MEDPARTNERS INC, DEF 14A, 1997-04-14

MEDPARTNERS INC
DEF 14A, 1997-04-14
SPECIALTY OUTPATIENT FACILITIES, NEC

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SCHEDULE 14A
(RULE 14A-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>

MEDPARTNERS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

(1) Title of each class of securities to which transaction applies:

(2) Aggregate number of securities to which transaction applies:

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):

(4) Proposed maximum aggregate value of transaction:

(5) Total fee paid:

[ ] Fee paid previously with preliminary materials:

[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

(2) Form, Schedule or Registration Statement No.:

(3) Filing Party:

(4) Date Filed:
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MEDPARTNERS, INC.
3000 GALLERIA TOWER, SUITE 1000
BIRMINGHAM, ALABAMA 35244

APRIL 11, 1997

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

The Annual Meeting of Stockholders of MedPartners, Inc. (the "Company")
will be held at The Wynfrey Hotel, 1000 Riverchase Galleria, Birmingham,
Alabama, on May 13, 1997, at 4:00 p.m. Central Time, for the following purposes:

1. To elect four Directors to serve a term of three years each.

2. To approve and adopt the MedPartners 1997 Long Term Incentive
Compensation Plan.

3. To approve and adopt the MedPartners Employee Stock Purchase Plan.

4. To transact such other business as may properly come before the
Annual Meeting or any adjournment thereof.

Stockholders of record at the close of business on March 20, 1997 are
entitled to notice of, and to vote at the Annual Meeting or any adjournment
thereof.

PLEASE COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY AND RETURN IT
PROMPTLY TO THE COMPANY. IF YOU ATTEND THE ANNUAL MEETING, YOU MAY REVOKE YOUR
PROXY AND VOTE IN PERSON IF YOU DESIRE TO DO SO, BUT ATTENDANCE AT THE ANNUAL
MEETING DOES NOT ITSELF SERVE TO REVOKE YOUR PROXY.

By Order of the Board of Directors,

Tracy P. Thrasher
Corporate Secretary

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

PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY WHETHER YOU PLAN TO
ATTEND THE ANNUAL MEETING OR NOT.

A SELF-ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS
REQUIRED IF MAILED WITHIN THE UNITED STATES.

- --------------------------------------------------------------------------------
<PAGE> 3

MEDPARTNERS, INC.

PROXY STATEMENT

This Proxy Statement is furnished to the holders of Common Stock, par value
$.001 per share, of MedPartners, Inc. (the "Company" or "MedPartners") in
connection with the solicitation of Proxies on behalf of the Board of Directors
of the Company for the Annual Meeting of Stockholders to be held on May 13, 1997
(the "Annual Meeting"). Only stockholders of record at the close of business on
March 20, 1997 are entitled to notice of and to vote at the Annual Meeting.
Returning your completed Proxy will not prevent you from voting in person at the
Annual Meeting should you be present and wish to do so. Any such Proxy may be
revoked by a stockholder at any time before it is exercised by either giving
written notice of such revocation to the Secretary of the Company or submitting
a later-dated Proxy to the Company prior to the Annual Meeting. A stockholder
attending the Annual Meeting may revoke his proxy and vote in person if he
desires to do so, but attendance at the Annual Meeting will not of itself revoke
the Proxy.

The Company's stockholders will be solicited by mail on or about April 11,
1997. The Company has retained ChaseMellon Shareholder Services, L.L.C. to
solicit proxies on its behalf. The Company will pay ChaseMellon Shareholder
Services, L.L.C. a fee of $12,500 and will reimburse ChaseMellon Shareholder
Services, L.L.C. for out of pocket expenses incurred. Additional solicitation
may be made by mail, telephone or telegram by the officers or regular employees
of the Company, who will receive no additional compensation therefor. The
Company expects to reimburse brokerage houses, custodians, nominees and
fiduciaries for reasonable out-of-pocket expenses incurred by them in connection
therewith. The entire expense of the solicitation, including the cost of
preparing, assembling and mailing the proxy materials, will be borne by the
Company.

Shares represented by executed and unrevoked Proxies will be voted in
accordance with the instructions contained therein or in the absence of such
instructions, in accordance with the recommendations of the Board of Directors.
Neither abstentions nor broker non-votes will be counted for the purpose of
determining whether any given proposal has been approved by the stockholders of
the Company. The election of directors requires a plurality of the votes cast by
the holders of the Company's Common Stock. A "plurality" means that the
individuals who receive the largest number of affirmative votes cast are elected
as directors up to the maximum number of directors to be chosen at the Annual
Meeting. The approval and the adoption of the MedPartners 1997 Long Term
Incentive Compensation Plan and the MedPartners Employee Stock Purchase Plan
require the affirmative vote of a majority of the votes cast on each proposal,
provided the votes cast on each proposal represent over 50% in interest of the
Common Stock entitled to vote on each proposal. In the event there are
insufficient votes cast to satisfy such 50% requirement, the Annual Meeting may
be adjourned in order to permit further solicitation of proxies.

As to all matters that may come before the Annual Meeting, each stockholder
will be entitled to one vote for each share of Common Stock of the Company held
by him at the close of business on March 20, 1997. The holders of a majority of
the shares of Common Stock of the Company entitled to vote and present in person
or represented by proxy will constitute a quorum at the Annual Meeting.
Abstentions and broker non-votes will be counted for purposes of determining the
presence of a quorum. At March 20, 1997, there were 171,449,860 shares of Common
Stock outstanding.

DISSENTERS' RIGHTS OF APPRAISAL

There are no dissenters' rights of appraisal in connection with the vote of
the stockholders with respect to the matters to be voted on.

PROPOSALS BY STOCKHOLDERS

Any proposals by stockholders of the Company intended to be presented at
the 1998 Annual Meeting of Stockholders must be received by the Company for
inclusion in the Company's Proxy Statement and form of Proxy by November 30,
1997.

ELECTION OF DIRECTORS

Pursuant to the terms of the Company's Third Restated Certificate of
Incorporation (the "Company's Certificate") and the Company's Second Amended and
Restated Bylaws (the "Company's Bylaws"), the Board of Directors of the Company
is divided into three classes, with each class being as nearly equal in number
as reasonably possible. One class holds office for a term that will expire at
this year's Annual Meeting of Stockholders,
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a second class holds office for a term that will expire at the annual meeting of
stockholders to be held in 1998, and a third class holds office for a term that
will expire at the annual meeting of stockholders to be held in 1999. Each
director holds office for the term to which he is elected and until his
successor is duly elected and qualified. At each annual meeting of stockholders
of the Company, the successors to the class of directors whose terms expire at
such meeting will be elected to hold office for a term expiring at the annual
meeting of stockholders held in the third year following the year of their
election. Messrs. Scrushy, McCourtney and Piccolo and Dr. Lopez have terms
expiring at the time of the Annual Meeting; Messrs. House, McDonald, Kramer,
Newhall and Headrick have terms expiring in 1998, and Messrs. Striplin, Kraemer
and Hodson and Dr. Mullikin have terms expiring in 1999. The Board of Directors
elects officers annually and such officers serve at the discretion of the Board
of Directors.

At this year's Annual Meeting four directors are to be elected. The
enclosed Proxy will be voted in favor of the persons named below unless other
instructions are given. These nominees will serve until 2000 and until their
successors have been duly elected and qualified at the annual meeting of
stockholders to be held in 2000. In the event that any of the nominees shall be
unable to serve as a director, it is the intention of the persons designated as
proxies to vote for substitutes selected by the Board of Directors. The Board of
Directors has no reason to believe that any of the persons named will be unable
to serve if elected.

Set forth below is certain information about each of the directors
nominated for re-election at the Annual Meeting:

Richard M. Scrushy has been a member of the Company's Board of Directors
since January 1993. Since 1984, Mr. Scrushy has been Chairman of the Board and
Chief Executive Officer of HEALTHSOUTH Corporation ("HEALTHSOUTH"), a publicly
traded provider of rehabilitation healthcare services. Mr. Scrushy is also a
member of the Board of Directors of Capstone Capital Corporation ("Capstone"), a
publicly traded real estate investment trust.

Ted H. McCourtney has been a member of the Company's Board of Directors
since August 1993. He has been a general partner of Venrock Associates, a
venture capital firm, since 1970. Mr. McCourtney is a member of the Board of
Directors of Cellular Communications, Inc., Cellular Communications of Puerto
Rico, Inc., Cellular Communications International, Inc., International CabelTel
Incorporated, SBSF, Inc. and Structural Dynamics Research Corporation, each of
which is publicly traded.

Rosalio J. Lopez, M.D. has been a member of the Company's Board of
Directors since November 1995. Dr. Lopez had been a director of the general
partner of Mullikin Medical Enterprises, L.P. ("MME") since 1989. Dr. Lopez
joined MME's principal professional corporation in 1984 and serves as the
Chairman of its Medical Council and Family Practice and Managed Care committees.
He also acted as a director and a Vice President of MME's principal professional
corporation. He is also a director and shareholder of Mullikin Independent
Practice Association ("MIPA").

C.A. Lance Piccolo has been Vice Chairman of the Company's Board of
Directors since September 1996. From August 1992 to September 1996, he was
Chairman of the Board of Directors and Chief Executive Officer of Caremark
International Inc. ("Caremark"). From 1987 until November 1992, Mr. Piccolo was
an Executive Vice President of Baxter International Inc. ("Baxter") and from
1988 until November 1992, he served as a director of Baxter. Mr. Piccolo also
serves as a director of Crompton & Knowles Corporation ("CKC") and Baxter, each
of which is publicly traded.

See Appendix A to this Proxy Statement, "Directors and Executive Officers",
for certain information about the other directors named whom it is anticipated
will continue in office following the Annual Meeting.

MANAGEMENT MATTERS

There are no arrangements or understandings known to the Company between
any of the directors, nominees for director or executive officers of the Company
and any other person pursuant to which any such person was or is to be elected
as a director or an executive officer, except the executive employment agreement
of Larry R. House. See "Compensation Committee Report on Executive
Compensation -- Chief Executive Officer Compensation". Drs. Mullikin and Lopez
and Messrs. McDonald and Kramer initially became members of the Board of
Directors in connection with the acquisition of MME, and Messrs. Piccolo,
Headrick, Hodson and Kraemer became members of the Board of Directors in
connection with the acquisition of Caremark when it was agreed that at least
four members of the Company's thirteen member Board of Directors would be
designated by Caremark to serve for a three-year period immediately following
the acquisition. There are no family relationships between any directors,
nominees for director or executive officers of the Company. The Board of
Directors of the Company held a total of eight meetings and acted by unanimous
written consent nine times during 1996.

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In addition to Mr. House's employment agreement, the Company entered into
an employment agreement with Mark L. Wagar pursuant to which the Company is
obligated to make certain payments to, and continue certain benefits for, Mr.
Wagar in the event of a Change in Control of the Company. See "Executive
Compensation and Other Information -- Executive Employment Agreements".

ATTENDANCE AT MEETINGS OF THE BOARD OF DIRECTORS

The Board of Directors held a total of eight meetings during 1996,
including four regularly scheduled meetings and four special meetings. During
1996, all of the directors, except for Mr. Hodson, attended at least 75% of the
Board of Directors' meetings held during the period for which such person was
serving as a director. Mr. Hodson attended one of the two meetings of the Board
of Directors held during the portion of 1996 that he was serving as a director.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors of the Company currently has two committees: the
Audit Committee and the Compensation Committee.

The Audit Committee has the responsibility for reviewing and supervising
the financial controls of the Company. The Audit Committee makes recommendations
to the Board of Directors of the Company with respect to the Company's financial
statements and the appointment of independent auditors, reviews significant
audit and accounting policies and practices, meets with the Company's
independent public accountants concerning, among other things, the scope of
audits and reports, and reviews the performance of overall accounting and
financial controls of the Company. The Audit Committee consists of Messrs.
McCourtney and Hodson and Dr. Lopez. During 1996, there were three meetings of
the Audit Committee.

The Compensation Committee has the responsibility for reviewing the
performance of the officers of the Company and recommending to the Board of
Directors of the Company's annual salary and bonus amounts for all officers of
the Company. The Compensation Committee also administers the Company's 1993
Stock Option Plan, 1995 Stock Option Plan, MedPartners Incentive Compensation
Plan and the 1997 Long Term Incentive Compensation Plan. The Compensation
Committee consists of Messrs. Newhall, McDonald and Headrick. Mr. Headrick
replaced Mr. McCourtney in September 1996. During 1996, there were two meetings
of the Compensation Committee. See "Compensation Committee Report on Executive
Compensation".

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors and persons who
beneficially own more than 10% of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission and The New York Stock Exchange. Officers,
directors and beneficial owners of more than 10% of the Company's Common Stock
are required by regulations promulgated by the Securities and Exchange
Commission to furnish the Company with copies of all Section 16(a) forms that
they file. Based solely on review of the copies of such forms furnished to the
Company, or written representations that no reports on Form 5 were required, the
Company believes that during 1996, all of its officers, directors and
greater-than-10% beneficial owners complied with Section 16(a) filing
requirements applicable to them, except that Harold O. Knight, Jr. filed a Form
4 due March 10 late as a result of an exchange of shares that took place by
operation of law and John J. Gannon filed his Form 3 late as a result of a
difficult travel schedule.

MEDPARTNERS 1997 LONG TERM INCENTIVE COMPENSATION PLAN

INTRODUCTION

The Company's Board of Directors has adopted the MedPartners 1997 Long Term
Incentive Compensation Plan (the "1997 Plan") for the Company's directors,
executives and other key employees and certain consultants of the Company and
its subsidiaries. The 1997 Plan is intended to advance the Company's interests
by providing such persons with additional incentives to promote the success of
the Company's business, to increase their proprietary interest in the success of
the Company and to encourage them to remain in the Company's employ. Management
believes that the 1997 Plan is a necessary tool to help the Company compete
effectively with other enterprises for the services of new employees and to
retain key employees and directors, all as may be required for the future
development of the Company's business. Management intends for the 1997 Plan to
complement the Company's 1993 Stock Option Plan (the "1993 Plan"), the 1995
Stock Option Plan (the "1995 Plan"), and the Incentive

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Compensation Plan (the "IC Plan") by making additional shares available for
issuance pursuant to options granted under the 1997 Plan. See "Executive
Compensation -- Stock Option Plans".

It should be noted that each director, each nominee for director and each
officer and employee of the Company has, by reason of being eligible to receive
awards under the 1997 Plan, an interest in seeing that the 1997 Plan is adopted
by the stockholders.

Set forth below is a summary of all material features of the 1997 Plan. See
"Executive Compensation -- Stock Option Plans" in this Proxy Statement for
information with respect to stock options granted to certain directors and
executives of the Company under the IC Plan, the 1993 Plan and the 1995 Plan.

NATURE OF AWARDS TO BE GRANTED PURSUANT TO THE 1997 PLAN

The 1997 Plan provides for the grant of options intended to qualify as
"incentive stock options" ("ISOs") under Section 422(b) of the Internal Revenue
Code of 1986 (the "Code") and non-qualified stock options ("NQSOs"). Options
designated as ISOs by the Compensation Committee of the Board of Directors (the
"Compensation Committee") will contain terms designed to comply with the
provisions of Section 422(b). All options issued pursuant to the 1997 Plan and
not expressly designated as ISOs shall be conclusively deemed to be NQSOs. The
1997 Plan also provides for Restricted Stock Awards.

