<PAGE>   1            SECURITIES AND EXCHANGE COMMISSION

                         WASHINGTON, D.C. 20549



                              FORM 10 - K


         [ X ] ANNUAL REPORT PURSUANT  TO SECTION 13 OR 15 (d)

                 OF THE SECURITIES EXCHANGE ACT OF 1934

              For the fiscal year ended December 31, 2001
                                  OR


         [   ] TRANSITION REPORT PURSUANT SECTION 13 OR 15 (d)

                 OF THE SECURITIES EXCHANGE ACT OF 1934

               For the transition period from         to


                      Commission File No.  0-23998



                    FIRST CHOICE HEALTH NETWORK, INC.
         (Exact name of Registrant as specified in its charter)

       Washington                                            91-1272766
(State or Other Jurisdiction of	                     (I.R.S. Employer
 Incorporation or Organization)	                     Identification No.)

                               601 Union Street
                                  Suite 1100
                        Seattle, Washington 98101-1838
                            (Address of principal
                              executive offices)

                Issuer's Telephone Number, Including Area Code

                                (206) 292-8255
               (Issuer's telephone number, including area code)







                                      1

<PAGE>   2
    Securities registered pursuant to Section 12 (b) of the Act: None


         Securities to be registered under Section 12 (g) of the Act:
             Class A Common Stock, par value $1.00 per share


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-B is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.  [    ]


There is no trading market for the Registrants voting stock (Class A Common
Stock, $1.00 par value and Class B Common Stock, $1.00 par value) and,
accordingly, the market value of the voting stock held by non-affiliates of
the Registrant based on bid and asked prices cannot be determined.


The aggregate number of Registrant's shares outstanding on December 31, 2001
was 539 shares of Class A Common Stock, and 40,600 shares of Class B Common
Stock, $1.00 par value, respectively.



Transitional Small Business Disclosure Format ( check one ):


                        Yes   ______        No   __X__

Documents incorporated by reference:

None



                                      2

<PAGE>   3
<TABLE>
<S>   <C>         <C>                                                 <C>
PART  I
      ITEM 1      DESCRIPTION OF BUSINESS                              4

      ITEM 2      DESCRIPTION OF PROPERTY                              9

      ITEM 3      LEGAL PROCEEDINGS                                    9

      ITEM 4      SUBMISSION OF MATTERS
                  TO A VOTE OF SECURITY HOLDERS                        9

PART  II

      ITEM 5      MARKET FOR COMMON EQUITY AND
                  RELATED STOCKHOLDER MATTERS                          9

      ITEM 6      SELECTED FINANCIAL DATA                             10

      ITEM 7      MANAGEMENT'S DISCUSSION AND ANALYSIS
                  OF FINANCIAL CONDITION AND RESULTS OF
                  OPERATIONS                                          10

      ITEM 7A     QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
                  MARKET RISK                                         13

      ITEM 8      FINANCIAL STATEMENTS AND
                  SUPPLEMENTARY DATA                                  14

      ITEM 9      CHANGES IN AND DISAGREEMENTS WITH
                  ACCOUNTANTS ON ACCOUNTING AND
                  FINANCIAL DISCLOSURE                                31

PART  III

      ITEM 10     DIRECTORS AND EXECUTIVE OFFICERS OF
                  FIRST CHOICE HEALTH NETWORK, INC.                   32

      ITEM 11     EXECUTIVE COMPENSATION                              39

      ITEM 12     SECURITY OWNERSHIP OF CERTAIN
                  BENEFICIAL OWNERS AND MANAGEMENT                    40

      ITEM 13     CERTAIN RELATIONSHIPS AND RELATED
                  TRANSACTIONS                                        42

PART  IV

      ITEM 14     EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
                  AND REPORTS ON FORM 8-K                             43

                  SIGNATURES                                          47
</TABLE>
                                     3

<PAGE>   4                                         PART  I
DESCRIPTION OF BUSINESS

GENERAL

ITEM 1.

First Choice Health Network, Inc., ("the Network") is a provider-owned,
managed health care company which has established a network of physicians,
hospitals and other health care providers (a "Preferred Provider
Organization" or "PPO") located primarily in the State of Washington
for the provision of health care services.  A small portion of the PPO is
located in each of Alaska, Idaho and Montana.  The Network contracts with
the health care providers in its PPO for the provision of health care services
on a discounted fee basis and contracts with self-insured employers, indemnity
insurers, health maintenance organizations, union trusts (collectively,
"Health Plans") and third party administrators ("TPAs"), to provide their
subscribers (or members) access to the PPO, for which it receives a fee
from the Health Plan or the TPA, as applicable, typically on a per subscriber
(or member) per month basis.  An additional per subscriber (or member) monthly
fee is received in the event the Health Plan or TPA elects to receive
utilization management services.  In addition, the hospitals participating
in the PPO pay the Network an administrative fee under their respective
participating health care facility service contracts.

At December 31, 2001, the Network had arrangements with TPA's
and health plans representing approximately 1.2 million members
and their dependents (collectively "Covered Persons").  Essentially all of
the Company's revenues were derived from services performed in the state of
Washington during the year ended December 31, 2001.

The Network's success depends to a significant degree on its ability to
control health care costs for the Health Plans and TPA's utilizing its
PPO.

An integral part of the Network's PPO is its comprehensive quality assurance
program.  This program is designed to maintain and improve proper medical
care and includes verification of physicians' credentials and hospital
accreditation, medical care evaluations, outcome studies which evaluate
hospital admissions and referral patterns and the processing of Covered
Persons' grievances.  In excess of 85% of the PPO physicians are board
certified or board eligible in one or more specialties.

First Choice Health Network, a corporation organized under the laws of the
state of Washington in 1984, is owned by 539 physicians, all of whom own
Class A Common Stock; seven hospitals who own Class B Common Stock, and four
hospital participants.

During 1995, the Network formed a wholly-owned subsidiary, First Choice
Health Plan, Inc. ("the Plan"), to operate as a health care service contractor
("HCSC") that permits the Company to assume risk for healthcare services in
its operations.

An HCSC is an organization that arranges for the provision and delivery of
health care services for a fixed periodic premium through a network of
providers who generally receive either a capitation fee (a fixed periodic fee
per covered member) or a negotiated fee for the health care services rendered.
HCSC's may use a "gatekeeper" system of health care delivery where each member
is serviced by a primary care physician (generally, a family practitioner,
pediatrician or internist).  The primary care physician provides medical care
related to the general health of the HMO member and refers members to
specialists and other health care providers, as appropriate.  HCSC's differ
from PPO's in that they are permitted to assume the financial risk of the cost
of health care services.  HCSC's are required to register with the state of
                                     4

<PAGE>   5
Washington Office of Insurance Commissioner.  Filing requirements include
filing copies of organizational documents, financial disclosure, forms of
agreements to be issued to members, a schedule of proposed rates of
reimbursement to providers, solicitation materials and a description of
grievance procedures and a quality assurance program.

Risked Based Capital ("RBC") requirements were adopted by the state of
Washington and the NAIC effective for 1998 and subsequent years, which
established that certain required amounts of capital be maintained.
As of December 31, 2000, the Plan's RBC was less than the required amount
by $402,987.  The Plan subsequently cured this capital deficiency in
March 2001.  As of December 31, 2001, the Plan's RBC exceeded the required
amount in connection with its statutory filing.

During 1998, the Plan filed an application with the Federal Health Care
Financing Administration ("HCFA"), now known as the Centers for Medicare and
Medicaid Services (CMS) for a license to offer a Medicare risk product called
SeniorsFirst.  The medicare application was approved in the
third quarter of 1998 and the first sales of the product occurred on
January 1, 1999.  As of December 31, 1999, 2000 and 2001,there were 2,585,
2,973 and 0 members, respectively, and collected premiums of $6,338,440,
$19,060,419 and $0, respectively.  The Plan ceased offering this product on
January 1, 2001.

Redeemable Equity Participation

On December 20, 1999, First Choice Health Network, Inc. executed an agreement
with the University of Washington Academic Medical Center ("UWMC") to become a
participant in the administration, operations and any incentives bestowed upon
any shareholders in First Choice Health Network effective January 1, 2000.
First Choice offers and operates a preferred provider organization and a
managed care delivery system for cost-effective, quality health care benefits,
and for comprehensive health care claims processing and administration.
University of Washington Academic Medical Center has agreed to pay the
affiliation fee of $2,520,000, payable $1,260,000 upon execution of the
Agreement and the remaining $1,260,000 will be paid in three equal payments of
$420,000 due annually for three years plus interest at five percent (5%).

UWMC does not become a shareholder or member of the Network.  UWMC shall
participate in any incentive or reward program established by the Network as
if UWMC owned 5,800 shares of class B common stock.  Dividends, distributions,
and liquidation of the Network are also determined as if UWMC owned 5,800
shares of class B stock.

If the Network performs certain actions that substantially change the
organization, the Network discontinues the health care facility services
contract with UWMC, or if total managed care enrollment falls below 500,000
member months, then UWMC can withdraw from the agreement, but no refunds are
given.  If the Network merges, is sold, or if the Network takes a material
action that proves detrimental to UWMC, then UWMC may redeem their interest
for the equivalent of the fair value of 5,800 class B common shares of the
Network stock, less any amounts still owed by UWMC.

PRODUCTS

First Choice Health Network's Preferred Provider Organization (PPO)

The Network's PPO is comprised of physicians, hospitals and other health care
providers in the states of Washington, Alaska, Idaho and Montana who are
required to sign preferred physician contracts, health care facility service
contracts and provider contracts, respectively, under which the health care

                                     5

<PAGE>   6
provider agrees to accept, as payment in full, the discounted fee schedule
negotiated by the Network for each covered service; such agreements are
terminable on 90 days notice.

Physicians


The Network seeks to include within its PPO high-quality, cost-effective
physicians who have admitting privileges at a participating PPO hospital.  In
addition, physicians are recruited in geographic areas in which the Network's
PPO does not have a physician presence if a prospective Health Plan has a
large number of Covered Persons in such area.  Upon receipt of an application
by a physician to participate in the PPO, the Network conducts its own
credentialing process (separate and distinct from those performed by
participating hospitals with respect to physicians with admitting privileges),
evaluating relevant information such as malpractice insurance, claims activity
and the physician's standing with licensing regulatory authorities.  The number
of contracted physicians is 11,000 at December 31, 2001.

Hospitals

The Network has contracts with hospitals in most counties in the State of
Washington and in each county in which it conducts business in other states.
The PPO offers Covered Persons a full range of hospital services, including
tertiary care.

The Network seeks to attract hospitals rendering high-quality, cost-effective
care.  Prior to contracting with a hospital, the Network reviews the hospital's
accreditation, federal and state certifications, and internal and external
claims data and reports, including data available from regulatory agencies.
The number of contracted hospitals is 100 at December 31, 2001.


Other Health Care Providers

The Network has contracts with many health care providers (other than
physicians and hospitals) which, among other services, provide mental health
care, diagnostic services, chiropractic services, physical therapy, out-patient
surgery, laboratory services and home health care.  The number of contracted
other health care providers is 5,000 at December 31, 2001.

The Network has also developed a pharmacy network in the state of
Washington, which provides data with respect to utilization of prescribed
drugs by physicians participating in the PPO, which the Network intends to
incorporate into its utilization management program.

Utilization Management Services

In addition to providing Health Plans with access to its PPO, the Network
offers a utilization management program for an additional per subscriber (or
member) monthly fee to the Health Plan.  The goal of the utilization
management program is to ensure that high quality health care is consistently
delivered to Covered Persons in an efficient and cost-effective manner.  The
program includes individual case reviews of hospital admissions, outpatient
surgery, primary care physician referrals to specialists, management of
catastrophic, psychiatric and substance abuse cases, profiling practice
patterns of individual physicians and evaluation of hospital utilization
patterns.

At December 31, 2001, the Network had contractual arrangements through
which Health Plans and TPA's representing approximately 1.2 million
Covered Persons, utilized the company's PPO.  The

                                     6

<PAGE>   7
Network receives a fee for providing access to its PPO, typically on
a per subscriber per month basis, from the Health Plan or TPA.  The per
subscriber monthly fee is generally fixed for a twelve-month
period under contracts with each Health Plan or TPA, and is based upon the
extent of the network utilized (hospitals and/or physicians) and whether
utilization management services are requested.

First Choice Health Plan Products

The Plan offers health care coverage to employer groups, Association Plans as
well as a Medicare Supplement product:

Association Plans

These plans include a plan offered through Costco Wholesale and a plan offered
through the Employers Health Purchasing Cooperative which are tailor made to
targeted populations of employees.

Medicare Risk

In 1999 and 2000 the Plan offered a medicare risk product called SeniorsFirst
for persons eligible to receive Medicare (parts A and B) at no or minimal cost
to the member.  SeniorsFirst was a medicare managed care plan that combines
health insurance and health services in one organization, a Medicare + Choice
HMO.  SeniorsFirst offered the same benefits that original medicare offers and
additional benefits, which may change from year to year.  Under this program,
the Health Care Financing Administration of the United States Department of
Health and Human Services (HCFA) paid a fixed premium for coverage of each
member based on a formula of the projected medical expense of each Medicare
member.  The Plan ceased offering this program as of January 1, 2001.

Medicare Supplement

Under the HCSC license, the Plan contracts with Olympic Health
Management Systems, Inc., to operate a Medicare Supplement product.

