45,647 shares of restricted common stock.

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Dr. Joseph A. Hill, one of our current directors, was a shareholder of
the Doctors' Clinic. We managed the Doctors' Clinic pursuant to a 40-year
service agreement which terminated effective March 31, 2001. Under the service
agreement, we received a management fee for our 2001 services of approximately
$4.0 million which equaled the clinic expenses incurred by us plus a percentage
of operating income of the clinic.

         Mr. Dent, our Chairman, is a shareholder of HRT and was a director of
HRT from 1993 until February 2001. Property previously occupied by the Doctors'
Clinic is leased from HRT by PhyCor of Vero Beach, Inc., one of our wholly-owned
subsidiaries, at a base rental of approximately $1.2 million per year until
2008. First Physician Care of South Florida, Inc., another wholly-owned
subsidiary, leases property from HRT at a base rental of approximately $400,000
per year pursuant to a lease which terminates in 2009. In addition, we have
guaranteed the lease obligations of our formerly affiliated Roanoke, Virginia
physician group, Lewis-Gale Clinic, LLC, to HRT.



                                       70
<PAGE>

Lewis-Gale Clinic, LLC leases properties under a 15-year agreement with HRT
which includes rent and certain operating expenses. During 2001, we paid HRT
$647,000 under the leases on Florida properties. During 2001, we defaulted on
these two lease obligations and lease guarantees. On February 1, 2002, the
Bankruptcy Court entered an order approving the rejection of certain executory
contracts and lease obligations including our obligations to HRT under the
leases and related subleases. HRT has filed a substantial claim with the
Bankruptcy Court related to these lease obligations. Additional creditors have
also filed claims with the Bankruptcy Court relating to certain rejected
executory contracts and leases.

                                     PART IV

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

(a)      Index to Consolidated Financial Statements, Financial Statement
         Schedules and Exhibits

         (1)      Financial Statements: See Item 8 herein.

         (2)      Financial Statement Schedules:

              Independent Auditors' Report                             S-1

              Schedule II - Valuation and Qualifying Accounts          S-2

              All other schedules are omitted, because they are not applicable
              or not required, or because the required information is included
              in the consolidated financial statements or notes thereto.

         (3)      Exhibits:

Exhibit
Number         Description of Exhibits
-------        -----------------------

2.1       --   Amended Joint Reorganization Plan of PhyCor, Inc. and Debtor
               Subsidiaries (1)
3.1       --   Amended Bylaws of the Company (2)
3.2       --   Restated Charter of the Company (2)
3.3       --   Amendment to Restated Charter of the Company (3)
3.4       --   Amendment to Restated Charter of the Company (4)
4.1       --   Form of 4.5% Convertible Subordinated Debenture due 2003 (5)
4.2       --   Form of Indenture by and between the Company and First
               American National Bank, N.A. (5)
10.1      --   Credit and Security Agreement between the Company and AmSouth
               Bank (6)
10.2      --   Company's Amended 1988 Incentive Stock Plan (7)
10.3      --   Company's Amended 1992 Non-Qualified Stock Option Plan for
               Non-Employee Directors (7)
10.4      --   Company's Savings and Profit Sharing Plan (8)
10.5      --   Company's 1999 Stock Incentive Plan (9)
10.6      --   Form of IPA Commercial Risk Services Agreement between
               Pacificare of California and a Company Subsidiary (6)
10.7      --   Form of IPA Medicare Partial Risk Services Agreement between
               Pacificare of California and a Company Subsidiary (6)
10.8      --   Reserved
10.9      --   Risk Contract Management Agreement, dated as of May 1, 1995,
               by and between North American Medical Management-Illinois, Inc.
               and Elmhurst Physician Hospital Organization, LLC (10)
10.10     --   First Amendment to Risk Contract Management Agreement, dated
               as of November 1, 1996, by and between Elmhurst Physician
               Hospital Organization, LLC and North American Medical Management
               - Illinois, Inc. (10)
10.11     --   Amendment to Risk Contract management Agreement, dated as of
               May 1, 2000, by and between Elmhurst Physician Hospital
               Organization, LLC and North American Medical Management-Illinois,
               Inc. (10)
10.12     --   Management Services Agreement, dated as of September 1, 1998,
               by and between North American Medical Management - Illinois, Inc.
               and Health Options Illinois, Inc. (10)