COMMON STOCK SUBJECT TO THE 1997 PLAN

The aggregate number of shares of Common Stock covered by the 1997 Plan is
6,725,000 shares. Under the terms of the 1997 Plan, the number of shares of
Common Stock for which awards may be granted under such plan shall automatically
increase on the first day of each calendar year during the term of the 1997
Plan, beginning with the 1998 calendar year, by an amount equal to 1% of the
shares of Common Stock outstanding on December 31 of the immediately preceding
year. However, such additional shares shall be available only for the grant of
NQSOs or Restricted Stock under the 1997 Plan and not for the grant of ISOs.
Notwithstanding the foregoing, the maximum number of shares of Restricted Stock
that may be granted under the 1997 Plan shall be an amount equal to one-fifth of
the total number of shares reserved for issuance under the 1997 Plan.

Shares issued upon exercise of options or awards of Restricted Stock under
the 1997 Plan may be either authorized but unissued shares or shares re-acquired
by the Company. If, on or prior to the termination of the 1997 Plan, an award
granted thereunder expires or is terminated for any reason without having been
exercised or vested in full, the unpurchased or unvested shares covered thereby
will again become available for the grant of awards under the 1997 Plan. Shares
of Common Stock covered by options surrendered in connection with the exercise
of other options shall not be deemed to have been exercised and shall again
become available for the grant of awards under the 1997 Plan.

The purchase price of the shares of Common Stock covered by each option
granted under the 1997 Plan will be at least 100% of the fair market value, but
in no event less than the par value, of the Common Stock at the time the option
is granted. No option granted to any person who, at the time of such grant,
owns, taking into account the attribution rules of Section 424(d) of the Code,
stock possessing more than 10% of the total combined voting power of all classes
of the Company's stock or of the stock of any of its corporate subsidiaries, may
be designated as an ISO unless at the time of such grant the purchase price of
the shares of Common Stock covered by such option is at least 110% of the fair
market value, but in no event less than the par value, of such shares.
Notwithstanding any contrary provision contained in the 1997 Plan, the aggregate
fair market value (determined as of the time each ISO is granted) of the shares
of Common Stock with respect to which ISOs issued to any one person thereunder
are exercisable for the first time during any calendar year shall not exceed
$100,000.

Awards of Restricted Stock under the 1997 Plan will be made at the
discretion of the Compensation Committee and will consist of shares of Common
Stock granted to a participant and covered by a Restricted Stock award
agreement. At the time of an award, a participant will have the benefits of
ownership in respect of such shares, including the right to vote such shares and
receive dividends thereon and other distributions, subject to the restrictions
set forth in the 1997 Plan and in the Restricted Stock award agreement. The
shares will be legended and, at the option of the Company, may be held in escrow
by the Company and may not be sold, transferred or disposed of until such
restrictions have lapsed. Each award may be subject to a lapsing formula
pursuant to which the restrictions on transferability lapse over a particular
time period. The Compensation Committee has broad discretion as to the specific
terms and conditions of each award, including applicable rights upon certain
terminations of employment.

The 1997 Plan provides that the fair market value shall be deemed to be the
closing sale price at which the shares of Common Stock were traded on the
principal securities exchange on which the shares are traded on the

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date of the meeting of the Compensation Committee at which the award is granted,
or if no sale of the Common Stock was made on any national securities exchange
on such date, then on the next preceding day on which there was a sale of the
Common Stock. The Common Stock is listed on The New York Stock Exchange.

ADMINISTRATION OF THE 1997 PLAN

The 1997 Plan is administered by the Compensation Committee. The
Compensation Committee has full and exclusive authority to determine the grant
of awards under the 1997 Plan. Currently, Messrs. Newhall, McDonald and Headrick
serve as the Compensation Committee.

PURCHASE OF COMMON STOCK UNDER THE 1997 PLAN

Each award granted under the 1997 Plan shall be granted pursuant to and
subject to the terms and conditions of an award agreement (an "Award Agreement")
to be entered into between the Company and the awardholder at the time of such
grant. Any such Award Agreement shall incorporate by reference all of the terms
and provisions of the 1997 Plan as in effect at the time of grant and may
contain such other terms and provisions as shall be approved and adopted by the
Compensation Committee.

The expiration date of an award granted under the 1997 Plan shall be as
determined by the Compensation Committee at the time of grant, provided that an
ISO shall expire not more than ten years after the date such ISO is granted.
Each award shall become exercisable or vested in whole, in part or in
installments at such time or times as the Compensation Committee may prescribe
and specify in the Award Agreement at the time the award is granted.

In the event of a "Change in Control" (as defined below) of the Company,
awards granted under the 1997 Plan which, by their terms, vest or are
exercisable in installments, will become immediately exercisable or vested in
full. A "Change in Control" shall be deemed to have occurred as of the first day
that any one or more of the following conditions shall have been satisfied
(capitalized terms not otherwise defined herein are defined in the 1997 Plan):
(a) the acquisition by any Person of Beneficial Ownership of 20% or more of
either (A) the then outstanding shares of Common Stock of the Company, or (B)
the combined voting power of the outstanding voting securities of the Company
entitled to vote generally in the selection of Directors; provided, however,
that for purposes of this provision, the following transactions do not
constitute a Change of Control: (1) any acquisition directly from the Company
through a public offering of shares of Common Stock of the Company; (2) any
acquisition by the Company, (3) any acquisition by any employee benefit plan (or
related trust) sponsored or maintained by the Company or any corporation
controlled by the Company, or (4) any acquisition by any corporation pursuant to
a transaction which complies with clauses (A), (B) and (C) of subsection (c),
below; (b) the cessation, for any reason, of the individuals who constitute the
Company's Board of Directors as of the date hereof ("Incumbent Board") to
constitute at least a majority of the Company's Board of Directors; provided,
however, that any individual becoming a Director following the date hereof whose
election, or nomination for election by the Company's stockholders, was approved
by a vote of at least a majority of the Directors then comprising the Incumbent
Board shall be considered as though such individual was a member of the
Incumbent Board, but excluding any such individual whose initial assumption of
office occurs because of an actual or threatened election contest with respect
to the election or removal of Directors to other actual or threatened
solicitation of proxies or consents by or on behalf of Person other than the
Company's Board of Directors; (c) the consummation of a reorganization, merger
or consolidation or sale or other disposition of all or substantially all of the
assets of the Company ("Business Combination") unless, following such Business
Combination, (A) all or substantially all of the individuals and entities who
were the Beneficial Owners, respectively, of the outstanding shares of Common
Stock of the Company and the outstanding voting securities of the Company
immediately before such Business Combination beneficially own, directly or
indirectly, more than 50% of, respectively, the then outstanding shares of
Common Stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of Directors, as the case
may be, of the Company resulting from such Business Combination (including,
without limitation, a corporation which as a result of such transactions owns
the Company or all or substantially all of the Company's assets either directly
or through one or more subsidiaries) in substantially the same proportions as
their ownership immediately before such Business Combination of the outstanding
shares of Common Stock and the outstanding voting securities of the Company, as
the case may be; (B) no party (excluding any corporation resulting from such
Business Combination or any employee benefit plan (or related trust) of the
Company or such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 20% or more of, respectively, the
then outstanding shares of common stock of the corporation resulting from such
Business Combination or the combined voting power of the then outstanding voting
securities of such corporation except to the extent that such ownership existed
before the Business Combination; and (C) at least a majority of the members of
the board of directors of the corporation resulting from such Business
Combination were members of

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the Company's Board of Directors at the time of the execution of the initial
agreement, or of the action of the Company's Board of Directors, providing for
such Business Combination; or (d) the approval by the stockholders of the
Company of a complete liquidation or dissolution of the Company. These
provisions of the 1997 Plan may have some deterrent effect on certain mergers,
tender offers or other takeover attempts, thereby having some potential adverse
effect on the market price of the Company's Common Stock.

The exercise price for options granted under the 1997 Plan may be paid in
any of the following ways, which may be combined for any given exercise: (a) the
exercise price may be paid in cash or its equivalent; (b) the exercise price may
be paid by tendering previously acquired shares of Common Stock having a fair
market value equal to the aggregate exercise price for the options being
exercised; or (c) subject to applicable requirements of the Exchange Act, the
optionholder may deliver with his exercise notice irrevocable instructions to a
broker to promptly deliver to the Company an amount of sale or loan proceeds
sufficient to pay the exercise price. In addition, with respect to optionholders
who are subject to reporting requirements under Section 16(a) of the Exchange
Act, the optionholder may surrender unexercised options having a "Spread" (as
defined below) equal to the exercise price of the options sought to be exercised
(together with (c) above, "Cashless Exercise"). For purposes of the 1997 Plan,
"Spread" means, with respect to a surrendered option, (i) the average price per
share of Common Stock on the date of exercise, less (ii) the exercise price of
the surrendered option.

Awards granted under the 1997 Plan shall be assignable or transferable by
will or pursuant to the laws of descent and distribution or as otherwise
specifically permitted by the Award Agreement or by the Committee, and options
shall be exercisable during the awardholder's lifetime by the awardholder
himself or herself or any permitted transferee. No holder of any option shall
have any rights to dividends or other rights of a stockholder with respect to
shares subject to an option prior to the purchase of such shares upon exercise
of the option.

TERMINATION OF EMPLOYMENT, DEATH OR DISABILITY OF OPTIONHOLDER

Each option, to the extent it has not been previously exercised, shall
terminate upon the earliest to occur of: (i) the expiration of the option period
set forth in the Award Agreement; (ii) for ISOs, the expiration of three months
following the Participant's retirement (following the Participant's Retirement,
NQSOs shall terminate upon the expiration of the option period set forth in the
Award Agreement); (iii) the expiration of 12 months following the Participant's
death or disability; (iv) immediately upon termination for cause; or (v) the
expiration of 90 days following the Participant's termination of employment for
any reason other than cause, Change in Control, death, disability, or
retirement. Upon a termination of employment related to a Change in Control,
options shall be treated in the manner set forth in the Change of Control
provisions.

Upon a Participant's death, disability, or retirement, all Restricted Stock
shall vest immediately. Each Award Agreement shall set forth the extent to which
the Participant shall have the right to retain unvested restricted shares
following termination of the Participant's employment with the Company in all
other circumstances. Such provisions shall be determined in the sole discretion
of the Compensation Committee, shall be included in the Award Agreement entered
into with each Participant, need not be uniform among all shares of Restricted
Stock issued pursuant to the 1997 Plan, and may reflect distinctions based on
the reasons for termination of employment.

EXPIRATION, TERMINATION AND AMENDMENT OF THE 1997 PLAN

The 1997 Plan may, at any time or from time to time, be terminated,
modified, altered, suspended or amended by the Board of Directors or the
Compensation Committee. The Board of Directors or the Compensation Committee
may, insofar as permitted by law, from time to time with respect to any shares
of Common Stock at the time not subject to options or other awards, suspend or
discontinue the 1997 Plan or revise or amend it in any respect whatsoever,
except that, without approval of the stockholders of the Company, no such
revision or amendment shall increase the number of shares available for grants
of ISOs under the 1997 Plan or alter the class of participants in the 1997 Plan.
Subject to the provisions described above, the Board of Directors or the
Compensation Committee has the power to amend the 1997 Plan and any outstanding
awards granted thereunder in such respects as the Board of Directors or the
Compensation Committee shall, in its sole discretion, deem advisable in order to
incorporate in the 1997 Plan or any such award any new provision or change
designed to comply with or take advantage of requirements or provisions of the
Code or other statute, or rules or regulations of the Internal Revenue Service
or other federal or state governmental agency enacted or promulgated after the
adoption of the 1997 Plan. Any award outstanding under the 1997 Plan at the time
of the 1997 Plan's termination shall remain in effect in accordance with its
terms and conditions and those of the 1997 Plan.

6
<PAGE> 9

Notwithstanding the foregoing, neither the Board of Directors nor the
Compensation Committee may cancel outstanding awards and issue substitute awards
in replacement thereof or reduce the exercise price of any outstanding options.

FEDERAL TAX CONSEQUENCES

The Company believes that the following generally summarizes the federal
income tax consequences of awards under the Plan for participants and the
Company. A participant will not be deemed to have received any income subject to
tax at the time a stock option (including an ISO) or Restricted Stock award that
is subject to conditions, restrictions or contingencies is awarded, nor will the
Company be entitled to a tax deduction at that time. When a stock option (other
than an ISO) is exercised, the participant will be deemed to have received an
amount of ordinary income equal to the excess of the fair market value of the
shares purchased over the exercise price. The income tax consequences of
Restricted Stock Awards will depend on how the awards are structured, but
generally, a participant will be deemed to have ordinary income at the time a
Restricted Stock Award is distributed to him free of all conditions,
restrictions and contingencies. In each case, the Company will be allowed a tax
deduction in the year and in an amount equal to the amount of ordinary income
that the participant is deemed to have received.

If an ISO is exercised by a participant who satisfies certain employment
requirements at the time of exercise, the participant will not be deemed to have
received any income subject to tax at such time, although the excess of the fair
market value of the common stock so acquired on the date of exercise over the
exercise price will be an item of tax preference for purposes of the alternative
minimum tax. Section 422 of the Code provides that if the Common Stock is held
at least one year after the exercise date and two years after the date of grant,
the participant will realize a long-term capital gain or loss upon a subsequent
sale, measured as the difference between the exercise price and the sales price.
If Common Stock acquired upon the exercise of an ISO is not held for one year, a
"disqualifying disposition" results, at which time, the participant is deemed to
have received an amount of ordinary income equal to the lesser of (a) the excess
of the fair market value of the Common Stock on the date of exercise over the
exercise price or (b) the excess of the amount realized on the disposition of
the shares over the exercise price. If the amount realized on the "disqualifying
disposition" of the Common Stock exceeds the fair market value on the date of
exercise, the gain on the excess of the ordinary income portion will be treated
as a capital gain. Any loss on the disposition of Common Stock acquired through
the exercise of an ISO is a capital loss. No income tax deduction will be
allowed to the Company with respect to shares of Common Stock purchased by a
participant through the exercise of an ISO, provided there is no "disqualifying
disposition" as described above. In the event of a "disqualifying disposition",
the Company is entitled to a tax deduction equal to the amount of ordinary
income recognized by the participant.

NEW PLAN BENEFITS

No awards have been granted under the 1997 Plan.

VOTE REQUIRED

The affirmative vote of the holders of a majority of the votes cast on this
proposal at the Annual Meeting, provided the votes cast on the proposal
represent over 50% in interest of the Common Stock entitled to vote on the
proposal, will be necessary for stockholder approval of the 1997 Plan.

RECOMMENDATION OF THE BOARD OF DIRECTORS

The Board of Directors of the Company recommends a vote FOR the adoption of
the 1997 Plan.

7
<PAGE> 10

EMPLOYEE STOCK PURCHASE PLAN

PURPOSE AND NATURE OF THE PLAN

The Board of Directors of the Company adopted and approved the MedPartners,
Inc. Employee Stock Purchase Plan (the "Plan") to offer eligible Employees an
opportunity to purchase shares of the Company's Common Stock on a more
advantageous basis than would otherwise be available, thereby increasing their
interest in the Company. Subject to the approval of the Plan by the Company's
stockholders, the Plan became effective on January 1, 1997. The Plan will remain
in effect until all of the shares of Common Stock reserved for issuance under
the Plan have been issued and balances in Participating Employees' contribution
accounts, established on behalf of employees opting to participate to which
contributions are credited ("Contribution Accounts") have been distributed,
unless earlier terminated by the Board.

The Company intends for the Plan, designed to be an "employee stock
purchase plan" within the meaning of Section 423 of the Code, to provide an
additional financial savings vehicle for MedPartners' employees. The Plan is not
a qualified plan under Section 401(a) of the Internal Revenue Code, and is not
subject to any provisions of the Employee Retirement Income Security Act of 1974
("ERISA").

ADMINISTRATION

The Plan will be administered by the Board, although the Company's Human
Resources Department and the Administration Agent will operate the Plan on a
day-to-day basis and the Brokerage Agent will manage the brokerage accounts set
up on behalf of the eligible employee opting to participate in the Plan
("Participating Employees") following purchases of Common Stock under the Plan.