The Plan offers four basic types of health care plans to prospective
employer groups:  Managed Plans, Triple Option Plans, Point of Service
Plans and Preferred Providers Open Access Plans.

Managed Plans

All health care, except emergency services, under this plan is provided or
arranged by a primary care physician (PCP) which is chosen by the member
during enrollment.  The PCP will refer the member to specialists, as well as
arrange hospital and other services with a Community Network of providers.

Point of Service Plan

This plan offers the same coverage as the Managed Plan but provides another
level of benefit coverage.  The member is required to choose a PCP during
enrollment.  The member may choose to have his/her services coordinated
through the PCP in order to have the highest level of benefit coverage
available.  The member also has the choice to self-refer to an Extended PPO
Network Provider, which is paid at a lower level.

                                     7

<PAGE>   8
Triple Option Health Plan

This plan offers three different levels of benefit coverage:  the Community
Network benefit level, the Extended PPO Network benefit level and an out-of-
network benefit level.  The member is required to choose a PCP during
enrollment.  The member may choose to have his/her services coordinated
through the PCP in order to receive the highest level of benefit coverage
available.  However, the member may choose to self-refer to an Extended PPO
Network Provider or a non-participating provider, which is covered at a lower
reimbursement.  This plan is being discontinued.

Preferred Provider Open Access Plan

During 2001, the Plan introduced an insured Preferred Provider Plan.
This plan is an open access plan that does not require PCP referrals to see
specialists.

MARKETING AND SALES

The Network markets its PPO and utilization management services through an
internal marketing staff to TPAs and, in conjunction with the TPAs and
independent brokers and agents, to the Health Plans.  The Network generally
does not market directly to subscribers or their dependents, although it does
engage in limited direct mailings relating to product development.

The Plan distributes its products through it direct sales force and
telemarketing representatives and through independent insurance agents and
brokers.

Direct Sales Force and Telemarketing

The Plan maintains a direct sales staff of account executives.  The account
executives sell to employer groups, primariy through brokers.  In
addition, they are the principal administrative contact for employers and their
benefit managers by conducting on-site employee meetings and various other
requests.

The Plan employs a staff of telemarketing representatives who sell the Costco
Health Insurance product directly to small groups.

Independent Insurance Agents and Brokers

Independent insurance agents and brokers have been responsible for a
significant portion of the Plan's enrollment growth.  They are compensated
pursuant to commission arrangements that vary depending on the particular
company products and services sold.

MAJOR CUSTOMER

The Company's largest customer, The Boeing Company, accounted for
approximately 24% of the Company's premium revenue and 74% of premiums
receivable in fiscal 2001 and approximately 22% of premium revenue and
53% of premiums receivable in fiscal 2000.  This customer accounted
for approximately $25.8 million and $22.7 million of the Company's
consolidated revenues for 2001 and 2000, respectively.

COMPETITION

The managed health care industry is highly competitive, primarily on the basis
of price, the size, quality and geographic location of the network of
physicians, hospitals and other health care providers, benefits provided and
quality of service.  The Network competes with other managed health care
companies, such as health maintenance organizations and indemnity health
insurance companies, and other PPO's in the state of Washington.

                                     8

<PAGE>   9
GOVERNMENTAL REGULATION

Patient Bill of Rights

The Patient Bill of Rights was effective July 1, 2001, and it encompasses areas
related to: (1) health plan disclosure nonpublic personal financial and health
information, (2) disclosure of information regarding health benefits, (3)
network adequacy, (4) quality in utilization review decisions, (5) grievance
procedures, (6) independent review of health care disputes, and (7) health plan
liability.  This is not expected to have a material impact on operations.

HIPAA

The Health Insurance Portability and Accountability Act of 1996 ("HIPAA"),
requires the United States Department of Health and Human Services
("DHHS") to develop standards and requirements for maintenance and
transmission of health information that identifies individual members.  The
Standards for Electronic Transactions Final Rule was published August 2000
and became effective October 2000 with a compliance date of October 2002.
This effective date has now been delayed to October 2003.  The Standards
for Privacy and Individually Identifiable Health Information Final Rule
was published December 2000 and became effective April 2001 with a
compliance date of April 2003.

It is difficult to assess the costs related to HIPAA compliance because these
are sweeping changes for which the Company has no historical experience.
Overall, costs of implementation and risk management are expected to be
significant as policy and process development is based on extensive assessment,
staff training, IS solution purchases and ongoing compliance evaluation.
There will be continuing costs to ensure compliance with the law over time.

Employees

At December 31, 2001, the Network had 180 employees, 178 of which were
full-time.  None of the company's employees are unionized or subject to
collective bargaining agreements with the Network, and the Network believes
its relationships with its employees to be good.

ITEM 2.     DESCRIPTION OF PROPERTY

First Choice leases and occupies two offices in separate buildings in
Seattle. The leases expire in March and July 2003.

ITEM  3.     LEGAL PROCEEDINGS

In the normal course of business, the Company may encounter claims,
assessments, and litigation brought against the Company.  If and when these
situations arise, the Company assesses the situation and accrues for financial
exposure, if appropriate.  As of December 31, 2001, the Company is not aware
of any such material situations.

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

No matters were submitted in the fourth quarter of 2001.

PART II

ITEM  5.     MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

There is no public trading market for any of the Company's equity securities.

                                     9

<PAGE>   10
As of December 31, 2001, there were 539 holders of the Company's Class A
Common Stock, seven holders of the Company's Class B Common Stock, and
three Hospital Participants and UWMC.

Holders of each class of Common Stock are entitled to share ratably on a share-
for-share basis with respect to any dividends on such class of Common Stock,
when, as and if declared by the Board of Directors out of funds
legally available.  Therefore, such dividends may not be paid while an
obligation to repurchase shares remains outstanding.  Pursuant to the
Company's contracts with the Hospital Participants, if First Choice pays any
dividends or other distributions with respect to the Class B Common Stock,
First Choice must make an equivalent distribution to the Hospital Participants.
The Company does not currently anticipate paying cash dividends on its capital
stock.

<TABLE>
<CAPTION>
ITEM  6.     SELECTED FINANCIAL DATA

                                       2001         2000         1999         1998        1997
                                ------------  -----------  -----------  -----------  ----------
<S>                             <C>           <C>          <C>          <C>          <C>
Operating revenue               $122,652,504  $139,144,059  $92,097,975  $56,878,270  $26,581,122
Net income(loss)                  (1,407,987)   (1,349,859)   1,660,238      703,551      380,868
Net income(loss)
  per common share                    (24.04)       (23.04)       28.33        12.00         6.49
Total assets                      30,415,699    30,412,795   30,667,873   20,712,398   17,683,105
Total liabilities                 17,847,673    17,837,813   16,394,980    8,868,805    6,769,900
Redeemable equity participation    1,991,850     1,617,000    1,260,000       -            -
Total Equity                       9,338,690    10,784,920   12,148,644   10,523,508    9,600,974

</TABLE>

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

OVERVIEW

The Network's ability to retain existing clients and attract new clients is
largely dependent on its ability to control health care costs by creating and
maintaining a network of high quality, efficient, fully credentialed providers
who agree to accept competitive reimbursement rates and on its ability to
control excess utilization through its utilization management program.  During
2001, the Network continued to expand its PPO network.  In 2001, the Network
continued its system of physician reimbursement which had commenced in
July 1993, referred to as the Resource Based Relative Value System, whereby
fees to physicians are weighted more toward cognitive services (i.e., overall
patient care) as opposed to procedural services (e.g., surgery and diagnostic
tests).  This system is consistent with the company's belief in the importance
of managing the full scope of patient care to provide the most appropriate level
of service for each patient.

Since its inception, the Company has negotiated reimbursement to its principal
hospitals under a Diagnostic Related Group ("DRG") system under which
payments are based on the diagnosis of the patient's condition, generally
notwithstanding the length of hospitalization.  In 1997, the Network
negotiated with additional hospitals to change the basis upon which DRG's are
determined from an "All Medicare Grouper" to an "All Patient Grouper" and
concurrently introduced Washington State-specific hospital weights to more
closely match reimbursement payments to actual resource consumption.

In anticipation of the proposed Washington State health care reform and to
enhance its competitive position in the health care industry, the Plan obtained,
on January 13, 1995, a Certificate of Registration to operate as a health care
service contractor ("HCSC"), in the state of Washington, which permits the
Plan to assume financial risk in its operations.

The Plan's revenues consist primarily of commercial premiums resulting from
the offering of health insurance products.  However, this is supplemented by
the Plan's rental of the PPO network beginning January 1, 1998.  See the

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<PAGE>   11
"First Choice Health Plan Products" under "Description of Business" for
further explanation of products currently being offered by the Plan.

In 2001, Medical expenses were comprised of fee-for-service contracted
arrangements and capitation arrangements with the physician organizations
("PO") in which the risk for health insurance coverage has been passed to
the PO.  For the capitation arrangement the Plan passes much of the premium
to the POs and keeps a certain percentage for administrative fees which covers
services that the Plan provides on behalf of the PO.  The Plan assumes the full
risk for approximately 88% of commercial members at year-end 2001.  For the
membership that the Plan is at risk for, the medical expenses are comprised of
negotiated payments to physicians, hospitals and other health care providers
which includes an estimated amount for incurred but not reported claims
("IBNR").

The Plan had a license with the Federal Health Care Financing Administration
("HCFA") to offer a Medicare risk product.  The Medicare application was
approved in the third quarter of 1998 with the first sales of the product
occurring on January 1, 1999.  The Plan ceased offering this product as of
January 1, 2001.

As the Plan's business model has shifted form capitated contracts to fee
for service contract arrangements, management and the Board of Directors
has reevaluated the strategic importance of the Plan.  As a result, the
Plan's existing insured business will be wound down in an orderly manner with
a complete exit of the commercial insured business by December 2004.  The
resulting reduction in membership may subject the Plan to various risks
including adverse selection, claim volatility and administrative cost that
may result in losses.  This decision to exit the insured business required
The Network to evaluate the carrying value of its investment in the Plan and
resulted in the write-down noted under Results of Operations.


RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2001 COMPARED TO
YEARS ENDED DECEMBER 31, 2000 AND 1999

Operating revenue decreased $16.5 million (11.9%) from 2000 to 2001 and
increased $47.0 million (51.1%) from 1999 to 2000.  The decrease in 2001 was
due to the discontinuance of the SeniorsFirst Medicare Risk product
(approximately $19.1 million).  The increase in 2000 was primarily due to
increased Plan insured membership and rate increases.  Commercial member
months grew by 29.1% in 2000 and Medicare Risk member months grew by 156.7%
during 2000.  In addition, commercial premium rates increased by 14% and
Medicare Risk premium rates increased by 21% during 2000.  Network Access
fees increased $.8 million (10.3%) from 2000 to 2001 and were unchanged in
2000 from 1999.  The increase is due to higher contractual rates.  Hospital
administrative fees increased $1.0 million (14.7%) from 2000 to 2001 and
increased $.8 million (14.2%) from 1999 to 2000.  The increase is primarily
due to increased enrollment and a higher volume of services provided to the
hospitals.

Operating expenses decreased $19.5 million (13.6%)from 2000 to 2001 and
increased $52.6 million (58.0%) from 1999 to 2000.  The decrease in 2001
was primarily due to reduced medical expenses as a result of the discontinuance
of the SeniorsFirst Medicare Risk product (approximately $16.8 million).
The increase in 2000 was primarily due to increased medical costs
($47.9 million) as a result of the increased Plan health insurance membership
as well as increased costs per member.  Payroll and related expenses were flat
in 2001 compared to 2000 and increased $2.2 million (22.3%) from 1999 to 2000.
The Network increased the number of employees as a result of the increased Plan
membership.  Selling, general and administrative costs decreased $.7 million
(5.9%) from 2000 to 2001 and increased $2.2 million (29.6%) from 1999 to 2000.
The decrease in 2001 was a result of the reduction in Plan membership.
The increase in 2000 was a result of the increase in Plan membership.

Other expenses increased by $1.3 million in 2001 from zero in 2000.  This is
primarily due to the Network's write-down of its investment in the Plan to
the Plan's estimated net realizable value which consists of the Network's
80% ownership interest in the Plan's book value.  See "Market Risk" for a
discussion of the reason for the write-down of the investment in the Plan.


Inflation

Health care costs in the United States have increased more rapidly than the
national consumer price index in recent years, and that trend is expected to
continue.  The Company's operating results have not significantly been
affected by general inflation, and the Company does not anticipate that
inflation will have a significant impact on its operating results in the near
term.  However, inflation in healthcare costs does directly impact the Company's
operation as most commercial groups have only annual rate adjustments.
Prior to 2000, the Company transferred risk to health care providers through
capitation arrangements and risk-sharing provisions.  In 2000, the Plan began
to assume more risk for medical costs as provider groups terminated risk
arrangements.  At year-end 2001, the Plan was at risk for approximately 88%
of commercial members.  As a result of this, the Plan is significantly
impacted by rising medical costs.  Costs are managed through discounted
contractual arrangements and medical management activities.


                                     11

<PAGE>   12

Market Risk

HMOs and health insurance companies operate in a highly competitive
environment.  The Company has numerous competitors, including for-profit
and not-for-profit HMOs, preferred provider organizations ("PPOs"), and
indemnity insurance carriers, some of which have substantially larger
enrollments and greater financial resources than the Company.  The Network's
ability to retain existing clients and attract new clients is largely dependent
on its ability to control health care costs by creating and maintaining a
network of high quality, efficient, fully credentialed providers who agree to
accept competitive reimbursement rates and on its ability to control excess
utilization through its utilization management program.