                                       71
<PAGE>

10.13     --   Management Agreement by and between North American Medical
               Management - Illinois, Inc. and Ingalls Provider Group (10)
10.14     --   Amendment to Management Agreement, dated November 30, 1999, by
               and between Ingalls Provider Group and North American Medical
               Management - Illinois, Inc. (10)
10.15     --   Management Agreement, dated April 1, 2000, by and between
               North American Medical Management -Illinois, Inc. and Northwest
               Community Capco, Inc. (10)
10.16     --   Management Agreement, dated October 1, 1999, by and between
               North American Medical Management -Illinois, Inc. and Silver
               Cross Managed Care Organization (10)
10.17     --    Management Agreement, dated August 1, 1996, by and between
               NAMM-Illinois, Inc. and Swedish Covenant Managed Care Alliance,
               Inc. (10)
10.18     --   Amendment to Management Agreement, dated December 31, 1999, by
               and between Swedish Covenant Managed Care Alliance, Inc. and
               North American Medical Management-Illinois, Inc. (10)
10.19     --   Management Services Agreement by and between Kansas City
               Physician Management, LLC and New Century Health Quality
               Alliance, Inc. (10)
10.20     --   Management Agreement, dated April 1, 1996, by and between IPA
               Management Associates, Inc. and Quality Care Network of Texas,
               Ltd. (10)
10.21     --   Full Service Management Agreement by and between Tri-Co, LLC
               and Tri-County Physicians Association, Inc. (10)
10.22     --   Management Agreement, dated October 15, 1999, by and among
               PhyCor of Rockford, Inc., PhyCor, Inc., Rockford Health System
               and Rockford Memorial Health Services Corporation (10)
10.23     --   Addendum to Management Agreement by and among PhyCor of
               Rockford, Inc., PhyCor, Inc., Rockford Health System, Inc. and
               Rockford Memorial Health Services Corporation (10)
10.24     --   Service Agreement, dated November 30, 2000, by and between
               PhyCor of Western Tidewater, Inc., and Lakeview Medical Center,
               Inc. (10)
10.25     --   Service Agreement, dated September 30, 2000, by and between
               SynerPhy of Rome, Inc. and Harbin Clinic, LLC (10)
10.26     --   Employment Agreement dated January 22, 2002 between Mr. Jones
               and the Company (1)
10.27     --   Separation Agreement and General Release dated January 22,
               2002 between Mr. Dent and the Company (1)
10.28     --   Amended and Restated Employment Agreement dated January 1,
               2002 between Mr. Moret and North American Medical Management
               California, Inc. (1)
21        --   List of subsidiaries of the Company (1)
23        --   Consent of KPMG LLP (1)
------------------------
(1)      Filed herewith.
(2)      Incorporated by reference to exhibits filed with the Annual Report on
         Form 10-K for the year ended December 31, 1994, Commission No. 0-19786.
(3)      Incorporated by referenced to exhibits filed with the Company's
         Registration Statement on Form S-3, Commission No. 33-93018.
(4)      Incorporated by referenced to exhibits filed with the Company's
         Registration Statement on Form S-3, Commission No. 33-98528.
(5)      Incorporated by reference to exhibits filed with the Company's
         Registration Statement on Form S-3, Registration No. 333-328.
(6)      Incorporated by reference to exhibits filed with the Company's
         Quarterly Report on Form 10-Q for the quarter ended September 30, 2001,
         Commission No. 0-19786.
(7)      Incorporated by reference to exhibits filed with the Company's Annual
         Report on Form 10-K for the year ended December 31, 1997, Commission
         No. 0-19786.
(8)      Incorporated by reference to exhibits filed with the Company's Annual
         Report on Form 10-K for the year ended December 31, 1993, Commission
         No. 0-19786.
(9)      Incorporated by reference to exhibits filed with the Company's Annual
         Report on Form 10-K for the year ended December 31, 1999, Commission
         No. 0-19786.
(10)     Incorporated by reference to exhibits filed with the Company's Annual
         Report on Form 10-K for the year ended December 31, 2000, Commission
         No. 0-19786.