SHARES SUBJECT TO THE PLAN

The Company has reserved 5,000,000 shares of Common Stock for issuance
under the Plan. In the event of any merger, consolidation, reorganization,
recapitalization, spin-off, stock dividend, stock split, exchange or other
change in the corporate structure or capitalization affecting the Common Stock,
the number of shares which are subject to the Plan will be equitably adjusted by
the Board, in its sole discretion, to preserve the value of benefits under the
Plan.

ELIGIBILITY AND PARTICIPATION

Eligibility. Subject to the limits on contribution under the tax laws as
described below, every Employee of the Company and its subsidiaries who has been
employed by the Company or a subsidiary for at least the 60 consecutive days
preceding the Effective Date of his or her enrollment in the Plan may
participate.

Under the Plan and Section 423 of the Code, no Employee may participate
(through contributions or purchases) in the Plan if, giving effect to such
participation, the Employee would own 5% or more of the combined voting power or
equity value of the Company. Nor may an Employee participate at a rate that
exceeds $25,000 in fair market value (as determined under such section) of
Common Stock in a calendar year. Notably, participation in all Section 423 plans
of an employer and its subsidiaries must be included in applying this $25,000
limit; as a result, participants in Caremark's Qualified Employee Stock Purchase
("CareShares") Plan may be limited in their ability to participate, or in the
extent of their participation, in the Plan. Representatives of the Company and
Aon Consulting, Inc., the administration services firm selected by the Board to
provide administrative services with respect to the Plan ("Administration
Agent") will be able to assist CareShares participants with their questions
regarding participation in the Plan.

Enrollment. Subject to stockholder approval of the Plan, Eligible
Employees could enroll in the Plan effective January 1, 1997 or, pursuant to the
period during which the Administration Agent processed enrollments ("Extended
Enrollment Period"), effective February 1, 1997. Enrollment in the Plan is for
one year from the first day of the calendar quarter following an employee's
timely election to participate in the Plan ("Effective Date") following
enrollment, except that the initial Employee Plan Year for those who enrolled
during the Extended Enrollment Period will be the 11-month period from February
1, 1997 through December 31, 1997 ("Employee Plan Year"). Following February 1,
1997, for so long as the Plan remains in effect, eligible employees may enroll
effective as of the commencement of any calendar quarter; however, Participating
Employees may enroll in only one Employee Plan Year at a time. Following such
year, the Participating Employee's enrollment will be automatically rolled over
for an additional Employee Plan Year unless discontinued in the manner described
below.

8
<PAGE> 11

DEDUCTIONS, MODIFICATIONS AND PLAN WITHDRAWAL

Upon enrollment, a Participating Employee must authorize a payroll
deduction from each paycheck during the Employee Plan Year in an amount not less
than $5.00 nor more than $800.00 per pay period (the "Contribution Rate").
Deductions are made with after-tax dollars, directly from payroll and after the
withholding of applicable taxes. The minimum and maximum amounts may be adjusted
by the Company at any time, in its discretion, for the sake of administrative
convenience or to ensure compliance with the provisions of Section 423 of the
Code.

Payroll deductions at the selected Contribution Rate begin on the first pay
date following the Effective Date of the Participating Employee's enrollment in
the Plan, and will be allocated to the contribution account administered on the
Participating Employee's behalf by the Administration Agent (the "Contribution
Account"). No interest will accrue or be paid on any amounts contributed under
the Plan. Participating Employees may call the Administration Agent at its
toll-free number to obtain information regarding their Contribution Accounts and
the balances in such accounts.

Participating Employees may reduce (but not increase) their Contribution
Rate or choose to discontinue contributions under the Plan at any time during
their Employee Plan Year by calling the Administration Agent at the toll-free
number provided above. The modification or discontinuation will be implemented
as soon as administratively feasible following such call. A Participating
Employee who discontinues contributions may choose to remain in the Plan and
have the already-contributed balance in his or her Contribution Account applied
to purchases of Common Stock on The New York Stock Exchange's last trading date
during an Employee Plan Year ("Purchase Date"), or to withdraw from the Plan and
have the balance in his or her Contribution Account returned. The Company will
reimburse employees withdrawing from the Plan through payroll as soon as
administratively feasible. An employee who has discontinued payroll deductions
under the Plan may not resume contributions during such person's Employee Plan
Year, and an Employee who has withdrawn from the Plan may not re-enroll until
such person's Employee Plan Year has expired.

PURCHASES UNDER THE PLAN

On the "Purchase Date," the balance in the Participating Employee's
Contribution Account will be applied to purchase the maximum number of whole
shares of Common Stock possible at the discounted issue price ("Issue Price").
The Issue Price for a share of Common Stock will be the lesser of 85% of the
Market Price on the Purchase Date, or 85% of the Market Price on the first
trading date of an Employee Plan Year. The Market Price means the closing sale
price, as of any measurement date, of a share of Common Stock as reported on the
National Association of Securities Dealers' New York Stock Exchange Composite
Reporting Tape (or, if the Common Stock is no longer traded on the New York
Stock Exchange, on the exchange on which it is traded or as reported by an
applicable automated quotation system). There is no commission charged to
Participating Employees for purchases under the Plan.

The shares of Common Stock purchased on behalf of a Participating Employee
under the Plan will be deposited in a brokerage account opened on the
participant's behalf and maintained by Merrill Lynch, Pierce, Fenner & Smith
Incorporated, the registered broker-dealer selected by the Board to Administer
the brokerage accounts of Participating Employees ("Brokerage Agent").
Participating Employees will receive quarterly statements from the Brokerage
Agent detailing the number of shares credited to their accounts; in addition,
Participating Employees may obtain information regarding their purchased shares
via a toll-free telephone service which will be maintained by the Brokerage
Agent.

Once shares have been purchased, Participating Employees will be entitled
to all of the voting and other rights that holders of Common Stock enjoy. The
Brokerage Agent will transmit all proxy material and other reports furnished by
the Company to its stockholders to Participating Employees, and will vote the
shares of Common Stock on behalf of Participating Employees in accordance with
their instructions.

SALES OF STOCK PURCHASED UNDER THE PLAN

To sell some or all of the shares of Common Stock which they have purchased
under the Plan, Participating Employees contact the Brokerage Agent through its
toll-free telephone service. Following a sale, the Brokerage Agent will mail the
Participating Employee a check for the proceeds, less brokerage fees and
commissions, as soon as administratively feasible. Brokerage fees and
commissions charged by the Brokerage Agent to participants in the Plan will be
lower than the Brokerage Agent's standard fees and commissions, but
Participating Employees are urged to inquire about what fees and commissions to
expect before initiating a sale. Selling shares under the Plan does not affect a
Participating Employee's on-going contributions under or participation in the
Plan.

9
<PAGE> 12

RESTRICTIONS ON THE TRANSFER OF RIGHTS UNDER THE PLAN AND PURCHASED SHARES

The right of an eligible Employee to participate in the Plan and to
purchase shares of Common Stock under the Plan may not be transferred or
assigned.

Any person who is not an "affiliate" of the Company and purchases shares of
Common Stock under the Plan may generally resell such stock without restriction.
Persons who are "affiliates" of the Company within the meaning of applicable
securities laws and regulations (for example, control persons and certain
officers, including, in some cases, certain officers and directors of
subsidiaries of the Company) may only sell shares of Common Stock pursuant to
the volume and certain other limitations of Rule 144 under the Securities Act of
1933, as amended (the "Securities Act"), or by complying with the registration
requirements of the Securities Act. While such an affiliate need not comply with
the holding period limitations of Rule 144, and thus is free under Rule 144 to
resell shares of Company Common Stock immediately upon purchase, the volume,
manner of sale and notice provisions of Rule 144 are applicable to any resale of
Common Stock. In addition, Section 16 of the Exchange Act may limit affiliates'
right to resell shares or impose reporting obligations upon any such resale. All
such persons should consult the Company's counsel concerning their status as
affiliates and the applicability of Rule 144 and Section 16 before selling any
Company Common Stock.

TAX CONSIDERATIONS

In general, Participating Employees will not owe any additional taxes
(contributions under the Plan are in after-tax dollars) upon the purchase of
shares of Common Stock under the Plan. The tax consequences resulting from the
sale or other disposition of such shares depends in large part upon whether the
seller has held the shares for the required holding period under the Code. The
required holding period is the longer of two years from enrollment or one year
from purchase. In addition, Participating Employees must consider the
applicability of state income taxes, which vary from state to state.

Shares Sold Within the Holding Period. Generally, under present law, if a
Plan participant sells shares prior to the expiration of the holding period,
such person will recognize ordinary income in the amount of the difference
between his or her actual purchase price and the fair market value of the stock
on the Purchase Date. This amount will be reported by the Company on such
person's W-2 form as ordinary income. Any further profit will likely be taxable
as a short-term capital gain. In the event of a loss, the Plan participant must
still recognize ordinary income on the aforementioned discount at purchase; the
loss will be treated as a capital loss.

Shares Sold After the Holding Period. Generally, under present law, if a
Plan participant sells shares after the holding period, such person will
recognize ordinary income on the lesser of (i) the fair market value of the
stock on the first trading date following the Effective Date of such person's
enrollment minus his or her actual purchase price or (ii) the fair market value
of the stock at disposition (generally, the sale price) minus such person's
actual purchase price. Any further profit will likely be taxable as a long-term
capital gain. If a Plan participant has held purchased stock for the requisite
holding period and sells at a loss, then such person should not recognize any
ordinary income, and the loss will be treated as a capital loss.

Reporting and Consequences for the Company. The Company will report the
ordinary income on sales of shares within the holding period on the
Participating Employee's W-2 form, and the Company will receive a compensation
deduction for such amounts. All other tax reporting (e.g., capital gains within
the holding period, and ordinary income and capital gains after the holding
period) will be the responsibility of the individual participant. Under current
law, stock must be held for more than one year to receive long-term capital gain
or loss treatment. The Company will not receive any deduction for purchases or
sales under the Plan other than the compensation deduction resulting from
dispositions within the holding period.

CHANGES IN STATUS AFFECTING ELIGIBILITY

Only Employees of the Company and its subsidiaries may participate in the
Plan. Upon the termination of a Participating Employee's employment, for any
reason (including, without limitation, death, permanent disability or
retirement), such person's participation in the Plan will be deemed discontinued
and payroll deductions credited to his or her Contribution Account will be
returned to him or her as promptly as administratively feasible.

If a Participating Employee temporarily leaves the employ of the Company or
a subsidiary by reason of leave of absence, temporary lay-off or temporary
disability, he or she may continue participating in the Plan for up to 180 days.
During the continuation period, the Participating Employee must make regular
payments to the Administration Agent (in lieu of payroll deductions) at his or
her chosen Contribution Rate. If a Purchase Date occurs during the continuation
period, the balance in the participant's Contribution Account will be applied to
the purchase of shares. However, if the Participating Employee has not resumed
employment after 180 days, he or she

10
<PAGE> 13

will be treated as having withdrawn from the Plan as of that date, and the
balance in the Contribution Account will be returned as soon as administratively
feasible.

DEFINITIONS

"Administration Agent" means Aon Consulting, Inc., the administration firm
selected by the Board to provide administrative services with respect to the
Plan.

"Brokerage Agent" means Merrill Lynch, Pierce, Fenner & Smith Incorporated,
the registered broker-dealer selected by the Board to administer the brokerage
accounts of Participating Employees.

"Common Stock" shall mean the Company's Common Stock, par value $.001 per
share.

"Contribution Account" refers to an account established on behalf of a
Participating Employee to which contributions under the Plan are credited.

A Participating Employee's "Contribution Rate" is the amount selected by
the Participating Employee to be contributed by payroll deduction to his or her
Contribution Account.

The "Effective Date" of the Plan is January 1, 1997. The "Effective Date"
of a particular Employee's enrollment in the Plan is the first day of the
calendar quarter following such Employee's timely election to participate in the
Plan (except that February 1, 1997 is the Effective Date of enrollment for those
who enrolled during the Extended Enrollment Period).

"Employee" means any person who is employed by the Company or a subsidiary
of the Company.

"Employee Plan Year" refers to the 12-month period following the Effective
Date of a Participating Employee's enrollment in the Plan (except that the
initial Employee Plan Year for Employees who enrolled during the Extended
Enrollment Period is the 11-month period from February 1, 1997 to December 31,
1997).

The "Extended Enrollment Period" refers to the period during which the
Administration Agent processed enrollments to become effective February 1, 1997.

"Issue Price" refers to the purchase price of shares of the Company's
Common Stock to be charged to a Participating Employee on the Purchase Date.

"Market Price" means the closing sale price of a share of Common Stock for
the day upon which the Market Price is to be determined as reported on the
National Association of Securities Dealers' New York Stock Exchange Composite
Reporting Tape (or, if the Common Stock is no longer traded on the New York
Stock Exchange, the closing sale price on the exchange on which it is traded or
as reported by an applicable automated quotation system).

"Participating Employee" means any eligible Employee opting to participate
in the Plan.

"Purchase Date" is The New York Stock Exchange's last trading date during
an Employee Plan Year.

VOTE REQUIRED

RECOMMENDATION OF THE BOARD OF DIRECTORS

The Board of Directors of the Company recommends a vote FOR the adoption of
the MedPartners Employee Stock Purchase Plan.

11
<PAGE> 14

EXECUTIVE COMPENSATION AND OTHER INFORMATION

EXECUTIVE OFFICER COMPENSATION

Executive Officer Compensation. The following table presents certain
information concerning compensation paid or accrued for services rendered to the
Company in all capacities during the years ended December 31, 1996, 1995 and
1994, for the Chief Executive Officer and the four other most highly compensated
executive officers of the Company or its subsidiaries whose total annual salary
and bonus in the last fiscal year exceeded $100,000 (collectively, the "Named
Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------- AWARDS
OTHER ------------
ANNUAL SECURITIES ALL OTHER
NAME AND PRINCIPAL COMPENSATION UNDERLYING COMPENSATION
POSITION HELD YEAR SALARY ($) BONUS ($) ($)(1) OPTIONS (#) ($)
------------------ ---- ---------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Larry R. House(2).................. 1996 $717,852 $1,786,429 -- 2,700,000(6) $ 25,000(8)
Chairman of the Board, 1995 349,908 600,000 -- 828,000 28,335
President and Chief Executive 1994 335,000 -- -- 457,000 25,474
Officer
Mark L. Wagar(3)................... 1996 350,002 579,674 -- 700,000(7) 32,516(8)
President -- Western Operations 1995 346,601 -- -- 250,000 30,485
James G. Connelly, III(4).......... 1996 383,852 2,883,981(5) $ 74,400 230,000 417,120(8)
President -- Caremark
Kristen E. Gibney(4)............... 1996 330,147 2,153,582(5) 620,200 175,000 427,566(8)
Vice President -- Caremark
Michelle J. Hooper(4).............. 1996 253,641 1,318,713(5) -- 100,000 184,448(8)
Vice President -- Caremark
</TABLE>

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

(1) Dollar value of perquisites was less than the lesser of $50,000 or 10% of
total salary and bonus for each Named Executive Officer.

(2) Pursuant to a reimbursement agreement, the Company paid HEALTHSOUTH the sum
of $150,195 as reimbursement for services rendered by Mr. House from
January 1, 1994 to August 31, 1994, when the agreement terminated. See
"-- Compensation Committee Interlocks and Insider Participation".

(3) Mr. Wagar commenced employment on November 28, 1995, at the time of the MME
Acquisition. The table includes all compensation paid to him in 1995.

(4) These Named Executive Officers commenced employment on September 5, 1996,
at the time of the Caremark Acquisition. The table includes all
compensation paid to them in 1996.