As the Plan's business model has shifted form capitated contracts to fee
for service contract arrangements, management and the Board of Directors
has reevaluated the strategic importance of the Plan.  As a result, the
Plan's existing insured business will be wound down in an orderly manner with
a complete exit of the commercial insured business by December 2004.  The
resulting reduction in membership may subject the Plan to various risks
including adverse selection, claim volatility and administrative cost that
may result in losses.  This decision to exit the insured business required
the Network to evaluate the carrying value of its investment in the Plan and
resulted in the write-down noted under Results of Operations.


LIQUIDITY AND CAPITAL RESOURCES

Since inception in 1986, the Company has financed its operations from equity
investments from over 870 physicians, from the seven hospitals constituting
the Company's Class B shareholders, non-equity capital contributions from
four additional hospitals pursuant to their respective participation
agreements, and funds from operations.

At December 31, 2001, the Company had cash and cash equivalents of
approximately $3.2 million as compared to approximately $12.7 million at
December 31, 2000.  The decrease in cash and cash equivalents is primarily
due to the purchase of $13.3 million in bonds available for sale.
The bonds consist of U.S. Government Agency loan-backed adjustable rate
securities.

The Company anticipates that the revenues generated by operations, cash and
cash equivalents and bonds available for sale as of December 31, 2001 will be
sufficient to meet its cash requirements throughout 2002.  The expected
reduction in the Plan's insured membership is expected to be funded by a
corresponding reduction in the Plan's reserve for unpaid claims and claim
adjustment expenses.

In the event the above sources of funds are not adequate to meet the
liquidity needs of the Plan, additional funds estimated to be in the
$1.5 million to $2.0 million range will be available from the Network
pursuant to the Contribution Agreement referred to in Note 5 to the
financial statements.

On July 1, 1997, First Choice Health Network, Inc. (the Network), First
Choice Health Plan, Inc. (the Plan), Health First Partners, Inc. (Health
First) and Health Washington, L.L.C. (Health WA) entered into a merger and
asset purchase agreement.  The agreement between the four companies consisted
of three transactions as described in the paragraphs below.

First, the Plan purchased substantially all of the assets of Health WA in
exchange for 34,523 shares of the Plan's Common Stock.  These shares were
issued to the former shareholders of Health WA.  The assets of Health WA
consisted primarily of Health WA's rights to various provider contracts,
a large group ontract, as well as other intangible property including
trademarks.  Estimated growth in membership was 12,500 as a result of this
merger.  These shares represent approximately 12.6% ownership in the Plan.


Secondly, Health First merged with and into the Plan with Health First ceasing
operations and the Plan as the surviving corporation.  The Plan issued
33,572 shares of stock to the former shareholders of Health First for the net
assets of Health First as well as the rights to various provider and group
contracts.  The net assets purchased included those assets and liabilities that
existed as of July 1, 1997, which had a book value of approximately $1.0
million.  Estimated growth in membership was 5,500 as a result of this merger.
These shares represent approximately 12.3% ownership stake in the Plan.

Third, the Network, formerly the sole shareholder of the Plan, became
obligated to contribute cash to the Plan in exchange for 55,436 shares of
the Plan stock.  This is facilitated by a Contribution Agreement that states
that the Network shall contribute a certain percentage of revenues over the
next ten years in exchange for those shares.  The Network's ownership in the
subsidiary, the Plan, was approximately 75.1%.

In January 1998, the owners of the Plan signed an agreement, which gave the
Company an 80% ownership in the common stock of the Plan.  The purpose
of the increase in common stock ownership was to allow for consolidation of
Plan income or losses in the Company's filing of consolidated tax return,
which includes the Plan.  This transaction by Health Washington exchanging
8,613 shares of common stock for the same number of preferred shares.  Two
other owners made a similar exchange of 4,187 shares each.  In order to
facilitate this transaction, the Plan amended their Articles of Incorporation

                                     12

<PAGE>   13

to authorize 1,000,000 shares of preferred stock.  This stock has a par value
of $29.10 and is non-voting and non-cumulative, but has a dividend preference
rate of 8.75% of the par value per share.

Effective February 1, 1998, the Network and Plan entered into a tax sharing
agreement, which provides for the sharing of Federal income tax liabilities and
benefits in the filing of consolidated tax returns.

In July 1998, the Plan amended the Articles of Incorporation to increase the
authorization of preferred shares to 1,000,000.  The Network then increased its
investment in the Plan by purchasing $3,000,000 in the Plan's preferred
stock.

On December 20, 1999, First Choice Health Network, Inc. executed an
agreement with University of Washington Academic Medical Center to
become a participant in the administration, operations and any incentives
bestowed upon any shareholders in First Choice Health Network effective
January 1, 2000.  University of Washington Academic Medical Center shall
pay the affiliation fee of $2,520,000, payable $1,260,000 upon execution of
this Agreement and the remaining $1,260,000 will be paid in three equal
payments of $420,000 due annually for three years plus interest at five percent
(5%).  As of December 31, 2000, $1,617,000 in principal had been paid.

UWMC does not become a shareholder or member of the Network.  UWMC
shall participate in any incentive or reward program established by the Network
as if UWMC owned 5,800 shares of class B common stock.  Dividends,
distributions, and liquidation of the Network are also determined as if UWMC
owned 5,800 shares of class B stock.

If the Network performs certain actions that substantially change the
organization, the Network discontinues the health care facility services
contract with UWMC, or if total managed care enrollment falls below 500,000
member months, then UWMC can withdraw from the agreement, but no refunds are
given.  If the Network merges, is sold, or if the Network takes a material
action that proves detrimental to UWMC, then UWMC may redeem their interest
for the equivalent of the fair value of 5,800 class B common shares of the
Network stock, less any amounts still owed by UWMC.

Throughout 1999 and early 2000, the Plan contracted with Cascade Medical
Group (Cascade) for capitated health care services.  The Plan did not have
insurance risk for the covered individuals to the extent that Cascade could
continue to pay the Plan for claims paid on their behalf.  In March of 2000,
Cascade management dissolved the organization.  The dissolution of Cascade
does not affect the financial position or results of operations in 1999 because
the Plan had a payable to Cascade as of December 31, 1999.  The ultimate
financial impact of this event approximated $970,000, which was recorded as
medical expenses during 2000.

During 2001 and 2000 several other provider organizations experienced financial
difficulties.  As a result of this, the Plan recorded additional medical expense
of approximately $2.0 million and $4.4 million respectively.  These amounts
represent write-offs of provider settlement receivables and reserves for unpaid
claims for estimated claim run out liabilities.

As a result of these additional medical expenses, the Plan received
approximately $4.2 million in capital infusions from the Network in 2000.
and an additional $775,000 in 2001.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable as of December 31, 2001.

                                     13

<PAGE>   14

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . 14

Consolidated Balance Sheets as of December 31, 2001 and 2000 . . . . . . 15

Consolidated Statements of Operations
      for the years ended December 31, 2001, 2000, and 1999. . . . . . . 17

Consolidated Statements of Shareholders' Equity
      for the years ended December 31, 2001, 2000, and 1999. . . . . . . 18

Consolidated Statements of Cash Flows
      for the years ended December 31, 2001, 2000, and 1999. . . . . . . 19

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 21

                         INDEPENDENT AUDITORS' REPORT


Shareholders and Board of Directors
First Choice Health Network, Inc.


We have audited the accompanying consolidated balance sheet of First Choice
Health Network, Inc. as of December 31, 2001, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for the year then ended.  These financial statements are the
responsibility of the First Choice Health Network, Inc.'s management.
Our responsibility is to express an opinion on these financial statements
based on our audit.  The financial statements of First Choice Health
Network, Inc. as of December 31, 2000 and for the two-year period then
ended, were audited by other auditors, whose report dated March 30, 2001
expressed an unqualified opinion on those statements.


We conducted our audit 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
audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Choice Health
Network, Inc. as of December 31, 2001, and the results of its operations and
its cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.


Moss Adams LLP
February 1, 2002
Everett, Washington

                                     14
<PAGE>   15

FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 and 2000

<TABLE>
<CAPTION>

ASSETS	                                                             2001          2000
CURRENT ASSETS:
<S>                                                                <C>           <C>
Cash and cash equivalents                                          $ 3,207,241   $12,697,290
Short term investments                                                               499,995
Investment securities available for sale                            13,348,948
Service fees receivable, net of allowance for doubtful accounts
  of $420,497 and $650,024                                           1,592,263     2,131,111
Service fees and premiums receivable from related parties              384,274     1,326,448
Premiums receivable, net of allowance for doubtful accounts
 of $130,505 and $199,756                                            2,806,117     2,738,711
Provider settlements receivable - unrelated parties                    476,929       848,202
Provider settlements receivable - related parties                      181,770     1,032,618
Prepaid expenses                                                       777,401       839,805
Deferred tax assets (Note 4)                                           572,571     1,140,386
Other current assets                                                 1,645,201       716,959
                                                                  ------------   -----------
                        Total current assets                        24,992,715    23,971,525

FURNITURE, EQUIPMENT, AND COMPUTER SOFTWARE:
Furniture and equipment                                              4,466,461     4,354,690
Computer software                                                    1,187,970       886,933
                                                                  ------------   -----------
                                                                     5,654,431     5,241,623
Less accumulated depreciation and amortization                      (3,451,422)   (2,632,994)
                                                                  ------------   -----------
Furniture, equipment, and computer software, net                     2,203,009     2,608,629

Investments Available for Sale                                      13,348,948         -


DEFERRED TAX ASSETS (Note 4)                                         1,363,347       925,165

OTHER ASSETS:
Restricted indemnity cash                                            1,829,102     1,798,699
Goodwill, net of accumulated amortization of $247,734 and $192,658      27,526        82,602
Other intangible assets, net of accumulated amortization
  of $3,358,400 and $2,332,225                                                     1,026,175
                                                                  ------------   -----------
            Total other assets                                       1,856,628     2,907,476
                                                                  ------------   -----------
TOTAL                                                              $30,415,699   $30,412,795
                                                                  ============   ===========
</TABLE>

See notes to consolidated financial statements.

                                     15

<PAGE>   16
FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 and 2000

<TABLE>
<CAPTION>

LIABILITIES AND SHAREHOLDERS' EQUITY                                     2001        2000
<S>                                                                <C>           <C>
CURRENT LIABILITIES:
Accounts payable                                                   $  451,771    $   678,054
Accrued expenses                                                    1,833,074      3,296,789
Reserve for unpaid claims and claims adjustment expenses           11,815,058     10,181,595
Provider settlements payable - unrelated organizations              1,416,068      1,529,853
Unearned premiums                                                   1,633,532      1,064,390
Deferred income taxes                                                   -             87,132
Current portion of note payable                                       331,791        301,829
                                                                  -----------    -----------
            Total current liabilities                              17,481,294     17,139,642

NOTE PAYABLE (Note 10)                                                366,379        698,171

MINORITY INTEREST                                                   1,237,486        173,062

REDEEMABLE EQUITY PARTICIPATION                                     1,991,850      1,617,000

COMMITMENTS (Note 5)

SHAREHOLDERS' EQUITY:
Common stock:
Class A, par value $1 - Authorized, 30,000 shares;
  issued and outstanding, 539 and 572 shares                              539            572
Class B, par value $1 - Authorized, 70,000 shares;
  issued and outstanding, 40,600 shares                                40,600         40,600
Additional paid-in capital                                          4,306,581      4,336,182
Paid-in capital from affiliates                                     1,472,108      1,472,108
Retained earnings                                                   3,527,471      4,935,458
Accumulated other comprehensive income (loss), net of tax              (8,609)
                                                                  -----------    -----------
            Total shareholders' equity                              9,338,690     10,784,920
                                                                  -----------    -----------

TOTAL                                                             $30,415,699    $30,412,795
                                                                  ===========    ===========
</TABLE>

See notes to consolidated financial statements.