                                       72
<PAGE>
                  EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS

The following is a list of all executive compensation plans and arrangements
filed as exhibits to this Annual Report on Form 10-K:

         (1)      Employment Agreement, dated as of January 22, 2002, between
                  the Company and Mr. Jones (filed as Exhibit 10.26)

         (2)      Separation Agreement and General Release, dated as of January
                  22, 2002, between the Company and Mr. Dent (filed as Exhibit
                  10.27)

         (3)      Amended and Restated Employment Agreement, dated as of January
                  1, 2002, between the Company and Mr. Moret (filed as Exhibit
                  10.28)

         (4)      Company's Amended 1988 Incentive Stock Plan (filed as Exhibit
                  10.2)

         (5)      Company's Amended 1992 Non-Qualified Stock Option Plan for
                  Non-Employee Directors (filed as Exhibit 10.3)

         (6)      Company's 1999 Incentive Stock Plan (filed as Exhibit 10.5)

(b)      Reports on Form 8-K

         Not applicable.

         (c)      Exhibits

                  The response to this portion of Item 14 is submitted as a
                  separate section of this report. See Item 14(a)(3)

         (d)      Financial Statement Schedules

                  The response to this portion of Item 14 is submitted as a
                  separate section of this report. See Item 14(a)(2).




                                       73
<PAGE>
                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Nashville, State of Tennessee, on April 12, 2002.

                                   PHYCOR, INC.


                                   By: /s/ Tarpley B. Jones
                                       -------------------------------------
                                           Tarpley B. Jones
                                           Chief Executive Officer and President

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Company
and in the capacities and on the date indicated.


<TABLE>
<CAPTION>

<S>                                       <C>                                            <C>
/s/ Thompson S. Dent                      Chairman of the Board and Director             April 12, 2002
------------------------------------
Thompson S. Dent


/s/ Tarpley B. Jones                      Chief Executive Officer and President          April 12, 2002
------------------------------------      (acting as principal  financial and
Tarpley B. Jones                          principal accounting officer)


/s/ Joseph C. Hutts                       Director                                       April 9, 2002
------------------------------------
Joseph C. Hutts


/s/ Ronald B. Ashworth                    Director                                       April 8, 2002
------------------------------------
Ronald B. Ashworth


/s/ Winfield Dunn                         Director                                       April 8, 2002
------------------------------------
Winfield Dunn


/s/ Joseph A. Hill                        Director                                       April 8, 2002
------------------------------------
Joseph A. Hill, M.D.

</Table>



                                       74
<PAGE>
                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
PhyCor, Inc.:

         Under date of April 11, 2002, we reported on the consolidated balance
sheets of PhyCor, Inc. and subsidiaries as of December 31, 2001 and 2000, and
the related consolidated statements of operations, shareholders' deficit and
cash flows for each of the years in the three-year period ended December 31,
2001 as contained in the 2001 annual report to shareholders. These consolidated
financial statements and our report thereon are included in the Annual Report on
Form 10-K for the year 2001. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related financial
statement schedule. The financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statement schedule based on our audits.