(5) Bonuses for these Named Executive Officers include the following amounts:
Mr. Connelly -- $2,707,968 retention bonus; Ms. Gibney -- $1,962,174
retention bonus and $55,800 restricted stock option; Ms.
Hooper -- $1,127,305 retention bonus and $55,800 restricted stock option.

(6) Includes 500,000 options originally granted in 1995 and repriced in 1996,
and 600,000 options granted in 1996 but effectively cancelled by subsequent
repricing.

(7) Includes 250,000 options originally granted in 1995 and repriced in 1996,
and 150,000 options granted in 1996 but effectively cancelled by subsequent
repricing.

(8) Other compensation shown for the Named Executive Officers in 1996 includes
contributions by the Company in the following amounts: Mr. House -- $25,000
split dollar life insurance; Mr. Wagar -- $25,000 split dollar life
insurance, $6,766 long term disability insurance and $750 401(k) plan; Mr.
Connelly -- $10,357 split dollar life insurance, $11,124 life insurance,
$21,946 401(k) plan and $373,693 non-qualified pension plan; Ms.
Gibney -- $4,916 split dollar life insurance, $17,919 401(k) plan and
$404,731 non-qualified pension plan; and Ms. Hooper -- $2,994 split dollar
life insurance, $15,384 401(k) plan and $166,070 non-qualified pension
plan.

12
<PAGE> 15

Option Grants in 1996. The following table contains information concerning
the grant of stock options under the Stock Option Plans (as defined) to the
Named Executive Officers in 1996:

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES
---------------------------------------------------------------- OF STOCK PRICE
NUMBER OF PERCENT OF TOTAL APPRECIATION FOR
SECURITIES OPTIONS GRANTED EXERCISE OR OPTION TERM(2)
UNDERLYING OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION -------------------------
NAME GRANTED (#)(1) IN FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ---- ------------------ ---------------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Larry R. House............... 500,000(3)(4) 4.4% $16.625 11/21/05 $ 4,791,434 $11,911,841
600,000(3)(5) 5.3 25.750 4/10/06
9,716,422 24,623,321
600,000(3)(6) 5.3 16.625 4/10/06
6,046,764 15,197,843
1,000,000(3) 8.9 16.625 7/24/06
10,455,373 26,495,968
Mark L. Wagar................ 150,000(4) 1.3% $16.625 11/29/05 $ 1,441,636 $ 3,586,240
100,000(3)(4) 0.9 16.625 11/29/05
961,091 2,390,827
150,000(5) 1.3 25.750 4/10/06
2,429,106 6,155,830
150,000(6) 1.3 16.625 4/10/06
1,511,691 3,799,461
150,000 1.3 16.625 7/24/06
1,568,306 3,974,395
James G. Connelly, III....... 230,000 2.0% $19.875 9/5/06 $ 2,874,835 $ 7,285,395
Kristen E. Gibney............ 175,000 1.6% $19.875 9/5/06 $ 2,187,374 $ 5,543,235
Michele J. Hooper............ 100,000 0.9% $19.875 9/5/06 $ 1,249,928 $ 3,167,563
</TABLE>

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

(1) The vesting of each option is cumulative and no vested portion expires until
the expiration of the option. Unless otherwise noted, options vest at the
rate of 20% per year over a 5-year period beginning on the original grant
date.

(2) The potential realizable value is calculated based on the term of the option
at its time of grant (10 years) or its time of repricing (remaining term),
as applicable. It is calculated by assuming that the stock price on the date
of grant or repricing appreciates at the indicated annual rate compounded
annually for the entire term of the option and that the option is exercised
and sold on the last day of its term for the appreciated stock price. No
gain to the optionee is possible unless the stock price increases over the
option term, which will benefit all stockholders.

(3) These options are 100% vested.

(4) These options were originally granted in 1995, but were repriced in 1996.
See "Repricing of Outstanding Options".

(5) These options were granted in 1996, but were effectively cancelled by
subsequent repricing. See "Repricing of Outstanding Options".

(6) These options are the repriced options that effectively replaced options
granted earlier in 1996. See "Repricing of Outstanding Options".

13
<PAGE> 16

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values. The following table provides information with respect to options
exercised by the Named Executive Officers during 1996 and the number and value
of securities underlying unexercised options held by the Named Executive
Officers at December 31, 1996.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS AT
OPTIONS AT FY-END(#) FY-END($)(1)
SHARES ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- --------------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Larry R. House................ 55,000 $1,694,000 2,428,000/ -- $11,532,500/$ --
Mark L. Wagar................. -- $ -- 220,000/330,000 $ 907,500/$1,361,250
James G. Connelly, III........ -- $ -- 610,465/184,000 $ 5,401,324/$ 161,000
Kristen E. Gibney............. 47,388(2) $ 620,200 211,236/ -- $ 1,408,721/$ --
Michele J. Hooper............. -- $ -- 213,170/ 80,000 $ 1,588,429/$ 70,000
</TABLE>

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

(1) Based on December 31, 1996 closing price for MedPartners Common Stock of
$20.75.

(2) Includes options to purchase shares of Caremark exercised prior to the
Caremark Acquisition and gives effect to the exchange ratio of 1.21 shares
of MedPartners Common Stock for each share of Caremark.

DIRECTOR COMPENSATION

Officers of the Company do not receive any additional compensation for
serving as members of the Board or any of its committees. Effective January 1,
1996 and prior to July 25, 1996, non-employee directors were paid directors'
fees of $2,500 for each meeting of the Board of Directors attended in person,
$500 for each meeting of the Board of Directors attended by phone, and $1,000
for each meeting of the Audit Committee or the Compensation Committee attended
in person. Directors were reimbursed for travel costs and other out-of-pocket
expenses incurred in attending each meeting of the Board of Directors or one of
its committees. In addition, non-employee directors received an annual grant of
stock options for 10,000 shares of the Company's Common Stock under the Stock
Option Plans (as hereinafter defined). Such options vest in 20% increments and
expire ten years after the grant date. The exercise price of such options was
determined by the closing price of the Company's Common Stock on the NYSE on the
date of the option grant. Effective July 26, 1996, non-employee directors were
paid directors' fees of $3,000 for each meeting of the Board of Directors
attended in person, $1,000 for each meeting of the Board of Directors attended
by phone, and $1,000 for each meeting of the Audit Committee or the Compensation
Committee attended in person. In addition, non-employee directors receive an
annual grant of stock options for 25,000 shares of the Company's Common Stock
under the Stock Option Plans. In July 1996, each of Messrs. Kramer, McCourtney,
McDonald, Mullikin, Newhall, Scrushy and Striplin were granted an option to
purchase 10,000 shares of Common Stock, all at an exercise price of $16.625 per
share, the market price on the grant date. See "Executive Officer Compensation
and Other Matters -- Option Grants in 1996". Dr. Lopez was granted an option to
purchase 30,000 shares of Common Stock in April 1996 (repriced in July 1996) and
35,000 shares of Common Stock in September 1996, which shares have an exercise
price of $16.625 per share and $19.875 per share, respectively.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Messrs. Newhall, McCourtney and McDonald served on the Compensation
Committee of the Board of Directors of the Company in 1996, until Mr. Headrick
replaced Mr. McCourtney in September 1996. Mr. House served on the Compensation
Committee until February 1996.

In connection with the MME Acquisition, the Company entered into a
Termination and a Consulting Agreement with Mr. McDonald. Under the Termination
Agreement, Mr. McDonald's employment agreement with MME was terminated in
consideration for which Mr. McDonald received a lump sum payment of $796,000,
continuation of certain fringe benefits and perquisites under the former
employment agreement for 36 months, access to an office and support staff until
death or disability, payments from the Company and a trust set up by the Company
to fund the remainder of MME's pension obligations to Mr. McDonald, and payment
of all health and medical care (including prescriptions) for Mr. McDonald for
the remainder of his life through a Company-sponsored health insurance plan.
Under the five-year Consulting Agreement, Mr. McDonald will receive in
consideration for his services a consulting fee of $2,230,000, to be paid over
the term of the agreement with an initial payment of $669,000 on November 29,
1995, and equal payments of $390,250 on each anniversary of such date,

14
<PAGE> 17

access to an office and support staff and certain other benefits. See "Certain
Relationships and Related Transactions -- MME Acquisition Agreements".

INCENTIVE COMPENSATION PLANS

The Company has the 1993 Plan, the 1995 Plan, the IC Plan (the 1993 Plan,
the 1995 Plan, and the IC Plan are herein referred to together as the "Stock
Option Plans") and the 1997 Plan described under "MedPartners 1997 Long Term
Incentive Compensation Plan". The objectives of the Stock Option Plans are to
attract and retain qualified personnel, to provide incentives to employees,
officers and directors of the Company and to promote the success of the Company.
A total of 1,555,000 shares of Common Stock, including 1,055,000 shares of
Common Stock for issuance upon the exercise of options granted to officers,
directors, consultants and employees of the Company and 500,000 shares of Common
Stock for issuance upon the exercise of options issued in connection with the
acquisition of the assets of physician practices, are covered by the 1993 Plan.
A total of 8,687,941 shares of Common Stock are covered by the 1995 Plan.
Additionally the 1995 Plan includes a provision whereby the number of shares of
the Company's Common Stock for which options may be granted under the 1995 Plan
shall automatically increase on the first trading day of each calendar year
during the term of the 1995 Plan by an amount equal to 1% of the shares of the
Company's Common Stock outstanding on December 31 of the immediately preceding
year. However, such additional shares shall be available only for the grant of
NQSOs and not for the grant of ISOs. A total of 13,771,964 shares of Common
Stock are covered by the IC Plan. The Stock Option Plans authorize the grant of
options to purchase Common Stock intended to qualify as ISOs under Section 422
of the Code, and the grant of NQSOs. The IC Plan also provides for Restricted
Stock Awards.

The Company's Board of Directors has adopted the 1997 Plan for the
Company's Directors, executives and other key employees of the Company and its
subsidiaries and certain Affiliates. The 1997 Plan is intended to advance the
Company's interests by providing such persons with additional incentives to
promote the success of the Company's business, to increase their proprietary
interest in the success of the Company and to encourage them to remain in the
Company's employ. Management believes that the 1997 Plan is a necessary tool to
help the Company compete effectively with other enterprises for the services of
new employees and to retain key employees and Directors, all as may be required
for the future development of the Company's business. Management intends for the
1997 Plan to complement the Company's Stock Option Plans by making additional
shares available for issuance pursuant to options granted under the 1997 Plan.
See "1997 Long Term Incentive Compensation Plan".

As of March 1, 1997, the Company had outstanding options at exercise prices
ranging from $0.20 to $16.625 to acquire 636,115 shares of Common Stock under
the 1993 Plan. At the same date, there were outstanding options under the 1995
Plan to acquire 8,399,560 shares of Common Stock at exercise prices ranging from
$12.00 to $23.00 per share. At the same date, there were outstanding options
under the IC Plan to acquire 9,967,178 shares of Common Stock at exercise prices
ranging from $5.331 to $23.375 per share.

401(K) PLANS

The Company has the MedPartners, Inc. and Subsidiaries Employee Retirement
Savings Plan (the "MedPartners Plan"). The MedPartners Plan is a Code Section
401(k) plan which requires, subject to certain limited exceptions, the
attainment of age 21 and one year of service, with a minimum of 1,000 hours
worked, to become a participant in the plan. The Company, in its sole
discretion, may contribute an amount which it designates as a discretionary
employer contribution to all non-highly compensated and all non-key employees.
In years for which the MedPartners Plan is "top-heavy" (as defined in the Code),
a participant is entitled to the top heavy minimum allocation if the participant
was employed by the Company on the last day of the MedPartners Plan year, unless
the employee is a key employee. Participants in the MedPartners Plan may elect
to contribute from 2% to 15% of their gross compensation subject to annual Code
limitations.

Effective November 28, 1989, MME's principal professional corporation and
Pioneer Hospital adopted the Savings and Salary Deferral Plan (the "Mullikin
Plan"), which the Company has assumed. MME adopted the Mullikin Plan
retroactively to January 1, 1994 and assumed the administration responsibility
of the Mullikin Plan. The Mullikin Plan is also a Code Section 401(k) plan which
requires, subject to certain limited exceptions, the attainment of age 21 and
one year of service, with a minimum of 1,000 hours worked to become a
participant in the plan. Participants in the Mullikin Plan may elect to
contribute from 1% to 20% of their gross compensation, subject to annual Code
limitations. The Company will make a minimum matching contribution of 50% of the
first 3% of salary deferred into the Mullikin Plan, up to a maximum of $750 for
any Mullikin Plan year.

15
<PAGE> 18

In addition to these Plans, certain of the employee retirement plans of
various of the entities acquired during 1995 have been or will be merged into
the MedPartners Plan or the Mullikin Plan, while others may continue as prior to
the acquisition. The Company continues to investigate the feasibility of the
combination of the MedPartners Plan and the Mullikin Plan consistent with
applicable law and regulations and its desire to provide a comprehensive benefit
package for all employees.

STOCKHOLDER RETURN COMPARISON

Below is a line graph comparing the closing price of the Company's Common
Stock, the Standard & Poor's 500 (S&P 500) Index and a peer group index
("PPMS"). PPMS includes AHI Health Systems, American Oncology Resources, Apogee,
Inc., Coastal Physician Group, Inc., EmCare Holdings, Inc., Inphynet Medical
Management Inc., MedPartners, Inc., Occusystems, Inc., Pediatrix Medical Group,
Inc., PHP Healthcare Corp., Phycor, Inc., Physician Reliance Network, Phymatrix
Corp., Physician Resource Group and Sheridan Healthcare, Inc. The closing prices
for each over the last 12 months is included. The Company selected these
companies for the peer group based on the nature of such companies' businesses.
The following graph assumes $100 invested on February 28, 1995 (the closing date
of the Company's initial public offering) in the Company's Common Stock and in
each of the indices represented.

<TABLE>
<CAPTION>
Measurement Period MDM S&P 500
(Fiscal Year Covered) PPMS
<S> <C> <C> <C>
28-Feb-95 100.0 100.0 100.0
31-Mar-95 126.4 102.7 118.6
30-Jun-95 110.0 111.8 106.8
29-Sep-95 180.0 119.9 153.4
29-Dec-95 188.6 126.4 160.8
29-Mar-96 162.9 132.4 158.3
28-Jun-96 119.3 137.6 160.2
30-Sep-96 130.0 141.0 148.8
31-Dec-96 118.6 152.0 121.6
28-Feb-97 125.7 162.3 124.1
</TABLE>

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

General

The Compensation Committee (the "Compensation Committee"), consists of
Charles W. Newhall III, John S. McDonald and Roger L. Headrick. The Compensation
Committee is charged by the Board of Directors with establishing a compensation
plan which will enable the Company to compete effectively for the services of
qualified officers and key employees, to give such employees appropriate
incentive to pursue the maximization of long-term stockholder value, and to
recognize such employees' success in achieving both qualitative and quantitative
goals for the benefit of the Company and its stockholders. The Compensation
Committee makes recommendations as to appropriate levels of compensation for
specific individuals, as well as compensation and benefit programs for the
Company as a whole.

16
<PAGE> 19

Compensation Philosophy and Policies for Executive Officers

As its first principle, the Compensation Committee believes that executives
of the Company should be rewarded based upon their success in meeting the
Company's operational goals, improving its earnings, establishing its leadership
role in the healthcare field, and generating returns for its stockholders, and
the Compensation Committee strives to establish levels of compensation that take
such factors into account and provide appropriate recognition for past
achievement and incentive for future success. The Compensation Committee
recognizes that the demand for executives with expertise and experience in the
healthcare and physician practice management fields is intense. In order to
attract and retain qualified persons, the Compensation Committee believes that
the Company must offer current compensation at levels consistent with other
publicly-held healthcare and physician practice management companies. In
addition, the Compensation Committee believes that it is in the best interests
of the Company's stockholders to offer its executives meaningful equity
participation in the Company in order that those executives' interests will be
aligned with those of the Company's stockholders. The Compensation Committee
feels that the historic mix of cash compensation and equity participation has
proven to be effective in stimulating the Company's executives to meet both
long-term and short-term goals.