                                     16

<PAGE>   17

FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999


<TABLE>
<CAPTION>
                                                      2001          2000          1999
<S>                                            <C>           <C>           <C>
OPERATING REVENUE:
Premium revenue                                $ 95,551,521  $ 90,054,697  $ 64,496,942
Premium revenue, related parties                 10,532,868    15,162,019     7,204,129
Medicare revenue                                      -        19,060,419     6,338,440
Network access fees                               8,636,915     7,832,119     7,838,999
Hospital administrative fees                      4,628,533     4,532,068     4,289,828
Hospital administrative fees, related parties     3,094,633     2,201,602     1,609,000
Other                                               208,034       301,135       320,637
                                               ------------  ------------  ------------
            Total operating revenue             122,652,504   139,144,059    92,097,975

OPERATING EXPENSES:
Medical expenses                                 66,416,394    70,544,946    41,812,940
Medical expenses, related parties                32,534,341    47,089,964    27,875,293
Payroll and related expenses                     12,281,740    12,244,679    10,012,045
Selling, general, and administrative expenses    11,466,664    12,190,024     9,741,831
Amortization expense                              1,081,251     1,174,512     1,191,012
                                               ------------  ------------  ------------
            Total operating expenses            123,780,390   143,244,125    90,633,121
                                               ------------  ------------  ------------
            Operating income(loss)               (1,127,886)   (4,100,066)    1,464,854

OTHER INCOME (EXPENSE):
Interest and dividends                              826,822       780,904       361,200
Write-down of investment and other               (1,237,486)         -           46,000
                                               ------------  ------------  ------------
            Total other income, net                (410,664)      780,904       407,200
                                               ------------  ------------  ------------
            Income (loss) before federal
               income taxes and minority
               interest                          (1,538,550)   (3,319,162)    1,872,054

FEDERAL INCOME TAX EXPENSE (BENEFIT)                 42,499    (1,278,116)      279,143
                                               ------------  ------------  ------------
                                                 (1,581,049)   (2,041,046)    1,592,911

MINORITY INTEREST, net of tax                       173,062       691,187        67,327
                                               ------------  ------------  ------------
NET INCOME (LOSS)                              $ (1,407,987) $ (1,349,859) $  1,660,238
                                               ============  ============  ============
NET INCOME (LOSS) PER COMMON SHARE             $     (24.04) $     (23.04) $      28.33
                                               ============  ============  ============
WEIGHTED AVERAGE SHARES OUTSTANDING                  58,565        58,579        58,601
                                               ============  ============  ============
</TABLE>

See notes to consolidated financial statements.
                                      17

<PAGE>   18

FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999


<TABLE>
<CAPTION>

                                                                      Common stock
                                                                                                    Accumulated
                                      Class A       Class B   Additional        Paid-in                 Other        Total
                                                               paid-in        capital from Retained  Comprehensive  Shareholders'
                                    Shares  Amt  Shares   Amt   capital        affiliates  Earnings  Income (Loss)     Equity
<S>                                   <C>   <C>   <C>     <C>        <C>          <C>        <C>         <C>            <C>
BALANCE, January 1, 1999              619   $619  40,600 $40,600 $4,385,102   $1,472,108  $4,625,079 $             $10,523,508

  Cash received from shareholder
 receivable

  Repurchase of Class A common stock
 and membership rights                (34)   (34)                   (35,068)                                           (35,102)

  Net income                                                                               1,660,238                 1,660,238

BALANCE, December 31, 1999            585    585  40,600  40,600  4,350,034    1,472,108   6,285,317                12,148,644

  Repurchase of Class A common stock
 and membership rights                (13)   (13)                   (13,852)                                           (13,852)
Net income                                                                                (1,349,859)               (1,349,859)
                                   ----------  --------- -------- ---------   ----------  ----------  ----------     ----------

BALANCE, December 31, 2000            572    572  40,600  40,600  4,336,182    1,472,108   4,935,458       -        10,784,920


Repurchase of Class A common
stock and membership rights           (33)   (33)                   (29,601)                                           (29,634)

Unrealized loss on investments,
net of tax                                                                                              (8,609)         (8,609)

 Net loss                                                                                 (1,407,987)               (1,407,987)


BALANCE, December 31, 2001           539   $ 539 40,600   40,600 $4,306,581   $1,472,108  $3,518,862    (8,609)     $9,338,690
                                     ===   ===== ======   ====== ==========  ===========  ==========  =========    ===========
</TABLE>

See notes to consolidated financial statements.

                                     18

<PAGE>   19

FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999

<TABLE>
<CAPTION>
                                                           2001          2000         1999
<S>                                                 <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                 $(1,407,987)    (1,349,859)  $1,660,238
  Adjustments to reconcile net income (loss)
  to net cash from operating activities:
    Gain on sale of Dental Network                         -              -         (44,500)
    Depreciation                                        818,428        621,264      523,372
    Amortization                                      1,081,251      1,174,512    1,191,012
    Deferred income taxes, net                           42,501     (1,262,279)    (813,161)
    Provision for doubtful accounts                    (298,778)       253,914      207,356
    Minority interest                                 1,064,424       (691,187)     (67,327)

      Service fees receivable                         1,334,533    (1,565,527)   (1,631,435)
      Premiums receivable                               377,861      (309,916)     (544,285)
      Prepaid expenses                                   62,404      (266,870)     (182,187)
      Other current assets                             (928,242)     (546,377)      (89,403)
      Intangibles and other                                -              -        (390,009)
      Accounts payable                                 (226,283)       158,008      142,196
      Accrued expenses                               (1,463,715)     1,021,784      665,803
      Reserve for unpaid claims and claims
          adjustment expenses                         1,633,463      6,970,982    1,108,249
      Provider settlements receivable -
          related organizations                         850,848       (769,723)     462,535
      Provider settlements receivable -
          unrelated organizations                       257,488     (2,530,799)   3,569,500
      Federal income tax payable                           -             -          (28,417)
      Unearned Premiums                                 569,142     (2,040,131)   2,967,241
                                                    -----------   -----------  -------------
  Net cash from operating activities                  3,767,338      1,998,850    8,706,778

CASH FLOWS FROM INVESTING ACTIVITIES:
  Sale of Dental Network                                   -             -           90,000
 (Purchase) of short-term investment                    499,995      (499,995)           -
 (Purchase) of investments available for sale       (16,524,646)         -               -
  Maturities/sale of investments available for sale   3,167,089          -               -
 (Purchase) of furniture, equipment, and computer
      software                                         (412,808)   (1,563,753)     (769,630)
 (Increase)in restricted indemnity cash                 (30,403)      (51,073)      (41,671)
                                                    -----------   -----------  -------------
  Net cash from investing activities                (13,300,773)   (2,114,821)     (721,301)
                                                    -----------   -----------  -------------
  BALANCE, carried forward                          ( 9,533,435)     (115,971)     7,985,477
</TABLE>

See notes to consolidated financial statements.

                                     19

<PAGE>   20

FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONSOLDIATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999


<TABLE>
<CAPTION>
                                                          2001            2000         1999
<S>                                                 <C>                 <C>           <C>
BALANCE, brought forward                           $(9,533,435)     (115,971)  $  7,985,477

CASH FLOWS FROM FINANCING ACTIVITIES:
  Repurchase of Class A common stock and
      membership rights from physicians                (29,634)      (13,865)       (35,102)
  Redeemable equity participation                      374,850       357,000      1,260,000
  Proceeds of note issued                                  -        1,000,000          -
  (Payment) of note payable                           (301,830)   (1,612,004)    (1,887,996)
                                                    -----------   -----------   ------------
  Net cash from financing acivities                     43,386      (268,869)      (663,098)
                                                    -----------   -----------   ------------
NET INCREASE (DECREASE) IN CASH AND
    CASH EQUIVALENTS                                (9,490,049)     (384,840)     7,322,379

CASH AND CASH EQUIVALENTS:
  Beginning of year                                 12,697,290    13,082,130      5,759,751
                                                    -----------   -----------   ------------
  End of year                                      $ 3,207,241   $12,697,290   $ 13,082,130
                                                    ===========   ===========   ============
SUPPLEMENTAL DISCLOSURES OF CASH
    FLOW INFORMATION:
  Cash paid during the year for:
    Federal income taxes                           $       -        $ 430,000   $ 1,350,000
    Interest                                             84,540        11,800        94,174

SUPPLEMENTAL DISCLOSURES OF NONCASH
    FINANCING AND INVESTING ACTIVITIES:
  Business acquired for note payable                      -             -           612,333

</TABLE>

See notes to consolidated financial statements.

                                     20

<PAGE>   21

FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 and 2000


NOTE 1:     DESCRIPTION OF BUSINESS AND SUMMARY
            OF SIGNIFICANT ACCOUNTING POLICIES

Description of business: First Choice Health Network, Inc. (the Company) was
incorporated under the laws of the state of Washington on September 28, 1984.
The Company was formed to organize a network of independent participating
physicians and hospitals to provide a comprehensive, managed health care
delivery system for group plans established by employers and benefit groups.
The Company's business is conducted primarily in Washington, Oregon, and
Alaska.

The Company's majority owned subsidiary, First Choice Health Plan, Inc. (the
Plan), is a health care services contractor which was formed on January 31,
1995, to offer fully insured health care services to an enrolled population in
Washington state.

The Plan's Board of Directors have authorized management to proceed with an
orderly exit of the insured health care business by no later than December 2004.

Principles of consolidation:
The consolidated financial statements include the accounts of the Company and
the Plan.  All significant intercompany amounts have been eliminated in
consolidation.

New accounting pronouncements: In October 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 141, Business Combinations, which is effective for business
combinations initiated after June 30, 2001.  This statement establishes the
purchase method as the only acceptable method of accounting for business
combinations and eliminates the pooling-of-interest method.  The
Company did not participate in a business combination in 2001.
Also, in October 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets, which is effective for fiscal years beginning after
December 15, 2001.  SFAS No. 142 establishes new accounting and reporting
standards for goodwill and other intangible assets.  Under this statement,
goodwill will no longer be amortized, but will be recognized and measured
based in its fair value.  Management does not believe that adoption of these
statements will have a material effect on the Company's financial condition
or results of operations.

Cash equivalents:  The Company considers all investments purchased with an
original maturity of three months or less to be cash equivalents.  At
December 31, 2001 and 2000, cash and cash equivalents consisted of cash
management funds of $3,207,241 and $12,697,290, respectively.

Investment securities:  The Company owns U.S. Government Agency mortgage-backed
adjustable rate securities that are classified as available for sale.
Investment securities categorized as available for sale are generally held for
investment purposes (to maturity), although unanticipated future events may
result in the sale of some securities.  Available for sale securities are
recorded at fair value, with the net unrealized gain or loss included
in comprehensive income, net of the related tax effect.  Realized gains or
losses on dispositions are based on the net proceeds and the adjusted carrying
amount of securities sold, using the specific identification method.

Service fees receivable:  Service fees receivable consists primarily of
estimates for administrative fees receivable related to claims incurred on or
before the balance sheet date but not reported.  The Company evaluates the
reasonableness of administrative fees receivable based on claims reported in
subsequent periods.  These estimates are subject to the effects of trends in
claims.  Although considerable variability is inherent in such estimates,
management believes that the administrative fees receivable is reasonable.  The
estimates are continually reviewed and adjusted as necessary in the period new
information becomes known.

Allowance for doubtful accounts:  The Company performs periodic credit
evaluations of its customers and maintains an allowance for potential credit
losses related to receivables.

Premiums receivable:  Premiums receivable represents monthly group health
insurance premiums billed and outstanding.

Furniture, equipment, and computer software:  Furniture, equipment, and
computer software are recorded at cost.  Depreciation and amortization are
computed using the straight-line method over the lesser of the estimated useful
lives of the assets or lease term ranging from three to five years.

                                     21

<PAGE>   22
Restricted indemnity cash:  Restricted indemnity cash consists of amounts
required to be restricted for potential claims from enrollees as required by the
Office of the Insurance Commissioner of the State of Washington.  The balance
consists of short-term asset backed securities that are classified as held to
maturity.  These assets are recorded at amortized cost, which approximates
fair value.

Goodwill:  Goodwill is determined as the difference between the purchase price
and fair value of identifiable net assets purchased.  Goodwill is amortized
using the straight-line method over three to five years.  Events or changes in
circumstances have not occurred that indicate the value of goodwill has been
impaired as of December 31, 2001 and 2000.

Other intangible assets:  Intangible assets assumed in the Sound Health PPO
network acquisition were trademarks, contracts, and a noncompetition
agreement.  Intangible assets are amortized using the straight-line method over
three years.

Reserve for unpaid claims and claims adjustment expenses:  This liability
represents reported and unreported claims, which have been incurred but have
not been paid at the date of the financial statements.  The reserve for
unreported claims is determined actuarially using prior experience and the
nature of current health insurance contracts and volume.  Included in the
liability is an estimate of the future expenses necessary to settle claims.  Due
to the uncertainties inherent in the estimation process, actual costs may differ
from the estimated amounts in the near term, and these differences may be
significant.

Provider settlement receivable (payable):  This liability or asset is the amount
due from (to) health care providers in conjunction with capitation arrangements,
which are computed by subtracting the claims payments made on behalf of the
provider from the capitated amounts contractually allocated to them.  The
ultimate payout or receipt of these amounts is subject to a settlement process
subsequent to the contract year-end.  The Company believes the amounts
recorded appropriately reflect the settlement amounts.

Unearned premiums:  Unearned premiums consist of insurance premiums
received prior to fiscal year end for health insurance coverage subsequent to
year end.

Operating revenue:  Operating revenue consists primarily of premium revenue,
Medicare revenue, network access fees, and hospital administrative fees.
Premium revenue represents amounts charged for health care services and is
recognized as revenue in the period for which enrollees are entitled to medical
care.  Medicare revenue is paid at a fixed per member per month capitation
amount by the Centers for Medicare and Medicaid Services (CMS) based on the
projected medical cost for each Medicare member and is recognized as revenue
over the coverage period. The Plan ceased offering the Medicare plan effective
January 1, 2001.  Network access fees are recognized as earned during the
period of coverage and are recorded at contractual rates.  Hospital
administrative fees are recognized as earned in the period hospital claims are
incurred by a subscriber and are recorded at a contractual percentage of the
claims.

For the years ended December 31, 2001, 2000 and 1999, 24%, 22% and 34%
respectively, of the premium revenue related to one subscriber group.
Premiums receivables, as of December 31, 2001, 2000 and 1999 from that group
represented 74%, 53% and 68%, respectively.

Income taxes:  Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of 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 reverse.  The effect on the deferred tax assets and

                                     22

<PAGE>   23
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.  A valuation allowance is established to the extent
that it is more likely than not that deferred tax assets will not be realized.