         In our opinion, the financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
The audit report on the consolidated financial statements of PhyCor, Inc. and
subsidiaries referred to above contains an explanatory paragraph that states
that the Company has suffered recurring losses from operations, has a net
capital deficiency and has a net working capital deficit that raise substantial
doubt about its ability to continue as a going concern. On January 31, 2002, the
Company and 47 of its subsidiaries filed voluntary petitions for relief under
Chapter 11 of the United States Bankruptcy Code. Management has developed a plan
of reorganization for approval by the Company's creditors and confirmation by
the U.S. Bankruptcy Court. If the plan of reorganization is accepted,
continuation of the business thereafter is dependent on the Company's ability to
achieve successful future operations. The consolidated financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classifications
of liabilities that might result from the outcome of this uncertainty.

                                       /s/  KPMG LLP
                                       -----------------------------------------
                                       Nashville, Tennessee
                                       April 11, 2002





                                       S-1
<PAGE>
                          PHYCOR, INC. AND SUBSIDIARIES
                                   SCHEDULE II
                        VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>

                                                 Beginning       Additions                                          Ending
                                                  Balance         Expense      Deductions          Other(1)         Balance
                                                 ---------       ---------     ----------          --------         -------
<S>                                              <C>             <C>           <C>                 <C>              <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND
CONTRACTUAL ADJUSTMENTS (IN THOUSANDS)

December 31, 1999                                 $230,785       1,468,674     (1,601,421)          68,382          166,420
                                                  ========       =========     ==========           ======          =======
December 31, 2000                                 $166,420         814,377     (1,015,742)          36,980            2,035
                                                  ========       =========     ==========           ======          =======
December 31, 2001                                 $  2,035          10,342        (11,260)              --            1,117
                                                  ========       =========     ==========           ======          =======

</TABLE>

(1)      Represents allowances of operations held for sale



                 See accompanying independent auditors' report.





                                       S-2
<PAGE>

                                  EXHIBIT INDEX


Exhibit
Number         Description of Exhibits
-------        -----------------------

2.1       --   Amended Joint Reorganization Plan of PhyCor, Inc. and Debtor
               Subsidiaries (1)
3.1       --   Amended Bylaws of the Company (2)
3.2       --   Restated Charter of the Company (2)
3.3       --   Amendment to Restated Charter of the Company (3)
3.4       --   Amendment to Restated Charter of the Company (4)
4.1       --   Form of 4.5% Convertible Subordinated Debenture due 2003 (5)
4.2       --   Form of Indenture by and between the Company and First
               American National Bank, N.A. (5)
10.1      --   Credit and Security Agreement between the Company and AmSouth
               Bank (6)
10.2      --   Company's Amended 1988 Incentive Stock Plan (7)
10.3      --   Company's Amended 1992 Non-Qualified Stock Option Plan for
               Non-Employee Directors (7)
10.4      --   Company's Savings and Profit Sharing Plan (8)
10.5      --   Company's 1999 Stock Incentive Plan (9)
10.6      --   Form of IPA Commercial Risk Services Agreement between
               Pacificare of California and a Company Subsidiary (6)
10.7      --   Form of IPA Medicare Partial Risk Services Agreement between
               Pacificare of California and a Company Subsidiary (6)
10.8      --   Reserved
10.9      --   Risk Contract Management Agreement, dated as of May 1, 1995,
               by and between North American Medical Management-Illinois, Inc.
               and Elmhurst Physician Hospital Organization, LLC (10)
10.10     --   First Amendment to Risk Contract Management Agreement, dated
               as of November 1, 1996, by and between Elmhurst Physician
               Hospital Organization, LLC and North American Medical Management
               - Illinois, Inc. (10)
10.11     --   Amendment to Risk Contract management Agreement, dated as of
               May 1, 2000, by and between Elmhurst Physician Hospital
               Organization, LLC and North American Medical Management-Illinois,
               Inc. (10)
10.12     --   Management Services Agreement, dated as of September 1, 1998,
               by and between North American Medical Management - Illinois, Inc.
               and Health Options Illinois, Inc. (10)
10.13     --   Management Agreement by and between North American Medical
               Management - Illinois, Inc. and Ingalls Provider Group (10)
10.14     --   Amendment to Management Agreement, dated November 30, 1999, by
               and between Ingalls Provider Group and North American Medical
               Management - Illinois, Inc. (10)
10.15     --   Management Agreement, dated April 1, 2000, by and between
               North American Medical Management -Illinois, Inc. and Northwest
               Community Capco, Inc. (10)
10.16     --   Management Agreement, dated October 1, 1999, by and between
               North American Medical Management -Illinois, Inc. and Silver
               Cross Managed Care Organization (10)
10.17     --    Management Agreement, dated August 1, 1996, by and between
               NAMM-Illinois, Inc. and Swedish Covenant Managed Care Alliance,
               Inc. (10)
10.18     --   Amendment to Management Agreement, dated December 31, 1999, by
               and between Swedish Covenant Managed Care Alliance, Inc. and
               North American Medical Management-Illinois, Inc. (10)
10.19     --   Management Services Agreement by and between Kansas City
               Physician Management, LLC and New Century Health Quality
               Alliance, Inc. (10)
10.20     --   Management Agreement, dated April 1, 1996, by and between IPA
               Management Associates, Inc. and Quality Care Network of Texas,
               Ltd. (10)
10.21     --   Full Service Management Agreement by and between Tri-Co, LLC
               and Tri-County Physicians Association, Inc. (10)
10.22     --   Management Agreement, dated October 15, 1999, by and among
               PhyCor of Rockford, Inc., PhyCor, Inc., Rockford Health System
               and Rockford Memorial Health Services Corporation (10)
10.23     --   Addendum to Management Agreement by and among PhyCor of
               Rockford, Inc., PhyCor, Inc., Rockford Health System, Inc. and
               Rockford Memorial Health Services Corporation (10)
10.24     --   Service Agreement, dated November 30, 2000, by and between
               PhyCor of Western Tidewater, Inc., and Lakeview Medical Center,
               Inc. (10)
<PAGE>