The Company's compensation program has two distinct elements: base salary;
and incentive compensation, including both cash incentive compensation and
equity-based compensation. These elements are discussed below.

Base Salary: While the demand for experienced managers in the healthcare
and PPM services fields continues to grow, the Company has been very successful
in attracting and retaining key executives. The Company believes that its
compensation package is instrumental in such success. The Compensation Committee
endeavors to establish base salary levels for those key executives that are
consistent with those provided for similarly situated executives of other
publicly-held healthcare companies, taking into account each executive's areas
and level of responsibility, historical performance and tenure with the Company.
In establishing such levels, the Company considers compensation for executives
of other publicly-held providers of physician practice management services, such
as Phycor, Inc., as well as other publicly-held healthcare companies, such as
Columbia/HCA and Tenet Healthcare Corporation. The Company does not maintain a
reference record of where its compensation stands with respect to such other
companies. However, the Compensation Committee and the Board of Directors take
such levels of compensation into account in determining appropriate levels of
compensation for the Company's executives.

Incentive Compensation: In addition to base salary, the Compensation
Committee recommends cash incentive compensation for executives of the Company,
based upon each such executive's success in meeting qualitative and quantitative
performance goals on an annual basis. Individual incentive bonuses are not
determined in a formulary manner, but are determined on a basis that takes into
account each executive's success in achieving standards of performance, which
may or may not be quantitative, established by the Board of Directors and such
executive's superiors. Bonus determinations are made on a case-by-case basis,
taking into account appropriate quantitative and qualitative factors, and there
is no fixed relationship between any particular performance factor and the
amount of a given executive's bonus. In addition to the annual bonus review, the
Compensation Committee also believes that exceptional performance by an
executive related to specific projects or goals set by the Board of Directors
and senior management should be rewarded with special cash bonuses that are
awarded from time-to-time as circumstances indicate.

In addition to cash incentive compensation, as a growth company, the
Company has utilized equity-based compensation since inception, in the form of
stock options, as a tool to encourage its executives to work to meet the
Company's operational goals and maximize long-term stockholder value. Because
the value of stock options granted to an executive is directly related to the
Company's success in enhancing its market value over time, the Committee feels
that its stock option programs have been very effective in aligning the
interests of management and stockholders.

The Compensation Committee determines stock option grants and other awards
valued in whole or in part by reference or otherwise based on the Common Stock
of the Company. Under the Company's various incentive compensation plans, all of
which are described above under "Executive Compensation and Other Information --
Incentive Compensation Plans". Specific grants are determined taking into
account an executive's current responsibilities and historical performance, as
well as the executive's perceived contribution to the Company's results of
operations. Awards are also used to provide an incentive to newly-promoted
officers at the time that they are asked to assume greater responsibilities. In
evaluating award grants, the Compensation Committee considers prior grants and
shares currently held, as well as the recipient's success in meeting operational
goals and the recipient's level of responsibility. However, no fixed formula is
utilized to determine particular grants. The Compensation Committee believes
that the opportunity to acquire a significant equity interest in the Company is
a

17
<PAGE> 20

strong motivation for the Company's executives to pursue the long-term interests
of the Company and its stockholders, and promotes longevity and retention of key
executives. Information relating to stock options granted to the five most
highly-compensated executive officers of the Company is set forth elsewhere in
this Proxy Statement.

Section 162(m) of the Internal Revenue Code

The Omnibus Budget Reconciliation Act of 1993 contains a provision under
which a publicly-traded corporation is sometimes precluded from taking a federal
income tax deduction for compensation in excess of $1,000,000 that is paid to
the chief executive officer and the four other most highly-compensated
executives of the corporation during that corporation's tax year. Compensation
in excess of $1,000,000 continues to be deductible if that compensation is
"performance based" within the meaning of Section 162(m) of the Code. Various
criteria must be satisfied to meet the "performance based" standard including,
among others, arbitrary requirements to determine whether members of the Board
of Directors' Compensation Committee are "outside" directors and limitations
regarding the maximum number of shares subject to option that can be awarded
under any option plan to an executive during a specified time.

The Compensation Committee and the Board of Directors have made a decision
not to satisfy all the criteria of Section 162(m) at this time because both the
Board of Directors and the Compensation Committee believe such a decision would
not be in the best interests of the Company's stockholders. In the Compensation
Committee's view, the restrictions on Board and Compensation Committee
discretion contained in Section 162(m) and the regulations promulgated
thereunder run counter to good corporate governance. The Compensation Committee
believes that good corporate governance requires board compensation committees
to exercise their discretion based on informed judgment after careful review of
competitive performance. The Compensation Committee thinks it is inappropriate
to regulate executive compensation levels through tax policy or legislative
intervention. Such intervention typically steers compensation determinations
toward a more formulistic approach that overlooks the important role that
judgment and discretion have in the process. The Compensation Committee
believes, moreover, that in establishing bonus and incentive awards, certain
subjective factors must be taken into account in particular cases, based upon
the experienced judgement of the Compensation Committee members in addition to
factors that may be objectively quantified. While the preservation of tax
deductibility of all compensation is an important consideration, the
Compensation Committee believes that it is also important that the Company
retain the flexibility to reward superior effort and accomplishment even where
all compensation may not be fully deductible. The Compensation Committee also
notes that, to the extent such compensation consists of options which are ISOs
(and most of the options granted by the Company are), no tax deduction is
available to the Company in any event. The Compensation Committee will continue
to review the requirements for deductibility under Section 162(m) and will take
such requirements into account in the future as it deems appropriate and in the
best interest of the Company's stockholders. A portion of Mr. House's
compensation paid with respect to 1996 will not be deductible. The Company
believes that all other compensation paid to executive officers will be
deductible to the same extent that would have prevailed had the Company met all
the requirements for deductibility under Section 162(m).

Repricing of Outstanding Options

The Compensation Committee and the Board of Directors believe that the
future growth and success of the Company is dependent upon, and the best
interests of the Company and its stockholders are served by, the Company's
ability to attract, retain and motivate its officers, employees and consultants
consistent with the interests of its stockholders, and that the Company's stock
option plans are an important factor in accomplishing these goals. It is
believed that for young, high-growth companies, such as the Company, the
utilization of stock options as a significant portion of the compensation and
incentives for officers, employees and consultants and for aligning the
interests of its officers, employees and consultants with those of the Company's
stockholders is critical. During March 1996 through July 1996, stock prices on
the general market, and most particularly healthcare stocks, declined
dramatically. Even though the Company had consistently met or exceeded analysts'
expectations in terms of growth in revenues, margins, net income and earnings
per share, and had also strengthened its balance sheet, this general market
decline significantly impacted the market price of the Company's Common Stock.
This resulted in an artificially depressed market price for the Company's Common
Stock so that almost all of the stock options granted since the Company's
initial public offering were significantly out-of-the-money for reasons
unrelated to the Company's performance, thus creating a situation that had the
potential to act as a disincentive to the core group of officers and employees
responsible for the ongoing profitable growth of the Company, many of whom have
worked for lower than market value cash compensation in return for the
opportunity to participate significantly in the equity

18
<PAGE> 21

ownership of the Company through the stock option plans. Moreover, the depressed
market price made it difficult to reconcile the incentives provided to longer
term employees with those accorded newly hired persons and to properly integrate
an effective equity-based incentive program for all of the officers, employees
and consultants of both MedPartners and Caremark. The Compensation Committee and
the Board of Directors determined that lowering the exercise price would restore
the incentive value to the options, would achieve consistency between awards
granted to long term employees and those more recently hired, and would be a key
component in establishing equity among the post-Caremark merger management team.

Set forth below is certain information concerning the July 24, 1996,
repricing of stock options held by executive officers during the period February
22, 1995 through July 24, 1996:

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES MARKET PRICE LENGTH OF ORIGINAL
UNDERLYING OF STOCK AT EXERCISE PRICE OPTION TERM
OPTIONS TIME OF AT TIME OF NEW REMAINING AT DATE
REPRICED OR REPRICING OR REPRICING OR EXERCISE OF REPRICING OR
NAME DATE AMENDED (#) AMENDMENT ($) AMENDMENT ($) PRICE ($) AMENDMENT
---- ------- ----------- ------------- -------------- --------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Larry R. House................. 7/24/96 500,000 $16.625 $27.25 $16.625 9 years, 120 days
7/24/96 600,000 16.625 25.75 16.625 9 years, 260 days
Mark L. Wagar.................. 7/24/96 250,000 16.625 28.25 16.625 9 years, 128 days
7/24/96 150,000 16.625 25.75 16.625 9 years, 260 days
H. Lynn Massingale, M.D........ 7/24/96 23,000 16.625 25.75 16.625 9 years, 260 days
Harold O. Knight, Jr........... 7/24/96 150,000 16.625 27.25 16.625 9 years, 120 days
7/24/96 150,000 16.625 25.75 16.625 9 years, 260 days
Tracy P. Thrasher.............. 7/24/96 100,000 16.625 27.25 16.625 9 years, 120 days
7/24/96 150,000 16.625 25.75 16.625 9 years, 260 days
William R. Dexheimer........... 7/24/96 40,000 16.625 27.25 16.625 9 years, 120 days
7/24/96 100,000 16.625 25.75 16.625 9 years, 260 days
J. Rodney Seay................. 7/24/96 40,000 16.625 27.25 16.625 9 years, 120 days
7/24/96 100,000 16.625 25.75 16.625 9 years, 260 days
J. Brooke Johnston, Jr......... 7/24/96 20,000 16.625 27.25 16.625 9 years, 120 days
7/24/96 75,000 16.625 25.75 16.625 9 years, 260 days
Peter J. Clemens, IV........... 7/24/96 15,000 16.625 27.25 16.625 9 years, 120 days
7/24/96 10,000 16.625 25.75 16.625 9 years, 260 days
</TABLE>

Chief Executive Officer Compensation

Mr. Larry R. House is employed as Chairman of the Board, President and
Chief Executive Officer of the Company. Mr. House entered into a five-year
employment agreement with the Company as of July 24, 1996. Prior to that time,
Mr. House did not have an employment agreement. Mr. House received a base salary
of $335,000 and $349,908 in each of 1994 and 1995, respectively. Due to the fact
that the Company was still young, Mr. House received no bonus in 1994. In 1995,
he was awarded a special bonus of $600,000 in connection with the consummation
of the MME Acquisition, a transaction which doubled the size of the Company and
positioned it for significant growth in the future. Mr. House is entitled to
participate in any bonus plan approved by the Board of Directors for the
Company's management. Mr. House is also provided with a car allowance in the
amount of $500 per month and disability insurance through a Company-wide plan or
otherwise. Mr. House's Employment Agreement provides for appropriate
incentive-based compensation and equity participation consistent with the
philosophies set forth in this report.

Mr. House's employment agreement, which has a term of five years, provides
that Mr. House shall be employed as the Chairman of the Board, President and
Chief Executive Officer and shall be nominated as a director of the Company
during such term. The agreement provides for a base salary of $935,700, an
annual incentive bonus of up to $776,700, based on the achievement of certain
performance standards established by the Compensation Committee, and eligibility
for other benefits normally found in executive employment agreements.

Mr. House is entitled to certain compensation upon termination of his
employment agreement prior to its expiration. If the Company terminates the
agreement for "Cause" (as defined) or if Mr. House terminates without "Good
Reason" (as defined), Mr. House will receive a lump sum payment of 12 months
base salary plus certain employment benefits. If the agreement terminates due to
Mr. House's death, disability or retirement, Mr. House will receive a lump sum
payment of 12 months base salary, accrued bonus and immediate vesting of all
stock

19
<PAGE> 22

options. If Mr. House terminates the agreement for "Good Reason" and no "Change
in Control" (as defined) of the Company has occurred, Mr. House will receive
continued salary and bonus payments for three years or, if greater, for the
remainder of the contract term, continued participation in employee benefit
plans for such period and immediate vesting of all stock options. If the Company
terminates the agreement without Cause after a Change in Control or if Mr. House
terminates after a Change in Control for Good Reason, Mr. House shall receive a
lump sum payment equal to three times his base salary and bonus at the time of
termination, continued benefits for a term of three years and immediate vesting
of all stock options. The agreements provide that any payment by the Company to
Mr. House which is subject to the excise tax imposed by Section 4999 of the Code
shall be "grossed up" such that the Executive retains an amount of the "gross
up" payment equal to the excise tax imposed on the original payment.

The Compensation Committee determines Mr. House's equity-based compensation
and reports to the Board of Directors on other compensation arrangements with
Mr. House, and recommends to the Board of Directors the level of non-equity
incentive compensation that is appropriate for Mr. House with respect to each
fiscal year of the Company. In making such recommendation, the Compensation
Committee takes into account the Company's performance in the marketplace, its
success in meeting strategic goals and its success in meeting monthly and annual
budgets established by the Board of Directors, Again, ultimate compensation
decisions are not made in a formulary manner, but in a manner which takes into
account the Company's competitive position, its position in the financial
markets, its ability to achieve the per share earnings expectations of the Wall
Street analysts who follow the Company's Common Stock and the significant
contributions made by Mr. House to the success of the Company. In making its
decisions with respect to Mr. House's compensation, the Compensation Committee
believes that it is appropriate to recognize that, as a management founder of
the Company, Mr. House has played an instrumental role in establishing the
Company as the PPM industry leader and that, under his leadership, the Company
has significantly enhanced stockholder value and continues to grow in assets,
net revenues, net income (excluding merger charges) and market value. The
Compensation Committee believes that it is important to ensure that, if Mr.
House is successful in leading the Company to achieve the goals set by the Board
of Directors, his compensation will be at a level commensurate with that of
chief executive officers of similarly-situated public companies and that he will
continue to have the opportunity to obtain a significant equity interest in the
Company.

Other Executive Officer Compensation

The Company also has an employment agreement with Mr. Wagar. The employment
agreement for Mr. Wagar provides for a base salary of $350,000 and for an annual
incentive and performance bonus of up to 75% of base salary in addition to
certain employee benefits. The employment agreement is automatically extended
for an additional year on the anniversary thereof unless the Company shall give
prior notice of non-extension. Mr. Wagar is entitled to certain compensation
upon termination of his employment agreement prior to its expiration. If the
Company terminates the agreement for "Cause" (as defined) or if Mr. Wagar
terminates without "Good Reason" (as defined), he will receive a lump sum
payment of six months base salary plus certain employment benefits. If the
agreement terminates due to Mr. Wagar's death, disability or retirement, he will
receive a lump sum payment of six months base salary, accrued bonus and
immediate vesting of all stock options. If he terminates the agreement for "Good
Reason" and no "Change in Control" (as defined) of the Company has occurred, Mr.
Wagar will receive continued salary and bonus payments for three years,
continued participation in employee benefit plans for such period and immediate
vesting of all stock options. If the Company terminates the agreement without
Cause after a Change in Control or if Mr. Wagar terminates after a Change in
Control for Good Reason, he shall receive a lump sum payment equal to three
times his base salary and bonus at the time of termination, continued benefits
for a term of three years and immediate vesting of all stock options. The
agreements provide that any payment by the Company to Mr. Wagar which is subject
to the excise tax imposed by Section 4999 of the Code shall be "grossed up" such
that Mr. Wagar retains an amount of the "gross up" payment equal to the excise
tax imposed on the original payment.