Valuation of long-lived assets:  Using its best estimates, based on reasonable
and supportable assumptions and projections, the Company reviews its long-
lived assets for impairment whenever events or changes in circumstances have
indicated that the carrying amounts of its assets might not be recoverable.  At
December 31, 2001 and 2000, no write-downs were required.

Write-down of investment in Plan - As a result of the decision to exit the
insured health care business by December 2004, the Company's 80% ownership
interest in the Plan was written down to the expected net realizable value
which is the Plan's book value at December 31, 2001.  The write-down of
$1,237,486 is included in Other Expense.

Earnings per share:  Net income per common share (Class A and B) is
computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding during the period,
including 41,165, 41,179 and 41,201 common shares and 17,400 shares
applicable to affiliate common share equivalents (Note 2) in 2001,
2000 and 1999 respectively.  Shares issued and reacquired during each
period were weighted for the portion of the period that they were
outstanding.  There are no dilutive securities.

Use of estimates:  Preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America (GAAP) requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.


NOTE 2:     SHAREHOLDERS' EQUITY

Ownership of stock:  Class A voting common stock may be held solely by
physicians licensed in the state of Washington who contract with the Company
to provide health care services and who hold active, associate, or provisional
medical staff privileges at one or more of the hospitals that contract with
the Company to provide health care services.

Class B voting common stock may be held by hospitals in the state of
Washington that contract with the Company to provide health care services.

Voting rights:  Holders of each outstanding share of Class A or Class B
common stock are entitled to one vote on each matter submitted to a vote at
meetings of shareholders, and each class of common stock votes as a separate
class.

Transfer of stock:  Shareholders may only transfer their stock in the Company
to the Company for repurchase.  The repurchase price is established by the
Board of Directors each fiscal year as set forth in the bylaws.  Class A
shares were repurchased at $898.00, $1,144.26 and $1,031.95 per share
during 2001, 2000 and 1999 respectively.

Dividends:  The Board of Directors may declare and pay dividends on one or
more classes of common stock at such times and in such amounts as it
designates, but in no event may dividends be paid while there is an outstanding
obligation to repurchase shares.  Dividends are allocated among shareholders of
each class of stock according to the number of shares outstanding to each Class
A or Class B shareholder.  Any dividends paid to the Class B shareholders must
be shared with the nonshareholders that have rights equivalent to those of the
other shareholders.

Liquidation rights:  Upon liquidation or dissolution, the Board of Directors, at
its discretion, will allocate the value of assets among the classes of its
outstanding stock in proportion to the capital contributions of shareholders of
each class.  For these purposes, the contributions by the nonshareholder
district hospitals that have rights equivalent to those of the Class B
shareholders and the membership fees paid by Class A shareholders are considered
capital contributions.  The allocation to Class A shareholders will be shared
among all Class A shareholders in accordance with the number of shares
outstanding to each Class A shareholder.  The allocation of the Class B
shareholders must be shared with the nonshareholder hospitals that have rights
equivalent to those of Class B shareholders.

                                     23

<PAGE>   24

Paid-in capital from affiliates:  District hospitals are not shareholders of
the Company, but have contractual agreements with the Company that provide for
certain rights and obligations equivalent, but not identical, to those of
Class B shareholders, including liquidation and dividend rights.  The capital
contributions of the nonshareholders are recorded as paid-in capital from
affiliates.  These contractual agreements are considered to be common share
equivalents for purposes of calculating net income per common share.

Common stock:  In January 1998, the owners of the Plan entered into an
agreement which increased the Company's ownership in the common stock of
the Plan from 75.1% to 80%.  The purpose of the increase in common stock
ownership was to allow for the consolidation of tax returns between the
Company and the Plan.  This transaction included exchanging common stock
held by the minority owners of the Plan, who are also stockholders in the
Company, for the same number of preferred shares.  This preferred stock is
nonvoting and noncumulative, and has a dividend rate of 8.75%.

NOTE 3:     REDEEMABLE EQUITY PARTICIPATION

On December 20, 1999, the Company executed a participation agreement with
the University of Washington Academic Medical Center (UWMC) to become a
participant in the administration, operations, and any incentives bestowed upon
any shareholders in the Company effective January 1, 2000.  UWMC will pay a
fee of $2,520,000, $1,260,000 payable upon execution of this agreement and the
remaining $1,260,000 payable in three equal payments of $420,000 consisting of
principal and interest at 5%.  The final payment will be adjusted for any
outstanding principal and interest.


UWMC does not become a shareholder or a member of the Company.  UWMC
shall participate in any incentive or reward program established by the Company
as if UWMC owned 5,800 shares of Class B common stock.  Dividends,
distributions, and liquidation of the Company are also determined as if UWMC
owned 5,800 shares of Class B common stock.

If the Company performs certain activities that substantially change the
organization, the Company discontinues the health care facility services
contract with UWMC, or if total managed care enrollment falls below 500,000
member months, then UWMC can withdraw from the agreement, but no refunds are
given.  If the Company merges, is sold, or if the Company takes a material
action that proves detrimental to UWMC, then UWMC may redeem its interest for
the equivalent of the fair value of 5,800 Class B common shares of Company
stock, less any amounts still owed by UWMC.  Since redemption, under certain
terms, is outside the control of the Company, the amounts received are recorded
as a redeemable equity participation.

NOTE 4:     FEDERAL INCOME TAXES

Federal income taxes consist of the following components:

<TABLE>
<CAPTION>
                                                           2001          2000          1999
<S>                                                 <C>           <C>              <C>
Current                                             $        (2)  $    (15,837)  $1,092,304
Deferred                                                 42,501     (1,262,279)    (813,161)
                                                    ------------  ------------    ---------
                                                    $    42,499   $ (1,278,116)   $ 279,143
                                                    ============  ============    =========
</TABLE>
                                     24

<PAGE>   25

Federal income taxes differ from the amount computed by applying the expected
U.S. corporate income tax rate to income before federal income taxes for the
years ended December 31 as follows:

<TABLE>
<CAPTION>
                                               2000                   2000                   1999

                                         Amount    Percent       Amount    Percent      Amount   Percent
<S>                                  <C>            <C>      <C>            <C>      <C>          <C>
Computed expected tax rate           $  (523,107)  (34.0)%  $ (1,128,515)   (34.0) %  $  636,498   34.0 %
Tax effect of permanent differences:
  Write-down of investment in subsidiary 420,745    27.4
  Change in valuation allowance                                  (16,727)    (0.5)       (73,608)  (3.9)
  Adjustment to return filed                                     (26,119)    (0.8)      (283,747) (15.2)
  Other                                  144,861     9.4        (106,755)    (3.2)
                                     -----------    ----     -----------    ----     ----------   ----
                                     $    42,499     2.8%     $(1,278,116)   (38.5)%      279,143   14.9%
</TABLE>

The deferred tax assets and liabilities resulting from the tax effects of
temporary differences at December 31 are presented below:

<TABLE>
<CAPTION>
                                                        2001          2000
<S>                                                 <C>           <C>
Deferred tax assets:
  Net operating losses                              $2,679,716    $2,351,733
  Reduction of shareholders' equity                    213,724       213,724
  Allowance for doubtful accounts                      187,341       759,219
  Unearned premium                                     111,080        72,379
  Amortization                                         686,714       441,297
  Vacation                                             123,959       114,748
  Other                                                150,191       329,258
                                                    ----------    ----------

  Gross deferred tax assets                          4,152,725     4,282,358
  Valuation allowance                               (2,216,807)   (2,216,807)
                                                    ----------    ----------

      Net deferred tax assets                        1,935,918     2,065,551

Deferred tax liabilities:
  Furniture, equipment, and computer software             -           87,132
                                                    ----------    ----------


Deferred income tax asset, net                      $1,935,918    $1,978,419
                                                    ==========    ==========

Current portion of deferred tax assets              $  522,571    $1,140,386
Long-term portion of deferred tax assets             1,363,347       925,165
                                                    ----------    ----------

                                                    $1,935,918    $2,065,551
                                                    ==========    ==========
</TABLE>

                                     25

<PAGE>   26
The valuation allowance was established in 1997 for the tax benefit of the 1997
net operating losses (NOL's) of the Company since the Company filed a separate
federal income tax return for the final six months of 1997 and the first three
weeks of 1998, and the realization of the tax benefit is unlikely.  The
allowance also provides for NOL's acquired in acquisition of a business
in 1997.  The following schedule represents the amounts of the Plan's NOL's
and their expiration date:

<TABLE>
     <S>                                            <C>
     2007                                           $  150,754
     2008                                               53,781
     2009                                               20,754
     2010                                            1,584,667
     2011                                            2,075,894
     2012                                            2,353,449
     2018                                              280,723
     2020                                              396,839
     2021                                              964,657
     Total Net Operating Losses                      7,881,518
     Valuation Allowance                            (6,520,022)
                                                    ==========
                                                  $  1,361,496

</TABLE>


The Company has $1,361,496 in NOL's which expire in 2020 and 2021, as a result
of taxable losses in 2000 and 2001.  There is no valuation allowance on these
NOL's.

NOTE 5:     COMMITMENTS

Leases:  The Company leases its office facilities and some office equipment
under operating leases expiring through 2003.  The leases provide for monthly
minimum rent payments, and some include renewal options for an additional
five years.

Rental expense charged to operations under the operating leases for the years
ended December 31, 2001, 2000 and 1999 were $923,239, $876,900 and $749,108
respectively.

Future minimum lease payments under operating leases for the years ending
December 31 are as follows:

<TABLE>
     <S>                                            <C>

     2002                                              915,927
     2003                                              359,084
     2004                                                 -
                                                    ----------
                                                    $1,275,011
                                                    ==========
</TABLE>

In connection with the acquisition of a business in 1997, the Company is
required to contribute to the capital of the Plan based on a percentage of
the Company's administrative fee revenue for the 10 years following
July 1, 1997, if any.  No minimum amounts of contributions are required.
The following contributions were made pursuant to this agreement in 2001
and 2000.

<TABLE>

     <S>                                     <C>               <C>

                                            2001              2000

1999 Contribution                                          $ 1,714,515
2000 Contribution                                            1,503,152
2001 Contribution                                              996,848
Remaining 2001 Contribution                 775,000

                                            --------------------------
    Total Contributions                 $   775,000        $ 4,214,515
                                            --------------------------
The 2001 advance contribution was paid in 2000 to strengthen the Plan's Regulatory
Capital position

</TABLE>





                                             26

<PAGE>   27
NOTE 6:     REPORTABLE OPERATING SEGMENTS

Factors management used to identify the enterprise's reportable segments:
The Company has two reportable segments which correspond to the organization
of the Company and its majority-owned subsidiary, the Plan.  Each segment
requires distinct tracking capabilities in the areas of revenues, claims
processing, marketing strategies, and reporting to regulatory organizations.

Description of the types of products and services from which each
reportable segment derives its revenue:  The Company has two primary
products which have been aggregated into one reportable segment:  network
access fees and hospital administration fees.  Network access fees arise from
the rental of the Company's large PPO network while hospital administrative
fees arise from charges to the network hospitals based on claims incurred by
members.  The other reportable segment, the Plan, offers a variety of fully
insured health insurance plans to employer groups.

Measurement of segment profit or loss and segment assets:  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
profit and loss from operations before income taxes not including nonrecurring
gains and losses.  The Company accounts for intersegment revenues by
assigning a management fee to the Plan that is an estimate of resources
expended on the Plan's behalf.