10.25     --   Service Agreement, dated September 30, 2000, by and between
               SynerPhy of Rome, Inc. and Harbin Clinic, LLC (10)
10.26     --   Employment Agreement dated January 22, 2002 between Mr. Jones
               and the Company (1)
10.27     --   Separation Agreement and General Release dated January 22,
               2002 between Mr. Dent and the Company (1)
10.28     --   Amended and Restated Employment Agreement dated January 1,
               2002 between Mr. Moret and North American Medical Management
               California, Inc. (1)
21        --   List of subsidiaries of the Company (1)
23        --   Consent of KPMG LLP (1)
------------------------
(1)      Filed herewith.
(2)      Incorporated by reference to exhibits filed with the Annual Report on
         Form 10-K for the year ended December 31, 1994, Commission No. 0-19786.
(3)      Incorporated by referenced to exhibits filed with the Company's
         Registration Statement on Form S-3, Commission No. 33-93018.
(4)      Incorporated by referenced to exhibits filed with the Company's
         Registration Statement on Form S-3, Commission No. 33-98528.
(5)      Incorporated by reference to exhibits filed with the Company's
         Registration Statement on Form S-3, Registration No. 333-328.
(6)      Incorporated by reference to exhibits filed with the Company's
         Quarterly Report on Form 10-Q for the quarter ended September 30, 2001,
         Commission No. 0-19786.
(7)      Incorporated by reference to exhibits filed with the Company's Annual
         Report on Form 10-K for the year ended December 31, 1997, Commission
         No. 0-19786.
(8)      Incorporated by reference to exhibits filed with the Company's Annual
         Report on Form 10-K for the year ended December 31, 1993, Commission
         No. 0-19786.
(9)      Incorporated by reference to exhibits filed with the Company's Annual
         Report on Form 10-K for the year ended December 31, 1999, Commission
         No. 0-19786.
(10)     Incorporated by reference to exhibits filed with the Company's Annual
         Report on Form 10-K for the year ended December 31, 2000, Commission
         No. 0-19786.