Conclusion

The Compensation Committee believes that the levels and mix of compensation
provided to the Company's executives during 1995 and 1996 were appropriate and
were instrumental in the achievement of the Company's goals for 1996. It is the
intent of the Compensation Committee to ensure that the Company's compensation
programs continue to motivate its executives and reward them for being
responsive to the long-term interests of the Company and its stockholders.

20
<PAGE> 23

The foregoing report is submitted by the following directors of the
Company, comprising all of the members of the Compensation Committee of the
Board of Directors.

Charles W. Newhall III
John S. McDonald
Roger L. Headrick

CERTAIN TRANSACTIONS

MME ACQUISITION AGREEMENTS

Termination Agreements. In November 1995 in connection with the MME
Acquisition, the Company and each of Dr. Walter T. Mullikin, M.D. and John S.
McDonald, J.D., entered into a Termination Agreement that terminated their
previous employment agreements with MME, in consideration of which they
received, or shall receive, a lump sum payment of $1,064,000, in the case of Dr.
Mullikin, and $796,000 in the case of Mr. McDonald, continuation of certain
fringe benefits and perquisites for 36 months, payments from the Company and a
trust set up by the Company to fund the remainder of MME's pension obligations
to Dr. Mullikin or to Dr. Mullikin's spouse, should she survive him, and Mr.
McDonald, payment of all health and medical care (including prescriptions) for
Dr. Mullikin and his spouse and Mr. McDonald for the remainder of their lives
through a Company-sponsored health insurance plan, a death payment benefit to be
paid to Dr. Mullikin's designated beneficiary or estate of $2,700,000, and
certain other benefits.

Consulting Agreements. In November 1995, the Company and each of Dr.
Mullikin and Mr. McDonald entered into five-year Consulting Agreements whereby
they will receive in consideration for their services: consulting fees of
$2,480,000 to Dr. Mullikin, to be paid over the term of the agreement with an
initial payment of $744,000 on November 29, 1995 and equal payments of $434,000
on each anniversary of such date, and $2,230,000 to Mr. McDonald, to be paid
over the term of the agreement with an initial payment of $669,000 on November
29, 1995 and equal payments of $390,250 on each anniversary thereof, access to
an office and support staff and certain other benefits.

CAREMARK ACQUISITION AGREEMENTS

Termination Agreements. In September 1996 in connection with the Caremark
Acquisition, the employment of Messrs. Piccolo and Hodson was terminated,
entitling them to severance payments of $2,805,426 and $1,052,138, respectively,
and certain other benefits provided in their severance agreements. See
"Executive Compensation and Other Information -- Compensation Committee
Interlocks and Insider Participation".

Consulting Agreements. In September 1996, the Company and each of Messrs.
Piccolo and Hodson, now directors of the Company, entered into a consulting
agreement (the "Piccolo Agreement" and "Hodson Agreement", respectively). The
term of the Piccolo Agreement is ten years, unless terminated sooner. Over the
course of such ten-year period, Mr. Piccolo will be paid consulting fees
totaling approximately $5.4 million. The "gross up" provisions of that severance
agreement will apply to payments made pursuant to the Piccolo Agreement in the
event such consulting payments are determined to be "excess parachute" payments.
Mr. Piccolo or his spouse will be eligible to participate in all health and
medical employee benefit plans and programs available, from time to time, to
employees of the Company and Caremark until he reaches the age of 65. After age
65, Mr. Piccolo and his spouse will be provided with a prescription drug program
comparable to that provided Caremark employees through Caremark's prescription
drug benefit program. Mr. Piccolo will be provided with an adequate office and
secretarial support, as well as reimbursement of reasonable expenses, and will
be subject to certain non-compete and confidentiality restrictions.

The term of the Hodson Agreement is one year, unless terminated sooner.
Over the term, Mr. Hodson will be paid consulting fees of $318,856. The Hodson
Agreement may be extended on the same terms for an additional one-year period.
The "gross up" provisions of that severance agreement will apply to payments
made pursuant to the Hodson Agreement in the event such consulting payments are
determined to be "excess parachute" payments.

21
<PAGE> 24

PRINCIPAL STOCKHOLDERS OF THE COMPANY

The following table sets forth certain information regarding beneficial
stock ownership of the Company as of March 1, 1997: (i) each director and Named
Executive Officer of the Company, (ii) all directors and executive officers as a
group, and (iii) each stockholder known by the Company to be the beneficial
owner of more than 5% of the outstanding Company Common Stock. Except as
otherwise indicated, each person or entity listed below has sole voting and
investment power with respect to all shares shown to be beneficially owned by
him or it except to the extent such power is shared by a spouse under applicable
law. Shares of Common Stock subject to options held by directors and executive
officers that are exercisable within 60 days of March 1, 1997, are deemed
outstanding for the purpose of computing such director's or executive officer's
beneficial ownership and the beneficial ownership of all directors and executive
officers as a group.

<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
MEDPARTNERS %
NAME OF BENEFICIAL OWNER POSITION HELD COMMON STOCK OWNED
------------------------ ------------- ------------ -----
<S> <C> <C> <C>
Larry R. House....................... Chairman of the Board, President and Chief
Executive Officer 4,820,522(1) 2.76%
Mark L. Wagar........................ President -- Western Operations 301,005(2) *
James G. Connelly, III............... President -- Caremark 649,145(3) *
Kristen E. Gibney.................... Vice President -- Caremark 20,945(4) *
Michele J. Hooper.................... Vice President -- Caremark 267,584(5) *
Roger L. Headrick.................... Director 91,938(6) *
Thomas W. Hodson..................... Director 584,046(7) *
Harry M. Jansen Kraemer, Jr.......... Director 5,565(8) *
Richard J. Kramer.................... Director 1,876,974(9) 1.10%
Rosalio J. Lopez, M.D................ Director 120,069(10) *
Ted H. McCourtney.................... Director 63,841(11) *
John S. McDonald, J.D................ Director 310,281(12) *
Walter T. Mullikin, M.D.............. Director 439,424(13) *
Charles W. Newhall III............... Director 1,509,000(14) *
C. A. Lance Piccolo.................. Director 1,427,519(15) *
Richard M. Scrushy................... Director 1,927,500(16) 1.13%
Larry D. Striplin, Jr................ Director 110,100(17) *
All executive officers & directors as
a group (25 persons)............... 16,384,232(18) 9.19%
AIM Management Group Inc............. 12,772,855(19) 7.48%
11 Greenway Plaza, Suite 1919
Houston, TX 77046
Wachovia Bank and Trust Company...... 9,317,000(20) 5.46%
Trust Services Division
301 Main Street
Winston-Salem, NC 27150
</TABLE>

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

* less than one percent.

(1) Includes options to purchase 3,653,000 shares.

(2) Includes options to purchase 298,000 shares.

(3) Includes options to purchase 610,465 shares.

(4) Includes no options.

(5) Includes options to purchase 213,170 shares.

(6) Includes options to purchase 59,208 shares, and 1,210 shares held by
spouse.

(7) Includes options to purchase 5,000 shares, and 6,142 shares held by the
Hodson Foundation.

(8) Includes options to purchase 5,000 shares, and 50 shares held by spouse.

(9) Includes options to purchase 9,000 shares, and 1,867,674 shares held by
DCNHS -- West Partnership, L.P. ("DCNHS"). Mr. Kramer is the President and
Chief Executive Officer of Catholic Healthcare West, which

22
<PAGE> 25

is the sole general partner of DCNHS. Mr. Kramer disclaims beneficial
ownership of the shares held by DCNHS.

(10) Includes options to purchase 31,000 shares, and 81,293 shares held in trust
for the benefit of Dr. Lopez and members of his family.

(11) Includes options to purchase 9,000 shares.

(12) Includes options to purchase 9,000 shares, and 301,281 shares held by
certain trusts for the benefit of Mr. McDonald.

(13) Includes options to purchase 9,000 shares, and 430,424 shares held by the
Mullikin Family Trust U/D/T, dated February 10, 1976, for the benefit of
Dr. Mullikin and members of his family.

(14) Includes options to purchase 9,000 shares, and 1,500,000 shares held by New
Enterprise Associates VI, Limited Partnership ("NEA"). Mr. Newhall is a
general partner of NEA Partners VI, Limited Partnership, which is the
general partner of NEA. Mr. Newhall disclaims beneficial ownership of the
shares held by NEA.

(15) Includes options to purchase 1,317,126 shares.

(16) Includes options to purchase 29,000 shares, 250,000 shares held in trust
for minor children, and 1,098,500 shares held by HEALTHSOUTH. Mr. Scrushy
is Chairman of the Board, President and Chief Executive Officer of
HEALTHSOUTH. Mr. Scrushy disclaims beneficial ownership of the shares held
by HEALTHSOUTH.

(17) Includes options to purchase 13,000 shares.

(18) Includes options to purchase 7,438,769 shares.

(19) Shares held for which AIM Management Group Inc. (together with its
wholly-owned subsidiaries, AIM Advisors, Inc. and AIM Capital Management
Inc., "AIM") acts as investment advisor. AIM claims shared voting and
dispositive power with respect to all such shares.

(20) Shares held as Trustee for MedPartners, Inc. Employee Compensation Trust.

23
<PAGE> 26

RELATIONSHIP WITH
INDEPENDENT PUBLIC ACCOUNTANTS

Ernst & Young LLP, Birmingham, Alabama, has been engaged by the Board of
Directors of the Company as independent public accountants for the Company and
its subsidiaries for the fiscal year 1996 and it is expected that such firm will
serve in that capacity for the 1997 fiscal year. Management expects that a
representative of Ernst & Young LLP will be present at the Annual Meeting to
make a statement if he desires to do so and to be available to answer
appropriate questions posed by stockholders.

FINANCIAL STATEMENTS

The Company's audited financial statements for the fiscal years ended
December 31, 1996, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and other selected information are included in
Appendix A to this Proxy Statement.

OTHER MATTERS

As of the date of this Proxy Statement, the Board of Directors of the
Company does not know of any business which will be presented for consideration
at the Annual Meeting other than that specified herein and in the Notice of
Annual Meeting of Stockholders, but if other matters are presented, it is the
intention of the persons designated as proxies to vote in accordance with their
judgments on such matters.

A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1996, INCLUDING THE FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES THERETO, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, WILL BE
FURNISHED WITHOUT CHARGE TO ANY STOCKHOLDER OF THE COMPANY WHOSE PROXY IS
SOLICITED BY THE FOREGOING PROXY STATEMENT, UPON THE WRITTEN REQUEST OF ANY SUCH
PERSON ADDRESSED TO TRACY P. THRASHER, CORPORATE SECRETARY, MEDPARTNERS, INC.,
3000 GALLERIA TOWER, SUITE 1000, BIRMINGHAM, ALABAMA 35244. SUCH A REQUEST FROM
A BENEFICIAL OWNER OF THE COMPANY'S COMMON STOCK MUST CONTAIN A GOOD-FAITH
REPRESENTATION BY SUCH PERSON THAT, AS OF MARCH 20, 1997, HE WAS A BENEFICIAL
OWNER OF THE COMPANY'S COMMON STOCK.

Please SIGN, DATE and RETURN the enclosed Proxy promptly.

By Order of the Board of Directors:

TRACY P. THRASHER
Corporate Secretary

April 11, 1997

24
<PAGE> 27

APPENDIX A

This Appendix A, together with the foregoing Proxy Statement contains the
information required to be provided in the Company's annual report to security
holders pursuant to the Rules and Regulations of the Securities and Exchange
Commission and The New York Stock Exchange. The Company's 1996 Annual Report to
Stockholders, which provides additional information concerning the Company and
its performance in 1996, will be mailed to stockholders separately.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Business.................................................... A-1
Directors and Executive Officers............................ A-2
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. A-6
Audited Consolidated Financial Statements of MedPartners,
Inc. and Subsidiaries
Report of Independent Auditors............................ A-13
Consolidated Balance Sheets............................... A-14
Consolidated Statements of Operations..................... A-15
Consolidated Statements of Stockholders' Equity........... A-16
Consolidated Statements of Cash Flows..................... A-17
Notes to Consolidated Financial Statements................ A-18
</TABLE>
<PAGE> 28

APPENDIX A

BUSINESS

GENERAL

The Company is the largest PPM company in the United States based on annual
revenues of approximately $4.8 billion as of December 31, 1996. The Company
develops, consolidates and manages integrated healthcare delivery systems.
Through its network of affiliated group and independent practice association
("IPA") physicians, the Company provides primary and specialty healthcare
services to prepaid managed care enrollees and fee-for-service patients. The
Company also operates one of the largest independent PBM programs in the United
States, with annual revenues of approximately $1.8 billion as of December 31,
1996 and provides disease management services and therapies for patients with
certain chronic conditions. As of December 31, 1996, the Company operated its
PBM program in all 50 states and its PPM business in 26 states and was
affiliated with approximately 8,850 physicians, including approximately 2,600 in
group practices, 5,300 through IPA relationships and 950 who were
hospital-based, providing healthcare to approximately 1.6 million prepaid
enrollees.

The Company affiliates with physicians who are seeking the resources
necessary to function effectively in healthcare markets that are evolving from
fee-for-service to managed care payor systems. The Company enhances clinic
operations by centralizing administrative functions and introducing management
tools, such as clinical guidelines, utilization review and outcomes measurement.
The Company provides affiliated physicians with access to capital and to
advanced management information systems. In addition, the Company contracts with
health maintenance organizations and other third-party payors that compensate
the Company and its affiliated physicians on a prepaid basis (collectively
"HMOs"), hospitals and outside providers on behalf of its affiliated physicians.
These relationships provide physicians with the opportunity to operate under a
variety of payor arrangements and to increase their patient flow.

The Company's PPM revenue is derived from contracts with HMOs that
compensate the Company and its affiliated physicians on a prepaid basis and from
the provision of fee-for-service medical services. In the prepaid arrangements,
the Company, through its affiliated physicians, typically is paid by the HMO a
fixed amount per member ("enrollee") per month ("professional capitation") or a
percentage of the premium per member per month ("percent of premium") paid by
employer groups and other purchasers of healthcare coverage to the HMOs. In
return, the Company, through its affiliated physicians, is responsible for
substantially all of the medical services required by enrollees. In many
instances, the Company and its affiliated physicians accept financial
responsibility for hospital and ancillary healthcare services in return for
payment from HMOs on a capitated or percent of premium basis ("institutional
capitation"). In exchange for these payments (collectively, "global
capitation"), the Company, through its affiliated physicians, provides the
majority of covered healthcare services to enrollees and contracts with
hospitals and other healthcare providers for the balance of the covered
services. In March 1996, the California Department of Corporations (the "DOC")
issued a healthcare service plan license (the "Restricted License") to Pioneer
Provider Network, Inc. ("Pioneer Network") in accordance with the requirements
of the Knox-Keene Health Care Service Plan Act of 1975 (the "Knox-Keene Act")
which authorizes Pioneer Network to operate as a healthcare service plan in the
state of California. The Company intends to utilize the Restricted License for a
broad range of healthcare services.

The Company offers medical group practices and independent physicians a
range of affiliation models. These affiliations are carried out by the
acquisition of PPM entities or practice assets, either for cash or through an
equity exchange, or by affiliation on a contractual basis. In all instances, the
Company enters into long-term practice management agreements that provide for
the management of the affiliated physicians by the Company while assuring the
clinical independence of the physicians.

The Company also manages outpatient prescription drug benefit programs for
more than 1,300 clients throughout the United States, including corporations,
insurance companies, unions, government employee groups and managed care
organizations. The Company dispenses 42,000 prescriptions daily through four
mail service pharmacies and manages patients' immediate prescription needs
through a network of approximately 59,000 retail pharmacies. The Company is in
the process of integrating the PBM program with the PPM business by providing
pharmaceutical services to affiliated physicians, clinics and HMOs. The
Company's disease management services are intended to meet the healthcare needs
of individuals with chronic diseases or conditions. These services include the
design, development and management of comprehensive programs comprising drug
therapy, physician support and patient education. The Company currently provides
therapies and services for individuals with such conditions as hemophilia,
growth disorders, immune deficiencies, genetic emphysema, cystic fibrosis and
multiple sclerosis.