                                     27

<PAGE>   28
Information about profit or loss and assets of reportable segments:
<TABLE>
<CAPTION>
                                                First Choice     First Choice
                                               Health Network    Health Plan         Total
<S>                                             <C>              <C>              <C>
2001:
  Revenues from external customers              $ 13,826,171     $108,826,333     $122,652,504
  Revenue from intercompany                          383,050             -             383,050
  Interest revenue (expense)                          99,142          807,220          906,362
  Depreciation/amortization expense                1,485,580          414,099        1,899,679
  Income tax expense (benefit)                     1,196,097       (1,153,598)          42,499
  Expenditures on furniture, equipment,
    and computer software                            412,808           -               412,808
  Segment profit (loss)                            1,124,794       (2,705,843)      (1,581,049)
  Assets                                          14,306,068       21,861,357       36,167,425
  Liabilities                                      2,975,528       15,673,925       18,649,453

2000:
  Revenues from external customers              $ 12,077,869     $127,066,190     $139,144,059
  Revenue from intercompany                          403,860             -             403,860
  Interest revenue (expense)                          95,602          685,302          780,904
  Depreciation/amortization expense                1,616,473          179,303        1,795,776
  Income tax expense (benefit)                       562,064       (1,840,180)      (1,278,116)
  Expenditures on furniture, equipment,
    and computer software                          1,563,753             -           1,563,753
  Segment profit (loss)                            1,376,066       (3,417,112)      (2,041,046)
  Assets                                          25,011,867       23,404,879       48,416,746
  Liabilities                                      4,892,138       15,278,104       20,170,242

 1999:
   Revenues from external customers               11,850,166       80,247,809       92,097,975
   Revenue from intercompany                         337,226             -             337,226
   Interest revenue                                  (44,726)         405,926          361,200
   Depreciation/amortization expense               1,497,695          216,689        1,714,384
   Income tax expense (benefit)                      640,470         (361,327)         279,143
   Expenditures on furniture, equipment,
     and computer software                           769,630            -              769,630
   Segment profit (loss)                           1,748,182         (155,271)       1,592,911
   Assets                                         23,515,062       20,555,995       44,071,057
   Liabilities                                     6,213,590       10,413,052       16,626,642
</TABLE>

                                     28

<PAGE>   29

<TABLE>
<CAPTION>
                                                      2001            2000            1999
<S>                                             <C>              <C>              <C>
Revenues:
  Total revenues for reportable segments and
      consolidated revenues                     $122,652,504     $139,144,059      $92,097,975
                                                ============     ============     ============

Profit or loss:
  Total profit or loss for reportable segments  $ (1,581,049)    $ (2,041,046)     $ 1,592,911
  Adjustment for minority interest in
    consolidated statements                          173,062          691,187           67,327
                                                ------------     ------------     ------------

          Consolidated net income                $(1,407,987)    $ (1,349,859)     $  1,660,238
                                                 ===========     ============     =============
  Assets:
  Total assets for reportable segments          $ 36,167,425     $ 48,416,746     $ 44,017,057
  Elimination of intercompany investments         (4,949,946)     (15,671,522)     (13,171,522)
  Elimination of intercompany balances              (801,780)      (2,332,429)        (231,662)
                                                ------------     ------------     ------------

         Consolidated total assets              $ 30,415,699     $ 30,412,795     $ 30,667,873
                                                ============     ============     ============

Liabilities:
  Total liabilities for reportable segments     $ 18,649,453     $ 20,170,242     $ 16,626,642
  Elimination of intercompany balances             ( 801,780)      (2,332,429)        (231,662)
                                                ------------     ------------     ------------

         Consolidated total liabilities         $ 17,847,673     $ 17,837,813     $ 16,394,980
                                                ============     ============     ============
</TABLE>


Substantially all of the revenues from external customers are derived from
within the state of Washington.  Revenues from one customer of the Plan
represent approximately $25.8 million, $22.7 million and $24.5 million
of the Company's consolidated revenues for 2001, 2000 and 1999 respectively.

NOTE 7:     FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of cash and cash equivalents, short-term investments,
service fees and premiums receivable, accounts payable, notes payable, and
due to provider organizations approximates fair value because of the short
maturity of these instruments.

NOTE 8:  Investment Securities Available for Sale

Investment securities available for sale consist of the following:

<TABLE>

                                     <C>           <C>             <C>           <C>
                                                   Gross           Gross
                                   Amortized     Unrealized      Unrealized
                                     Cost           Gains          Losses       Market Value
                                 ----------------------------------------------------------
December 31, 2001
   Government-backed
   adjustable rate securities   $  2,096,826    $    3,651       $    -        $  2,100,477
   Mortgage-backed
   adjustable rate securities     11,260,732           -          (12,261)       11,248,471
                                 ----------------------------------------------------------
                                $ 13,357,558    $    3,651       $(12,261)     $ 13,348,948
                                 ===========================================================

</TABLE>

The amortized cost and estimated fair value of debt securities at December 31,
2001 based on contractual maturity dates, excluding principal paydowns, are all
due after ten years.


Proceeds from sales and maturities of investments in debt securities in 2001
were $3,167,089.


NOTE 9:     RETIREMENT PLAN

The Company has a qualified 401(k) Employee Savings and Profit Sharing Plan
covering all full-time employees.  Under the Plan, employees can defer up to
12% of their eligible compensation.  The Company matches 50% of each
employee's contribution, up to 6% of the employee's eligible salary.  Employees
become fully vested in employee contributions and vest over two years for
employer contributions.  The Company also has the option to make an additional
profit sharing contribution to the Plan.  Employer contributions to the Plan for
the years ended December 31, 2001 and 2000, amounted to $180,300 and
$161,110, respectively.

                                     29

<PAGE>   30


NOTE 10:     NOTE PAYABLE

The Company has a note payable at December 31, 2001 in the amount of
$698,170 bearing interest at 9.86%.  Principal payments for the years
2002 and 2003 are $331,791 and $366,379, respectively.

NOTE 11:     RESERVE FOR UNPAID CLAIMS AND ADJUSTMENT EXPENSES

Activity in the reserve for unpaid claims and unpaid claims processing expenses
is summarized as follows for the years ended December 31:

<TABLE>
<CAPTION>
                                                          2001          2000
<S>                                                 <C>           <C>
Balance, beginning of year                          $10,181,595   $ 3,210,613

  Incurred related to:
    Current year                                     66,860,450    32,350,518
    Prior year                                         (359,407)      416,921
                                                    -----------   -----------
         Total incurred                              66,501,043    32,767,439

  Paid related to:
    Current year                                     55,266,141    22,231,079
    Prior year                                        9,601,439     3,565,378
                                                    -----------   -----------
         Total paid                                  64,867,580    25,796,457
                                                    -----------   -----------
Balance, end of year                                $11,815,058   $10,181,595
                                                    ===========   ===========
 </TABLE>

During 2001 and 2000, the Company had reinsurance stop loss agreements in
place for claims for which the Company is at risk.
                                     30

<PAGE>   31


NOTE 12:     REGULATORY MATTERS

The Plan is subject to regulation by the Office of the Insurance Commissioner
(OIC) in the State of Washington including the requirement to follow
statutory accounting principles (SAP), which differ from accounting principles
generally accepted in the United States of America (GAAP).  The OIC also
requires that certain levels of capital be maintained.  The State of Washington
adopted a risk-based capital (RBC) calculation for determining statutory
capital requirements, effective for the year ended December 31, 1998.  As of
December 31, 2001, the Plan's RBC was $1,302,954 more than the required amount.

The primary differences in reporting between SAP and GAAP through
December 31, 2001 result from goodwill, healthcare receivables and excess
deferred tax assets beyond calculated admitted portions.

The Plan's statutory basis shareholders' equity as filed in the OIC statements
was $5,754,080 and $5,355,208 as of December 31, 2001 and 2000, respectively.
Statutory basis net loss as filed in the OIC statements was $2,949,648 and
$3,417,113 for the years ended December 31, 2001 and 2000, respectively.

The Plan is subject to regulations that limit dividend payments and regulate
other intercompany transactions.  At December 31, 2001 and 2000, the Plan
had negative statutory basis earned surplus and therefore must seek regulatory
approval prior to any such payment.  No dividends were paid by the Plan
during 2001 or 2000.


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

Effective September 28, 2001, the Company dismissed Deliotte & Touche LLP as the
Company's independent accountants and engaged Moss Adams LLP as its new
independent accountants.  The decision to change the Company's accounting firm
was approved by the Company's Audit Committee of the Board of Directors as
empowered by the Board of Directors.  Deloitte & Touche reports on the Company's
financial statements for the 1999 and 2000 fiscal years contained no adverse
opinion or disclaimer of opinion, and were not qualified or modified as to
uncertainity audit scope or accounting principles.

During the Company's last two fiscal years and the subsequent interim periods
to the date of the change of accountants, there were no material disagreements
between the Company and Deloitte & Touche on any matter of accounting principles
or practices, financial statement disclosure, or audit in scope or procedure,
which disagreements, if not resloved to the satisfaction of Deloitte & Touche,
would have caused them to make reference to the subject matter of the
disagreements in connection with their report on the financial statements.

The Company requested that Deloitte & Touche furnish a letter addressed to the
Securities and Exchange Commission stating whether it agrees with the above
statements.  A copy of such letter, dated September 28, 2001, was filed as an
exhibit to the Company's Form 8-K.


                                     31

<PAGE>   32
PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
            COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT.

The executive officers and directors of First Choice are as follows:

<TABLE>
<CAPTION>
Name	                       Age   Position
<S>                            <C>   <C>


Gary R. Gannaway               55    President & Chief Executive Officer
Kenneth Hamm                   43    Sr. Vice President-Chief Financial Officer
Ross D. Heyl                   48    Sr. Vice President-Chief Marketing Officer
Julie Keeffe                   44    Sr. Vice President-Medical Mgmt & Member Services
Ze'ev Young, M.D.              48    Sr. Vice President-Chief Medical Officer Services
Greg Van Pelt                  50    Director (II)
Paul M. Elliott                61    Director (I)
Kenneth D. Graham              54    Director (II)
Phillip J. Haas                53    Director (I)
William F. Johnston, M.D.      56    Director (III)
Garman E. Lutz                 56    Director (III)
William J. MacDonald, M.D.     57    Director (III)
R. Dean Martz, M.D.            44    Director (I)
Barbara L. Mauk                56    Director (II)
Richard A. McGee, M.D.         56    Director (II)
Richard H. Peterson            59    Director (II)
Paul G. Ramsey, M.D.           52    Director (II)
Richard E. Rust, M.D.          75    Director (II)
Richard Stubbs, M.D., M.B.A.   56    Director (I)
Clyde D. Walker                46    Director (III)
__________________
<FN>
(I)	Term Expires in 2002.
(II)	Term Expires in 2003.
(III)	Term Expires in 2004.
</TABLE>

Gary Gannaway

Mr. Gannaway joined First Choice Health Network as President and CEO in
January 1996.  He has over 25 years of experience in managing and marketing
HMOs, PPO's, and other managed care programs across the country.

He has worked as a Health Plan General Manager, and as a Regional Vice
President for national carriers, including Aetna and CIGNA, and as CEO and
COO for physician and hospital-sponsored managed care programs at the
regional and national level.

Mr. Gannaway is very active on community boards and serves professionally
on the Boards of both the American Association of Health Plans and the
Association of Washington Health Plans.
                                     32

<PAGE>   33

Mr. Gannaway earned his Bachelor's degree in both Political Science and German
at the University of California at Santa Barbara.  As an undergraduate, he also
studied at Georg August University in Gottingen, Germany.  He earned his
master's of Education degree from the State University of New York where he
also completed his course work and comprehensive examinations for a Ph.D. in
Management.

Kenneth A. Hamm

Mr. Hamm, Senior Vice President and Chief Financial Officer, joined
First Choice Health Network in July, 2000.  He has spent most of his career
in the Managed Care industry.  Mr. Hamm was Director of Finance in the Group
Market segment at Wellpoint Health Networks in Southern California from
1991-1994.  Mr. Hamm served in various roles at Premera Blue Cross and
Subsidiaries from 1994 to 1999 including Vice President of Finance and
Healthcare Economics, as well as a stint in Network Development.  Until
starting with the Company in July 2000 Mr. Hamm had been the interim Chief
Financial Officer at Medica Healthplans in Minnesota, a one million member
regional HMO.  Mr. Hamm earned a Bachelors degree in Finance from California
State University at Los Angeles in 1985 and is a CPA.

Ross Heyl

Mr. Heyl, Senior Vice President and Chief Marketing Officer, joined First
Choice Health in 1985.  Mr. Heyl is a licensed health insurance agent in the
state of Washington.  From 1980 to 1982, he was with Penn Mutual Life Insurance
Company in San Francisco and Seattle.  From 1982 to 1985, he was an account
executive for Rollins Burdick Hunter of Washington.

Julie A. Keefe

Ms. Keeffe, Senior Vice President of Medical Management and Member
Services, joined First Choice Health in May 1997.  Ms. Keeffe has worked in
health care since 1979.  Prior to coming to First Choice Health, she provided
health care management consulting services for Milliman and Robertson, Inc,
where she implemented successful strategies for the medical management systems
of health plans and delivery systems.  Earlier, Ms. Keeffe was Director of
Utilization and Quality Management for the Virginia Mason Health Plan for
nine years.  Her background includes indemnity, PPO, and HMO utilization
management and analysis.  Her clinical experience includes several years of
inpatient, outpatient, and emergency care nursing.  Ms. Keeffe expertise is
in designing medical management that meets the needs of the provider as well
as the payer.  Her areas of interest include utilization and quality management,
referral management, medical claims review and medical coverage policy
development.  Julie received her nursing degree from Yakima Valley School of
Nursing in 1979.

Dr. Ze'ev Young

Dr. Young joined First Choice Health as the Chief Medical Officer and
Senior Vice President in January 2001.  He is responsible for the oversight of
medical management and quality improvement.  He also participates actively in
strategic planning, network development, and public relations.  Dr. Young
interfaces with the local practitioner community to ensure that high-quality,
cost-effective health care services are available to First Choice Health
members.

Dr. Young brings significant managed care experience to First Choice Health.
Just prior to joining First Choice Health, Dr. Young spent nearly three years as
the Northwest Regional Medical Director for United Healthcare.  While at
United Healthcare, Dr. Young was instrumental in successfully introducing local
providers to an innovative, practitioner-friendly, and member-centric approach
to health care delivery.  Prior to joining United Healthcare, Dr. Young spent
five years at Regence Blue Shield serving as the Boeing Division Medical
Director, and was also responsible for corporate medical policy.

Dr. Young's undergraduate degree is from the University of California and he is
a graduate of the Albert Einstein College of Medicine in New York.  In 1978, he
was elected to the Alpha Omega Alpha Honor Medical Society.  Dr. Young
completed his Family Practice Residency at Providence Medical Center in
Seattle and is a Board Certified family physician.  He has over 20 years
practice experience and continues to maintain a small private practice.
Dr. Young is also a Clinical Assistant Professor of Family Medicine at the
University of Washington School of Medicine.