A-1
<PAGE> 29

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information about the executive
officers and directors of the Company:

<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Larry R. House................................. 53 Chairman of Board, President and Chief Executive
Officer
Mark L. Wagar.................................. 45 President -- Western Operations
John J. Gannon................................. 58 President -- Eastern Operations
James G. Connelly, III......................... 51 President -- Caremark
H. Lynn Massingale, M.D........................ 44 President -- Team Health
Harold O. Knight, Jr........................... 39 Executive Vice President and Chief Financial
Officer
Tracy P. Thrasher.............................. 34 Executive Vice President and Corporate Secretary
William R. Dexheimer........................... 40 Executive Vice President and Chief Operating
Officer -- East
J. Rodney Seay................................. 49 Executive Vice President of Mergers and
Acquisitions
J. Brooke Johnston, Jr......................... 57 Senior Vice President and General Counsel
Peter J. Clemens, IV........................... 32 Vice President of Finance and Treasurer
Richard M. Scrushy............................. 44 Director
Larry D. Striplin, Jr.......................... 67 Director
Charles W. Newhall III(1)...................... 52 Director
Ted H. McCourtney(2)........................... 58 Director
Walter T. Mullikin, M.D........................ 79 Director
John S. McDonald, J.D.(1)...................... 64 Director
Rosalio J. Lopez, M.D.(2)...................... 44 Director
Richard J. Kramer.............................. 54 Director
C.A. Lance Piccolo............................. 56 Director
Roger L. Headrick(1)........................... 60 Director
Thomas W. Hodson(2)............................ 50 Director
Harry M. Jansen Kraemer, Jr.................... 42 Director
</TABLE>

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

(1) Member of the Compensation Committee

(2) Member of the Audit Committee

Larry R. House has been President and Chief Executive Officer of the
Company since August 1993, and has been Chairman of the Board since January
1993. From 1985 to 1992, he was Chief Operating Officer of HEALTHSOUTH. From
1992 to 1993, Mr. House was President of HEALTHSOUTH International, Inc. Mr.
House is a member of the Board of Directors of each of HEALTHSOUTH, Capstone,
the American Sports Medicine Institute, UAB Research Foundation and Monitor
MedX.

Mark L. Wagar has been President-Western Operations of the Company since
January 1996. From January 1995 through December 1995, Mr. Wagar was Chief
Operating Officer of MME. From March 1994 to December 1994, he was the President
of CIGNA HealthCare of California, a healthcare plan serving enrollees in
California, Oregon and Washington, from January 1993 through February 1994, was
a Vice President of CIGNA HealthCare of California, an HMO. From November 1989
to December 1992, he was the President of Managed Care Partners, Inc., a private
consulting management company specializing in managed care services. He has been
involved in healthcare management for over 20 years, including 10 years in
managed care companies.

John J. Gannon has been President-Eastern Operations of the Company since
July 1996. For 23 years, Mr. Gannon was a Partner with KPMG Peat Marwick. His
most recent position with KPMG was that of National Partner-in-Charge of
Strategy and Marketing, Healthcare and Life Sciences. He served as one of the
firm's designated industry review specialists for healthcare financial
feasibility studies.

James G. Connelly, III has been President and Chief Operating Officer of
Caremark since August 1992. Mr. Connelly was the President of a subsidiary of
Caremark from April 1992 to November 1992. From May 1990 to November 1992, Mr.
Connelly was a Group Vice President of Baxter International Inc., a publicly
traded company that is a leading manufacturer and marketer of healthcare
products and services ("Baxter"). Prior to 1990, he was a

A-2
<PAGE> 30

Corporate Vice President of Baxter, responsible for its hospital supply business
group. Mr. Connelly also serves as a director of Boise Cascade Office Products
Corporation, a publicly traded company.

H. Lynn Massingale, M.D. has been President and Chief Executive Officer of
Team Health since its formation in March 1994. Dr. Massingale has served as
President of Southeastern Emergency Physicians, Inc., a subsidiary of Team
Health, since 1981. A graduate of the University of Tennessee Center for Health
Sciences in Memphis, Dr. Massingale is certified by the National Board of
Medical Examiners, Tennessee Board of Medical Examiners and American Board of
Emergency Medicine. Dr. Massingale's professional memberships include the
Knoxville Academy of Medicine, Tennessee Medical Association, American Medical
Association and American College of Emergency Physicians.

Harold O. Knight, Jr. has been Executive Vice President and Chief Financial
Officer of the Company since November 1994. Mr. Knight was Senior Vice President
of Finance and Treasurer of MedPartners from August 1993 to November 1994, and
from March 1993 to August 1993, Mr. Knight served as Vice President of Finance
of the Company. From 1980 to 1993, Mr. Knight was with Ernst & Young LLP, most
recently as Senior Manager. Mr. Knight is a member of the Alabama Society of
Certified Public Accountants and the American Institute of Certified Public
Accountants.

Tracy P. Thrasher has been Executive Vice President of the Company since
November 1994 and has been Corporate Secretary since March 1994. Ms. Thrasher
was Senior Vice President of Administration from March 1994 to November 1994,
and from January 1993 to March 1994, she served as Corporate Comptroller and
Vice President of Development. From 1990 to 1993, Ms. Thrasher was the Audit and
Health Care Management Advisory Service Manager with Burton, Canady, Moore &
Carr, P.C., independent public accountants. Ms. Thrasher began her career with
Ernst & Young LLP in 1985, and became a certified public accountant in 1986.

William R. Dexheimer has been Executive Vice President and Chief Operating
Officer-East of the Company since August 1993. From 1989 to 1993, Mr. Dexheimer
was a principal stockholder and Chief Executive Officer of Strategic Health
Resources of the South, Inc., a healthcare development and consulting firm. From
1986 to 1989, Mr. Dexheimer was employed by AMI Brookwood Medical Center as
Senior Vice President of Development and Chief Executive Officer of AMI
Brookwood Primary Care Centers, Inc.

J. Rodney Seay has been Executive Vice President of Mergers and
Acquisitions of the Company since April 1995. From August 1993 to April 1995, he
served as Executive Vice President of Development of MedPartners. Mr. Seay was
also Secretary of the Company from August 1993 to March 1994. From 1992 to 1993,
he was Vice President of Finance of HEALTHSOUTH. From 1988 to 1992, Mr. Seay was
a Senior Manager with KPMG Peat Marwick. From 1982 to 1988, he served as Chief
Executive Officer of Medical Data Services, a physician practice management
company with over 650 employees and over 1,500 physician clients.

J. Brooke Johnston, Jr. has been Senior Vice President and General Counsel
of the Company since April 1996. Prior to that, Mr. Johnston was a senior
principal of the law firm of Haskell Slaughter Young & Johnston, Professional
Association, Birmingham, Alabama, where he practiced corporate and securities
law for over seventeen years. Prior to that Mr. Johnston was engaged in the
practice of law in New York, New York and at another firm in Birmingham. Mr.
Johnston is a member of the Alabama State Bar and the New York and American Bar
Associations. Mr. Johnston is a member of the Board of Directors of United
Leisure Corporation, a publicly traded leisure time services company.

Peter J. Clemens, IV has been Vice President of Finance and Treasurer of
the Company since April 1995. From 1991 to 1995, Mr. Clemens worked in Corporate
Banking with Wachovia Bank of Georgia, N.A. Mr. Clemens began his career with
AmSouth Bank, N.A. in 1987, and received a Masters Degree in Business
Administration from Vanderbilt University in 1991.

Larry D. Striplin, Jr. has been a member of the Company's Board of
Directors since January 1993. Since December 1995, Mr. Striplin has been the
Chairman and Chief Executive Officer of Nelson-Brantley Glass Contractors, Inc.
and Chairman and Chief Executive Officer of Clearview Properties, Inc. Until
December 1995, Mr. Striplin had been Chairman of the Board and Chief Executive
Officer of Circle "S" Industries, Inc., a privately owned bonding wire
manufacturer. Mr. Striplin is a member of the Board of Directors of Kulicke &
Suffa, Inc. a publicly traded manufacturer of electronic equipment, and of
Capstone.

Charles W. Newhall III has been a member of the Company's Board of
Directors since September 1993. He has been a general partner of New Enterprise
Associates, a venture capital firm, since 1978. Mr. Newhall is a

A-3
<PAGE> 31

member of the Board of Directors of HEALTHSOUTH, Integrated Health Services,
Inc. and OPTA Food Ingredients, Inc., all publicly traded companies. He is
founder and Chairman of the Mid-Atlantic Venture Association, which was
organized in 1988.

Walter T. Mullikin, M.D., a surgeon, has been a member of the Company's
Board of Directors since November 1995. Dr. Mullikin was Chairman of the Board
of the general partner of MME from 1989 to 1995. He founded Pioneer Hospital and
the predecessors to MME's principal professional corporation in 1957. He was
also the Chairman of the Board, President and a shareholder of MIPA, until
November 1995. Dr. Mullikin is a member of the Board of Directors of Health Net,
a publicly traded HMO, and was one of the founders and a past chairman of the
Unified Medical Group Association.

John S. McDonald, J.D. has been a member of the Company's Board of
Directors since November 1995. Mr. McDonald was the Chief Executive Officer of
the general partner of MME from March 1994 to 1995, and he was an executive of
Pioneer Hospital and their related entities since 1967. Mr. McDonald was also a
director, the Secretary and a shareholder of MME's general partner. Mr. McDonald
is on the Board of Directors of the Truck Insurance Exchange and is a past
president of the Unified Medical Group Association.

Rosalio J. Lopez, M.D. has been a member of the Company's Board of
Directors since November 1995. Mr. Lopez had been a director of the general
partner of MME since 1989. Dr. Lopez joined MME's principal professional
corporation in 1984 and serves as the Chairman of its Medical Council and Family
Practice and Managed Care committees. He also acted as a director and a Vice
President of MME's principal professional corporation. He is also a director and
shareholder of MIPA.

Richard J. Kramer has been a member of the Company's Board of Directors
since November 1995. Mr. Kramer is President/Chief Executive Officer and a
director of Catholic Healthcare West ("CHW"). Before joining CHW in September
1989, Mr. Kramer served as the Executive Vice President of LifeSpan, Inc., a
multi-hospital/healthcare system headquartered in Minneapolis, which he joined
in 1971, serving in a variety of capacities, including Vice President of
Planning and Marketing and administrator for Abbott-Northwestern Hospital. Mr.
Kramer is currently a member of the Board of Directors of the California
Association of Hospitals and Health Systems and the Hospital Council of Northern
and Central California, the Board of Directors of the California Chamber of
Commerce, the Governing Council of the American Hospital Association Section on
Health Systems and the House of Delegates of the American Hospital Association,
the Advisory Council for the Center for Clinical Integration and the Board of
Directors of the Alumni Association of the University of Minnesota Program in
Health Care Administration.

C.A. Lance Piccolo has been Vice Chairman of the Company's Board of
Directors since September 1996. From August 1992 to September 1996, he was
Chairman of the Board of Directors and Chief Executive Officer of Caremark. From
1987 until November 1992, Mr. Piccolo was an Executive Vice President of Baxter
and from 1988 until November 1992, he served as a director of Baxter. Mr.
Piccolo also serves as a director of CKC and Baxter, each of which is publicly
traded.

Roger L. Headrick has been a member of the Company's Board of Directors
since September 1996 and has been President and Chief Executive Officer of the
Minnesota Vikings Football Club since 1991. Additionally, since June 1989, Mr.
Headrick has been President and Chief Executive Officer of ProtaTek
International, Inc., a bio-process and biotechnology company that develops and
manufactures animal vaccines. Prior to 1989, he was Executive Vice President and
Chief Financial Officer of The Pillsbury Company, a food manufacturing and
processing company. Mr. Headrick also serves as a director of CKC.

Thomas W. Hodson has been a member of the Company's Board of Directors
since September 1996, and was the Senior Vice President and Chief Financial
Officer of Caremark from August 1992 until September 1996. Mr. Hodson was a
Group Vice President of Baxter, from April 1992 to November 1992, and from 1990
to 1992 he was a Senior Vice President of Baxter responsible for financial
relations, strategic planning, acquisitions and divestitures and corporate
communications. From 1988 to 1990, Mr. Hodson was a corporate vice president of
Baxter. Mr. Hodson also serves as a director of APACHE Medical Systems, Inc., a
publicly traded provider of clinically-based decision support information
systems to the healthcare industry.

Harry M. Jansen Kraemer, Jr. has been a member of the Company's Board of
Directors since September 1996, and is a Vice President and Chief Financial
Officer of Baxter, having served in that capacity since November 1993.

A-4
<PAGE> 32

He was promoted to Baxter's three-member Office of the Chief Executive in June
1995, and appointed to Baxter's Board of Directors in November 1995. In addition
to his duties as its chief financial officer he is responsible for Baxter's
Global Hospital Business, Global Renal Business, and the Baxter Japan
subsidiary. Mr. Kraemer has been an employee of Baxter since 1982 serving in a
variety of positions, including Vice President, Group Controller for Baxter's
hospital and alternate-site businesses, president of Baxter's Hospitex Division
and Vice President Finance and Operations for Baxter's global-business group.

A-5
<PAGE> 33

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The purpose of the following discussion is to facilitate the understanding
and assessment of significant changes and trends related to the results of
operations and financial condition of the Company, including changes arising
from recent acquisitions by the Company, the timing and nature of which have
significantly affected the Company's results of operations. This discussion
should be read in conjunction with the consolidated financial statements and the
notes thereto.

GENERAL

In February and September of 1996, the Company combined with PPSI and
Caremark, respectively. These business combinations were accounted for as
poolings of interests. The financial information referred to in this discussion
reflects the combined operations of these entities and several additional
immaterial entities accounted for as poolings of interests.

MedPartners is the largest PPM company in the United States. The Company
develops, consolidates and manages integrated healthcare delivery systems.
Through its network of affiliated group and IPA physicians, the Company provides
primary and specialty healthcare services to prepaid enrollees and
fee-for-service patients in the United States. The Company also operates
independent PBM programs and furnishes disease management services and therapies
for patients with certain chronic conditions.

The Company affiliates with physicians who are seeking the resources
necessary to function effectively in healthcare markets that are evolving from
fee-for-service to prepaid payor systems. The Company enhances clinic operations
by centralizing administrative functions and introducing management tools such
as clinical guidelines, utilization review and outcomes measurement. The Company
provides affiliated physicians with access to capital and advanced management
information systems. The Company's PPM revenue is derived primarily from the
contracts with HMOs that compensate the Company and its affiliated physicians on
a prepaid basis. In the prepaid arrangements, the Company typically is paid by
the HMO a fixed amount per member ("enrollee") per month ("professional
capitation") or a percentage of the premium per member per month ("percent of
premium") paid by employer groups and other purchasers of healthcare coverage to
the HMOs. In return, the Company is responsible for substantially all of the
medical services required by enrollees. In many instances, the Company and its
affiliated physicians accept financial responsibility for hospital and ancillary
healthcare services in return for payment from HMOs on a capitated or percent of
premium basis ("institutional capitation"). In exchange for these payments
(collectively, "global capitation"), the Company, through its affiliated
physicians, provides the majority of covered healthcare services to enrollees
and contracts with hospitals and other healthcare providers for the balance of
the covered services. These relationships provide physicians with the
opportunity to operate under a variety of payor arrangements and increase their
patient flow.