                                     33

<PAGE>   34

Greg Van Pelt

Greg Van Pelt is the Vice President and Chief Executive of the Providence
Health System, Washington Region.  The Washington Region of the Providence
Health System includes hospital, clinic and long-term care service with more
than 9,000 colleagues throughout the state.  Mr. Van Pelt has been with
Providence Health System for over 25 years.  He has served in management roles
both as Chief Executive, Providence Health Plan and Chief Executive,
Providence-St. Vincent Hospital and Medical Center, both in Portland, Oregon.
Providence has been serving the West for over 140 years through its hospitals
and health services Alaska, Washington, Oregon and California.


Paul M. Elliott, CPA

Mr. Elliott, recently retired, was formerly Senior Vice President of Finance
and Operations for the Alpac Corporation.  From August 1969 to August 1981, he
was Vice President-Controller for Airborne Freight Corporation in Seattle.  He
is a member of the Board of Visitors for Central Washington University, on the
Board of the Boys & Girls Clubs of South Snohomish County and a member of
Rotary Club International.


Kenneth D. Graham, FACHE

Mr. Graham has served as President and CEO at Overlake Hospital Medical
Center since 1994, and has overseen significant changes in the organization.
The hospital has: developed a new facilities master plan; introduced operational
controls that have significantly improved hospital efficiency; established
contracts with more than 25 managed care companies and implemented new
programs like an adolescent psychiatric care program; a Multiple Sclerosis
Center; a Level III Emergency Center and a Women's Hospital.  He serves as
Chair of the Overlake Venture Center and also the Chair of Doctor Goodwell;
an Internet based virtual clinic service.




                                     34

<PAGE>   35
Mr. Graham also currently serves as the voluntary Executive Director of
RotaCare International; an organization dedicated to providing free clinics in
association with local Rotary clubs.  RotaCare serves homeless, migrant
workers, new immigrants and the uninsured or underinsured.

Mr. Graham is committed to community involvement in local, regional and
national organizations including the Bellevue Chamber of Commerce and the
Rotary Club of Bellevue.  He previously served as a member or advisor of more
than a dozen hospitals or health care organization boards.

He earned a B.S. degree in Public Health and a Masters degree in Public Health
Hospital Administration, both from UCLA.  He is a Fellow in the American
College of Health Care Executives and is the College's Regent for the State of
Washington.


Phillip J. Haas

Mr. Haas is Administrator-Managed Care of Valley Medical Center, a 304-bed
acute care public district hospital, with responsibility for negotiating,
implementing, and administering contracts and joint ventures linking payers
with the hospital, its clinic network, individual practice associations, and
medical staff.  Since joining Valley Medical Center in November 1993, he
managed the development of a clinic network including seven primary care
clinics, a family practice residency clinic, a behavioral health clinic, and two
occupational health clinics.

From 1988 through 1993, Mr. Haas was Executive Director of Virginia Mason
Health Plan, an HMO serving over 40,000 members.  From 1985 to 1988, he
was President of First Choice Health Network, a preferred provider organization.
His prior experiences include serving as Senior Vice President of the Illinois
Hospital Association, president of a hospital shared services organization, and
administrative director of a medical school-based prepaid group practice plan.
He is a Fellow of the American College of Healthcare Executives and a Director
of First Choice Health Network, Inc.  He received a M.B.A. degree from the
University of Chicago and a B.A. degree from Northwestern University in
Evanston, Illinois.

William F. Johnston, M.D., F.A.C.E.P.

Dr. Johnston is the Medical Director of Emergency Services at Northwest
Hospital.  Besides the supervision of the physicians who deliver emergency
medical care at the hospital, his position provides an interface between
administration, nursing, the medical staff and other hospital departments to
help support the smooth delivery of emergency medical services at the hospital.
He serves on the Executive Committee of the hospital as Chairman of the
Department of Emergency Medicine.  Bill also practices as an emergency
physician and helps teach Advanced Cardiac Life Support and Advanced
Trauma Life Support Courses.  He received his M.D., M.B.A. and M.S.E.E.
(Bioengineering) degrees from the University of Washington.

Garman E. Lutz, CPA

Mr. Lutz is Senior Vice President of Finance and Chief Financial Officer for
Empire Health Services in Spokane, Washington.  Empire operates Deaconess
Medical Center, Valley Hospital and Medical Center, St. Luke's Extended Care
Center, Family Home Care and First Care Urgent Care Centers.  He also serves
in various positions for EHS' joint venture projects including Inland Northwest
Health Services, Inland Empire Hospital Shares Services and the Spokane
PHCO.  Mr. Lutz, prior to his appointment at Empire Health Services, was a
partner in a local Spokane CPA firm for over eighteen years.  His practice
experience concentrated in a management advisory service, audit and financial
planning.  Mr. Lutz served as Chairman of the Valley Hospital & Medical
Center Advisory Board from its inception in 1985 until August of 1990.  Prior
to his appointment as an officer of EHS, Mr. Lutz served on the EHS Board of
                                     35

<PAGE>   36
Directors from 1988 through 1990.  Mr. Lutz is active in many community
organizations and currently is a board member of the Spokane Area Chamber of
Commerce, Eastern Washington Museum Foundation, Inland Empire Genetics
Clinic, Leadership Spokane and the Rockwood Retirement Committee.  He is a
member of the AICPA, Washington Society of CPA's, and Healthcare Financial
Management Association.

William J. MacDonald, M.D.

Dr. Bill MacDonald attended Brown University, received his medical degree
from the University of Vermont, and completed his residency at the University
of Pennsylvania.  He earned a Fellowship at the University of California, San
Diego, and is board certified in Internal Medicine and Cardiovascular Disease.
He joined The Everett Clinic in 1976, and was elected to the Board of Directors
in 1987.  Dr. MacDonald's interest in health care administration has been
furthered by the American College of Physician Executives, and by pleasant
association with Mr. Richard Cooper, CEO of The Everett Clinic.  Dr.
MacDonald has served as Board Chair and President of The Everett Clinic for
the last five years.  He has a half-time cardiology practice, providing reality
testing in both the hospital and office environments.  Special interests include
learning about the future of American medicine, and effective organizational
governance.

R. Dean Martz, M.D.

Dr. Martz is a practicing neurosurgeon in Spokane since 1990.  He is an active
staff member of both Sacred Heart Medical and Deaconess Medical Centers in
Spokane.  He is a member of the American Medical Association, American
Association of Neurological Surgeons, and was certified by the American Board
of Neurological Surgeons in 1993.  He received his medical degree from Case
Western Reserve University in Cleveland, Ohio.  He trained neurological
surgery at the University of Michigan Hospitals in Ann Arbor.

Barbara L. Mauk

Ms. Mauk is the Director, Human Resources for Valley Medical Center, Renton,
Washington.  Previously, she was the Managing Partner of ClearPoint, an
employee benefits brokerage and consulting firm.  She has previously served as
the Chief Operating Officer of The Reppond Company; Vice President Human
Resources for KIRO Broadcasting, Inc.; and Personnel Director for Northwest
Hospital.  She is active with Bellevue Rotary, the American Compensation
Association, Society of Human Resource Management, and the Employee
Benefits Planning Association.

Richard A. McGee, M.D., F.A.C.P.

Dr. McGee has a full-time private medical oncology practice and is President of
Washington Cancer Centers, the largest medical oncology group in Washington
State.  He was previously the Medical Director of Stevens Healthcare, a Public
Hospital District, and is a consultant in Medical Staff Affairs to other area
hospitals.  He is a diplomat of the American Board of Internal Medicine as well
as the specialty Boards of both the American Board of Hematology and the
American Board of Medical Oncology.  He is President of the Washington State
Medical Oncology Society.  He is Chairman of the Quality Assurance
Committee of Stevens Health Network, a local PHO.  He is a Clinical Professor
of Medicine at the University of Washington and is a Fellow of the American
College of Physicians.  He is a member of the Clinical Practice Committee of the
American Society of Clinical Oncology and Assistant Editor for Clinical
Practice on their Web site.  In the past, he has served as Chief of the Medical
Staff and Chairman of several hospital committees.  He was Vice-Chairman of
the Board of Directors of Snohomish County Physicians Corporation, a Blue
Shield company.  His undergraduate studies were at John Carroll University, his
graduate studies at Johns Hopkins University Medical School and his post
graduate work was done at the University of Washington Hospital and the
National Institutes of Health in Bethesda, Maryland.

                                     36

<PAGE>   37

Richard H. Peterson

Mr. Peterson is President and Chief Executive Officer of Swedish Health
Services, a non-profit organization comprised of a 163-bed community hospital
on the Ballard campus, the 436-bed Providence Seattle Medical Center
and a 697-bed tertiary care hospital on the First Hill campus.  Mr. Peterson
previously served as President and Chief Executive Officer of Fairview
Riverside Medical Center in Minneapolis, Minnesota.  In all, his career
in health system administration has spanned more than 25 years.  A
native of Minnesota, Mr. Peterson holds a master's degree in hospital and health
care administration from the University of Minnesota and a B.A. from
Macalester College in St. Paul, Minnesota.

Paul G. Ramsey, M.D.

Dr. Paul G. Ramsey is the Vice President for Medical Affairs and Dean of the
School of Medicine at the University of Washington.  Dr. Ramsey also practices
part-time and maintains his hospital staff privileges.

Dr. Ramsey graduated from Harvard College in 1971 with honors in
Biochemistry and received his M.D. from Harvard Medical School in 1975.
Following completion of residency training in Internal Medicine at
Massachusetts General Hospital, he came to the University of Washington as a
Senior Fellow in Infectious Disease in 1978.  Dr. Ramsey served as Chief
Medical Resident at the then University Hospital (now University of
Washington Medical Center) in 1980-1981.  He joined the faculty in the
Department of Medicine in 1980 as an Acting Instructor and was appointed as an
Assistant Professor in 1982.  Dr. Ramsey was promoted to Associate Professor in
1986 and to Professor of Medicine in 1991.  He served as Coordinator of Student
Teaching for the Department of Medicine from 1982-1990 and was Associate
Chair of the Department from 1988-1990.  He was appointed as Chair of the
Department of Medicine in 1992 and became the first holder of the Robert G.
Petersdorf Endowed Chair in Medicine in 1995.  He served as Chair of the
Department of Medicine until June 1997 when he was appointed Vice President
for Medical Affairs and Dean of the School of Medicine.  Dr. Ramsey has
received the Distinguished Teacher Award from the University of Washington
School of Medicine's graduating class three times (in 1984, 1986, and 1987) and
the Margaret Anderson Award from the University of Washington graduating
class of 1989.  The latter Award recognizes exceptional support of medical
students.

Dr. Ramsey's research has focused on the development of methods to assess
physicians' clinical competence.  From 1983-1986, he conducted the first large-
scale study of the relationship of certification of physicians by the American
Board of Internal Medicine to performance in practice.  He has been the
Principal Investigator on multiple research grants related to assessment of
physicians' clinical skills and served as a Henry J. Kaiser Family Foundation
Faculty Scholar in General Internal Medicine for five years.  Dr. Ramsey
received the John P. Hubbard Award from the National Board of Medical Examiners
in 1999 in recognition of his research contributions in the field of evaluation.
He has served on multiple national committees and is a member of multiple
organizations, including the American Association for the Advancement of
Science, the American Federation for Medical Research and the Association of
American Physicians.

Richard E. Rust, M.D.

Dr. Rust is a retired family practitioner.  Dr. Rust has served on the First
Choice Health Network Board of Directors since 1985.  Additional activities
have included serving as Trustee of the Washington Academy of Family
Physicians; Trustee, King County Medical Society; Trustee and Vice Chairman of
King County Medical Blue Shield; and President of King County Academy of
Family Physicians.  He was Chief of Medical Staff of Northwest Hospital
in 1965.

Richard Stubbs, M.D., M.B.A

Dr. Stubbs is the Vice President, Medical Affairs and the senior physician
manager in the MultiCare Health System with direct responsibility for medical
staff relationships and the departments of Medical Staff Services, Family

                                     37

<PAGE>   38
Practice Residency Education, Quality Management, Medical Records,
Transcription, Pharmacy, Cancer Services, Perinatal and Neonatal Services.  Dr.
Stubbs' position represents the key link between MultiCare Health Systems and
the physician community in the Pierce and South King County areas.  Dr. Stubbs
previously served as Medical Director, McKay-Dee Hospital Center in Ogden,
Utah, Medical Director for Blue Cross and Blue Shield of Virginia, in
Richmond, Virginia, and Medical Director, IPA and Group Plans, FHP in
Southern California.  Dr. Stubbs received his undergraduate and medical degrees
from the University of Arkansas and his M.B.A. from the University of Phoenix.
He is Fellow of the American Board of Family Practice and a Fellow of the
American College of Physician Executives where he currently serves on the
Council of Fellows.  He teaches Medical Ethics for the Tulane University
Masters of Medical Management program.

Clyde D. Walker

Mr. Walker recently was the Vice President, Human Resources of PRIMEX
Aerospace and Electronics Division and PRIMEX Aerospace Company in
Redmond, WA.  Mr. Walker has over ten years experience in the human
resources field and over twenty years of business administration and
management experience.  Since 1977, Mr. Walker has held positions of
increasing levels of responsibility in areas including subcontract
administration, contract administration, pricing and human resources.  He
received an M.B.A. degree from City University in Seattle and a B.A. degree in
business administration from the University of Washington.

Mr. Walker recently served as Chairman of the Board of Directors of both Big
Brothers and Big Sisters of King County and led both boards through the
combination of the two independent agencies.  He remains on the resultant
combined Board and also serves on the Board of Directors of First Choice
Health Network.

The Company's Board of Directors proposed an amendment of the Bylaws to
modify the membership of the Board, and on June 22, 2000, the shareholders
approved the changes unanimously.

Classification of Directors. - The management of this corporation shall be
vested in a Board of Directors.  Effective from June 22, 2000, the Board of
Directors shall consist of seventeen individuals: Seven (7) directors (the
"Class A Directors") shall be physicians representing Class A shareholders.
Seven (7) directors (the "Class B Directors") shall represent Class B
shareholders and any public hospitals that have made capital contributions to
the corporation ("participating hospitals").  Three (3) directors (the "Class
C Directors") shall represent employers other than health care providers and/or
be consumers of health care services.

The Board shall be divided into three categories as follows:
<TABLE>
<S>           <C>                    <C>                    <C>
Category   I: Two Class A Directors, two Class B Directors, and one Class C Director.
Category  II: Two Class A Directors, two Class B Directors, and one Class C Director.
Category III: Two Class A Directors, two Class B Directors, and one Class C Director.
</TABLE>

Directors may be removed, with or without cause, by an affirmative vote of the
holders of at least 75% of the outstanding shares of each class of Common
Stock, and the number, classification, qualifications and terms of directors may
not be altered except by such class voting.

A quorum of nine (9) directors is generally required to transact business at a
meeting of the Board, except that a quorum of thirteen (13) directors is
required for determination of the admission and expulsion of shareholders and
"members" (i.e., PPO physicians), the fees charged for and/or paid to health
care providers, any issues reviewed by the Board regarding the limitation or
termination of health care provider contracts, and any merger or sale of the
corporation or any subsidiary.

                                     38

<PAGE>   39
ITEM  11.    EXECUTIVE COMPENSATION

The following table sets forth a summary of the compensation earned by the
Company's President and Chief Executive Officer and each other executive
officer who earned in excess of $100,000 in each of the last three fiscal years:
<TABLE>
<CAPTION>
                                                 Annual     Compensation       All other
Name and Principal Position        Year          Salary         Bonus         Compensation
<S>                                 <C>         <C>            <C>               <C>
Gary Gannaway (1)                   01          $270,000       $   0             $ 7,735
President and CEO                   00          $268,887       $138,915          $ 8,646
                                    99          $238,218       $100,000            7,484

Kenneth Hamm                        01          $203,000         12,019          $   960
Senior Vice President, Finance      00            96,154            0             15,194

Ross Heyl                           01          $120,500        $29,243          $ 5,000
Senior Vice President, Marketing    00          $116,970        $25,200          $ 5,000
                                    99          $112,879        $15,930            5,208

Julie Keeffe, R.N.                  01          $150,000        $18,200          $   960
Senior Vice President, Medical      00          $145,600        $33,250          $   600
Management & Member Services        99          $143,205        $11,820              475

Ze've Young, M.D.                   01          $181,442        $  0             $   960
Chief Medical Officer

Joe Leinonen, M.D.                  00           197,600         35,720            6,600
Chief Medical Officer               99           195,539         12,610            6,250

David Peel                          99          $143,637        $22,250          $ 6,250
Senior Vice President, Finance
</TABLE>

Barbara L. Mauk, the Chairman of the Board, has been compensated $500 per
month (inclusive of attendance at regular Board meeting) and an additional $150
per hour for committee meetings since July 1, 1994.  All other directors have
received $75 per hour for attendance at Board and committee meetings since
February 1, 1995.  The Chairman and directors compensation remained the same
through December 31, 2001.

EMPLOYMENT AGREEMENTS

Effective January 1, 2000, Gary R. Gannaway entered into a three year
employment agreement as the Company's President and Chief Executive Officer.
Under his employment agreement with First Choice, Mr. Gannaway will receive
an annual base salary of $270,000 for 2000, subject to a 5% annual increase.
Mr. Gannaway will be eligible to receive a bonus of up to 50% of base pay
according to performance achieved against mutually determined targets.  The
amount of the annual bonus shall be determined and awarded by the Board of
Directors following acceptance each year by the Board of the independent
auditor's report on the financial statements.

                                     39

<PAGE>   40
ITEM  12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth as of December 31, 2001, information with respect
to the beneficial ownership of the Company's Class A Common Stock and Class
B Common Stock by (i) each person known by the Company to own beneficially
more than five percent of either the Class A Common Stock or Class B Common
Stock, (ii) each of the persons named in the Summary Compensation Table set
forth in "Item 11.  Executive Compensation" of this Part I of this Annual
Report, (iii) each director, and (iv) all directors and executive officers as a
group, together with their percentage ownership of each such class of Common
Stock.

<TABLE>
<CAPTION>
                                             Shares Owned                   Percent of
Name                                      Class A     Class B          Class A     Class B
-------                                   -------     -------          -------     -------
<S>                                         <C>        <C>                <C>       <C>
Northwest Hospital                          -          5,800              -         14.3 %
1550 North 155th
Seattle, WA  98133

Providence-General                          -          5,800              -         14.3 %
14th and Colby
Everett, WA  98201

Good Samaritan                              -          5,800              -         14.3 %
Community Healthcare
407-14th Avenue SE
Puyallup, WA  98371

MultiCare Medical Center                    -          5,800              -         14.3 %
409 South J
Tacoma, WA  98405

Empire Health Services                      -          5,800              -         14.3 %
80 Fifth Avenue
Spokane, WA  99210

Swedish Medical Center                      -          5,800              -         14.3 %
747 Broadway
Seattle, WA  98114

Overlake Hospital Medical Center            -          5,800              -         14.3 %
1035 116th Avenue NE
Bellevue, WA  98004

Paul M. Elliott                             -           -                 -           -


Kenneth D. Graham                           -           -                 -           -
</TABLE>
                                     40

<PAGE>   41

<TABLE>
<CAPTION>
                                             Shares Owned                   Percent of
Name                                      Class A     Class B          Class A     Class B
-------                                   -------     -------          -------     -------
<S>                                         <C>        <C>                <C>        <C>
Phillip J. Haas                              -           -                -           -

William F. Johnston, M.D.                    1           -                *           -

Garman Lutz

Greg Van Pelt                                -           -                -           -

William J. MacDonald, M.D.                   -           -                -           -

R. Dean Martz, M.D                           1           -                *           -

Barbara L. Mauk                              -           -                -           -

Richard A. McGee, M.D.                       1           -                *           -

Richard H. Peterson                          -           -                -           -

Paul G. Ramsey, M.D.                         -           -                -           -

Richard E. Rust, M.D.                        1           -                *           -

Richard Stubbs, M.D., M.B.A.                 -           -                -           -

Clyde D. Walker                              -           -                -           -

All directors and executive
officers as a group (4 persons)              4         40,600             *          100%
</TABLE>

Four additional hospitals in the state of Washington (Evergreen Hospital
Medical Center, 12040 Northeast 128th Street, Kirkland, WA  98034, Valley
Medical Center, 400 S. 43rd Street, Renton WA 98055, Stevens Memorial
Hospital, 21601 76th Avenue, Edmonds, WA  98026, and University of
Washington Medical Center, 1959 Northeast Pacific Street, Seattle, WA  98195)
are not shareholders of the Company, but have made capital contributions to the
Company in consideration of contractual rights substantially similar to the
rights to which each holder of Class B Common Stock is entitled, including
liquidation and dividend rights, but excluding voting rights.  See  "Item 8,
Note 2, Shareholders Equity."
                                     41

<PAGE>   42
ITEM  13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On December 20, 1999, First Choice Health Network, Inc. executed an
agreement with University of Washington Academic Medical Center (UWMC)
to become a participant in the administration, operations and any incentives
bestowed upon any shareholders in First Choice Health Network effective
January 1, 2000.  First Choice offers and operates a preferred provider
organization and a managed care delivery system for cost-effective, quality
health care benefits, and for comprehensive health care claims processing and
administration.  University of Washington Academic Medical Center has agreed
to pay the affiliation fee of $2,520,000, payable $1,260,000 upon execution of
the Agreement and the remaining $1,260,000 will be paid in three equal
payments of $420,000 due annually for three years plus interest at five percent
(5%).  UWMC does not become a shareholder or member of the Network.
UWMC shall participate in any incentive or reward program established by the
Network as if UWMC owned 5,800 shares of class B common stock.
Dividends, distributions, and liquidation of the Network are also determined as
if UWMC owned 5,800 shares of class B stock.



                                     42

<PAGE>   43
PART  IV

Item  14.    EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K.

(a)    Exhibits

2.1    Copy of Registrant's Restated Articles of Incorporation.*

2.2    Copy of Registrant's By-Laws.*

2.3    Copy of Contribution, Merger and Asset Purchase Agreement
       dated June 2, 1997

2.4    Purchase agreement dated as November 12, 1998, among First Choice
       Health Network, Inc. And Providence Plan Partners.

2.5    Reissued Independent Auditors' Report from Deloitte & Touche LLP
       for the years ended December 31, 2000, 1999 and 1998.

10.1   Form of Agreement between Registrant and Physician participating
       in PPO. **

10.2   Form of Health Care Facility Service Contract between Registrant and
       Hospital participating in PPO.*

10.3   Form of Agreement between Registrant and Health Care
	 Provider other than Hospitals and Physicians participating in PPO.*

                                     43

<PAGE>   44

10.4   Form of Agreement between Registrant and Third Party Administrator.*

10.5   Form of Agreement between Registrant and Insurance Company .*

10.6   Copy of Participation Agreement dated March 27, 1985, between
       Registrant and King County Public Hospital District No.2
       (Evergreen General Hospital).*

10.7   Copy of Participation Agreement dated March 26, 1985, between
       Registrant and Valley Medical Center.*

10.8   Copy of Participation Agreement dated December 19, 1991, between
       Registrant and Public Hospital District No.2 of Snohomish County
       (Stevens Memorial Hospital) and related Promissory Note in the
        aggregate  principal  amount  of  $ 566,000.*

10.23  Copy of Participation Agreement dated December 20, 1999, between
       Registrant and University of Washington Medical Center and related
       Promissary Note in the aggregate principal amount of $1,260,000.*

(b)    Reports on Form 8-K.

16     Report dated December 30, 1999.  Participation Agreement of University
       of Washington Medical Center.

16.1   Report dated September 27, 2001, Change in Registrants Certifying
       Accountant

*      Filed as same numbered Exhibit in Registrant's Registration Statement
       on Form 10-SB.

**     Denotes a management contract or compensatory plan or arrangement
       required to be filed as an exhibit to this Annual Report on Form 10K-SB.


                                     45

<PAGE>   46
SIGNATURES

In accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, on the 1st day of April 2002.


	FIRST CHOICE HEALTH NETWORK, INC.



By:	/s/KENNETH HAMM
	--------------------------------------
	KENNETH HAMM
	Chief Financial Officer


In accordance with the Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated on April 1, 2002.

<TABLE>
<CAPTION>
Signature                              Title                                         Date
---------                              -----                                         ----

<S>                                    <C>                                           <C>
/ s / GARY R. GANNAWAY	               Principal Executive Officer                   April 1, 2002
----------------------------
      GARY R. GANNAWAY

/ s / KENNETH HAMM	               Principal Financial Officer                   April 1, 2002
----------------------------
      KENNETH HAMM

/ s / WILLARD E. KESSEL III           Contoller                                     April 1, 2002
----------------------------

/ s / PAUL M. ELLIOTT	               Director                                      April 1, 2002
----------------------------
      PAUL M. ELLIOTT

/ s / KENNETH D. GRAHAM                Director                                      April 1, 2002
----------------------------
      KENNETH D. GRAHAM

/ s / PHILLIP J. HAAS	               Director                                      April 1, 2002
----------------------------
      PHILLIP J. HAAS

/ s / WILLIAM F. JOHNSTON, M.D.        Director                                      April 1, 2002
----------------------------
      WILLIAM F. JOHNSTON, M.D.

/ s / GARMAN E. LUTZ 	               Director                                      April 1, 2002
----------------------------
      GARMAN E. LUTZ

/ s / WILLIAM J. MACDONALD, M.D.       Director                                      April 1, 2002
----------------------------
      WILLIAM J. MACDONALD, M.D.

/ s / R. DEAN MARTZ, M.D.              Director                                      April 1, 2002
----------------------------
      R. DEAN MARTZ, M.D.

/ s / BARBARA L. MAUK                  Director                                      April 1, 2002
----------------------------
      BARBARA L. MAUK

/ s / RICHARD A. MCGEE, M.D.           Director                                      April 1, 2002
----------------------------
      RICHARD A. MCGEE, M.D.

/ s / RICHARD H. PETERSON              Director                                      April 1, 2002
----------------------------
      RICHARD H. PETERSON

/ s / PAUL G. RAMSEY, M.D.             Director                                      April 1, 2002
----------------------------
      PAUL G. RAMSEY, M.D.

/ s / RICHARD E. RUST, M.D.            Director                                      April 1, 2002
----------------------------
      RICHARD E. RUST, M.D.

/ s / RICHARD STUBBS, M.D., M.B.A.     Director                                      April 1, 2002
----------------------------
      RICHARD STUBBS, M.D., M.B.A.

/ s / CLYDE D. WALKER                  Director                                      April 1, 2002
----------------------------
      CLYDE D. WALKER

</TABLE>
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