The Company offers medical group practices and independent physicians a
range of affiliation models which are described in Note 1 of the accompanying
consolidated financial statements. These affiliations are carried out by the
acquisition of PPM entities or practice assets, either for cash or through
equity exchange, or by affiliation on a contractual basis. In all instances, the
Company enters into long-term practice management agreements with the affiliated
physicians that provide for both the management of their practices by the
Company and the clinical independence of the physicians.

The Company also organizes and manages physicians and other healthcare
professionals engaged in the delivery of emergency, radiology and teleradiology
services, hospital-based primary care and temporary staffing and support
services to hospitals, clinics, managed care organizations and physician groups.
Under contracts with hospitals and other clients, the Company identifies and
recruits physicians and other healthcare professionals for admission to a
client's medical staff, monitors the quality of care and proper utilization of
services and coordinates the ongoing scheduling of staff physicians who provide
clinical coverage in designated areas of care.

The Company also manages outpatient prescription drug benefit programs for
clients throughout the United States, including corporations, insurance
companies, unions, government employee groups and managed care organizations.
The Company dispenses 42,000 prescriptions daily through four mail service
pharmacies and manages patients' immediate prescription needs through a network
of national retail pharmacies. The Company is integrating its PBM program with
the PPM business by providing PBM services to the affiliated physicians, clinics
and HMOs. The Company's disease management services are intended to meet the
healthcare needs of individuals with chronic diseases or conditions. These
services include the design, development and management of comprehensive
programs that comprise drug therapies, physician support and patient education.
The Company currently

A-6
<PAGE> 34

provides therapies and services for individuals with such conditions as
hemophilia, growth disorders, immune deficiencies, genetic emphysema, cystic
fibrosis and multiple sclerosis.

RESULTS OF OPERATIONS

Through the Company's network of affiliated group and IPA physicians, the
Company provides primary and specialty healthcare services to prepaid enrollees
and fee-for-service patients. The Company also provides prescription benefit
services to more than 15 million individuals in all 50 states and provides
services and therapies to patients with certain chronic conditions, primarily
hemophilia and growth disorders. The following table sets forth the earnings
summary by service area for the periods indicated:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Physician Services
Net revenue.......................................... $1,053,519 $1,663,728 $2,555,642
Operating income..................................... 27,121 73,586 125,015
Margin............................................... 2.6% 4.4% 4.9%
Pharmaceutical Services
Net revenue.......................................... $1,097,315 $1,432,250 $1,784,319
Operating income..................................... 46,236 56,022 75,788
Margin............................................... 4.2% 3.9% 4.2%
Specialty Services
Net revenue.......................................... $ 487,820 $ 487,399 $ 473,538
Operating income..................................... 75,139 70,762 56,006
Margin............................................... 15.4% 14.5% 11.8%
Corporate Services
Operating loss....................................... $ (35,212) $ (24,668) $ (20,881)
Percentage of total net revenue...................... (1.3)% (0.7)% (0.4)%
</TABLE>

Physician Practice Management Services

The Company's PPM revenues have increased substantially over the past three
years primarily due to growth in prepaid enrollment, existing practice growth
and new practice affiliations. Of the total 1996 PPM revenue, $1.7 billion can
be attributed to acquisitions (accounted for as either poolings of interests or
purchase transactions) made during the year. The Company's PPM operations in the
western region of the country function in a predominantly prepaid environment.
The Company's PPM operations in the other regions of the country are in
predominantly fee-for-service environments with limited but increasing managed
care penetration. The following table sets forth the breakdown of net revenue
for the PPM services area for the periods indicated:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Prepaid................................................ $ 620,701 $ 982,128 $1,401,837
Fee-for-Service........................................ 408,832 661,974 1,139,265
Other.................................................. 23,986 19,626 14,540
---------- ---------- ----------
Total net revenue from PPM service area...... $1,053,519 $1,663,728 $2,555,642
========== ========== ==========
</TABLE>

The Company's prepaid revenue reflects the number of HMO enrollees for whom
it receives monthly capitation payments. The Company receives professional
capitation to provide physician services and institutional capitation to provide
hospital care and other non-professional services. The table below reflects the
growth in enrollment for professional and global capitation:

<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------
1994 1995 1996
------- --------- ---------
<S> <C> <C> <C>
Professional enrollees...................................... 548,821 603,391 1,025,763
Global enrollees (professional and institutional)........... 255,188 477,208 603,892
------- --------- ---------
Total enrollees................................... 804,009 1,080,599 1,629,655
======= ========= =========
</TABLE>

During 1996, the Company consolidated the majority of its acquisitions into
its management infrastructure, eliminating substantial overhead expenses and
improving integration of medical, administrative and operational

A-7
<PAGE> 35

management. The integration of various acquisitions into existing networks has
allowed the conversion of thousands of prepaid enrollees from professional
capitation to global capitation. This integration has been a significant factor
in increasing operating margins in the PPM service area from 2.6% in 1994 to
4.9% in 1996.

The Company has developed strong relationships with many of the national
and regional managed care organizations and has demonstrated its ability to
deliver high-quality, cost-effective care. The Company is strategically
positioned to capitalize on the industry's continued evolution toward a prepaid
environment, specifically by increasing the number of prepaid enrollees and
converting existing enrollees from professional to global capitation. These
changes are expected to result in significant internal growth.

The Company has continued to acquire high-quality groups of emergency
physicians and radiologists who believe in the value of providing increasingly
cost-effective care. The reputation and strong local presence of new and
existing hospital-based groups provide a substantial advantage in the
competition for contracts with emergency room and radiology departments. The
excellent reputation and leadership of these groups continue to provide
opportunities for new contracts.

In addition to the increased revenues and operational efficiencies realized
through acquisition and consolidation, the Company is profiting from synergies
produced by the exchange of ideas among physicians and managers across
geographical boundaries and varied areas of specialization. The PPM service
area, for example, has established medical management committees that meet
monthly to discuss implementation of the best medical management techniques to
assist the Company's affiliated physicians in delivering the highest quality of
care at lower costs in a consistent fashion. The Company is capitalizing on the
knowledge of its Western groups, which have significant experience operating in
a prepaid environment, to transfer the best practices to other groups in markets
with increasing managed care penetration. Through interaction between physicians
and managers from various medical groups during the fourth quarter of 1996,
significant cost savings have been identified at several of the Company's larger
affiliated groups.

The PPM service area has also created a medical advisory committee, which
is developing procedures for the identification, packaging and dissemination of
the best clinical practices within the Company's medical groups. The committee
also provides the Company's affiliated physicians a forum to discuss innovative
ways to improve the delivery of healthcare.

The Company has also initiated integration efforts between the PPM, PBM and
disease management areas. A project is in process to integrate patient care data
from several of the Company's affiliated clinics with the PBM's healthcare
information system. Through this database, which combines medical and claims
data with the prescription information tracked by the PBM area, the Company will
have access to the industry's most complete and detailed collection of
information on successful treatment patterns. Another synergy arising from
integration is the opportunity which the existing PBM infrastructure affords to
affiliated physician groups to further expand services by providing pharmacy
services ranging from fee-for-service retail claims processing to full drug
capitation programs. The Company is also beginning to integrate the disease
management area's expertise in an effort to formulate and implement disease
management programs for the Company.

Pharmacy Benefit Management Services

Pharmaceutical Services revenues continue to exhibit sustained growth. This
growth is entirely internal and has not been supplemented by acquisitions. Key
factors contributing to this growth include high customer retention, additional
penetration of retained customers, new customer contracts and drug cost
inflation. These growth factors were partially offset in 1995 and 1996 by
selective non-renewal of certain accounts not meeting threshold profitability
levels. The preponderance of Pharmaceutical Services revenue is earned on a
fee-for-service basis through contracts covering one to three-year periods.
Revenues for selected types of services are earned based on a percentage of
savings achieved or on a per-enrollee or per-member basis; however, these
revenues are not material to total revenues.

Operating income experienced accelerated growth in 1995 and 1996 while
margins fell slightly in 1995 to but returned to a 4.2% level in 1996. Operating
income and margins in 1996 were enhanced by reduced information systems costs
achieved through renegotiation of a contract with an outsource service vendor,
continued improvements in the acquisition costs of drugs, increased penetration
of higher margin value-oriented services and an overall 13% reduction in selling
and administrative expenses. Partially offsetting these cost reductions were
continued declines in prices to customers.

Margins in Pharmaceutical Services are also affected by the mix between
mail and retail service revenues. Margins on mail-related service revenues
currently are higher than those on retail service revenues. Revenues in both
mail and retail services continue to grow; although, the growth rate of retail
services in 1995 and 1996 was

A-8
<PAGE> 36

greater than the growth rate of mail services. In 1996, retail service revenues
grew to represent nearly 49% of PBM revenues. The Company has little or no
influence over certain other factors, including demographics of the population
served and plan design, which, can affect the mix between mail and retail
services. Consequently, margin percentage trends alone are not a sufficient
indication of progress. The Company's pricing and underwriting strategies are
closely linked to its working capital and asset management strategies and focus
on return on investment and overall improvements in return on capital deployed
in the business.

The Company has recently reorganized its sales and corporate accounts
management activities into eight geographic and two additional specialty areas.
This will enable the Company to improve its account retention, client service
and growth initiatives even further as a result of increased accountability and
focus. As mentioned under Physician Practice Management Services, the Company is
pursuing a number of PPM and PBM integration opportunities.

Specialty Services

Specialty Services concentrates on providing high quality products and
services in the home. Domestically, these services focus on low incidence
chronic diseases. Internationally, the company has established home care
businesses in Canada, Germany, France, the Netherlands, the United Kingdom,
Puerto Rico and Japan, where it is expanding into new services in response to
transforming health care delivery systems in these countries. Revenues for
specialty services have declined 3% as a result of managed care pricing
pressures, restructuring of benefit plans by payors and reduced reimbursement
from Medicaid and other state agency payors. For the hemophilia business,
federal government programs providing special pricing to qualified organizations
who may be competitors have impacted revenues negatively. To offset these
declines, the Company is attempting to launch new products and services
including the opening of a PBM in the Netherlands in the fourth quarter of 1996
and a multiple sclerosis ("MS") therapy service in the U.S.

In addition to pricing pressures, particularly in growth deficiency
therapy, operating expenses and cost of service expenses rose due to programs
targeted at launching the Company's new MS therapy service, an expanded payor
marketing initiative and an initiative targeted at attaining accreditation by
the Joint Committee on Accreditation of Healthcare Organizations for the
nationwide system of pharmacies.

Discontinued Operations

During 1995, Caremark divested its Caremark Orthopedic Services, Inc.
subsidiary as well as its clozaril patient management system, home infusion
business, and oncology management services business. The Company's consolidated
financial statements present the operating income and net assets of these
discontinued operations separately from continuing operations. Prior periods
have been restated to conform with this presentation. Discontinued operations
for 1995 reflect the net after-tax gain on the disposal of the clozaril patient
management system, the home infusion business and a $154.8 million after-tax
charge for the settlement discussed in Note 13 of the accompanying audited
consolidated financial statements related to the OIG investigation. Discontinued
operations for 1996 reflects a $65.6 million after-tax charge related to
settlements with private payors discussed in Note 13 of the accompanying audited
consolidated financial statements and an after-tax gain on disposition of the
nephrology services business, net of disposal costs, of $2.1 million.

Results of Operations for the Years Ended December 31, 1996 and 1995

For the year ended December 31, 1996, net revenue was $4,813.5 million,
compared to $3,583.4 million for 1995, an increase of 34.3%. The increase in net
revenue resulted primarily from affiliations with new physician practices and
the increase in PBM net revenue, which accounted for $339.9 million and $352.1
million of the increase in net revenue, respectively. The most significant
physician practice acquisition during this period was the CIGNA Medical Group
which was acquired in January 1996. This acquisition accounted for 92% of the
new practice revenue. The increase in PBM net revenue is attributable to
pharmaceutical price increases, the addition of new customers, further
penetration of existing customers and the sale of new products.

Operating income for the PPM and PBM services areas increased 69.9% and
35.3%, respectively, for 1996 compared to 1995. This growth was the result of
higher net revenues in both areas and increases in operating margins resulting
from the spreading of fixed overhead expenses over a larger revenue base and
continued integration of operations in the PPM services area. Operating income
and margins declined in the corresponding periods for the specialty services
area as a result of lower volumes in the hemophilia business and continued
pricing pressures for growth hormone products.

A-9
<PAGE> 37

Included in the pre-tax loss for 1996 were merger expenses totaling $308.7
million related to the business combinations with Caremark, PPSI and several
other entities, the major components of which are listed in Note 11 of the
accompanying audited consolidated financial statements.

Results of Operations for the Years Ended December 31, 1995 and 1994

Net revenue for the year ended December 31, 1995 was $3,583.4 million, an
increase of $944.7 million, or 35.8%, over the year ended December 31, 1994. The
increase in net revenue resulted primarily from affiliation with new physician
practices, the increase in prepaid enrollees at existing affiliated physician
practices and the increase in PBM net revenue, which accounted for $240.1
million, $295.8 million, and $334.9 million of the increase in net revenue,
respectively. The most significant physician practice acquisition affecting this
period was the Friendly Hills Healthcare Network which was acquired in May 1995.
This acquisition accounted for 53% of the new practice revenue. The increase in
PBM net revenue resulted from increases in covered lives due to new customer
contracts and greater penetration of existing customers.

Operating income grew 171.3% and 21.2% for 1995, compared to 1994, for the
PPM and PBM service areas, respectively. This growth is the result of higher net
revenues in both areas. The PPM service area also had a significant increase in
operating margin, 2.6% in 1994 to 4.4% in 1995, which resulted from the
leveraging of fixed overhead expenses over a substantially larger revenue base,
integration of operations and the impact of the varying margins of new physician
practice affiliations. Operating income and margins declined in the
corresponding periods for the specialty services areas as a result of pricing
pressures for growth hormone products.

FACTORS THAT MAY AFFECT FUTURE RESULTS

The future operating results and financial condition of the Company are
dependent on the Company's ability to market its services profitably,
successfully increase market share and manage expense growth relative to revenue
growth. The future operating results and financial condition of the Company may
be affected by a number of additional factors, including: the Company's growth
strategy, which involves the ability to raise the capital required to support
growth, competition for expansion opportunities, integration risks and
dependence on HMO enrollee growth; efforts to control healthcare costs; exposure
to professional liability; and pharmacy licensing, healthcare reform and
government regulation. Changes in one or more of these factors could have a
material adverse effect on the future operating results and financial condition
of the Company.

The Company completed the Caremark Acquisition in September 1996. There are
various Caremark legal matters which, if materially adversely determined, could
have a material adverse effect on the Company's operating results and financial
condition. See Note 13 to the accompanying consolidated financial statements of
the Company.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 1996, the Company had working capital of $170.3 million,
including cash and cash equivalents of $123.8 million. For the years ending
December 31, 1996, 1995 and 1994, cash flow from continuing operations was
$159.8 million, $152.8 million and $43.6 million, respectively.

For the year ended December 31, 1996, the Company invested $157.4 million
in acquisitions of the assets of physician practices and $122.1 million in
property and equipment. These expenditures were funded by approximately $270.2
million derived from equity proceeds and $133.6 million in net incremental
borrowings. For the year ended December 31, 1995, the Company invested $205.1
million in acquisitions of the assets of physician practices and $124.5 million
in property and equipment. These expenditures were funded by approximately $83.4
million derived from equity proceeds and $71.2 million in net incremental
borrowings. For the year ended December 31, 1994, the Company's investing
activities totaled $248.3 million, which was composed primarily of $126.7
million related to practice acquisitions and $102.7 million related to the
purchase of property and equipment. These expenditures were funded by $128.1
million derived from equity proceeds and $232.4 million in net incremental
borrowings. Investments in acquisitions and property and equipment are
anticipated to continue to be substantial uses of funds in future periods.

The Company entered into the $1 billion Credit Facility, which became
effective simultaneously with the closing of the Caremark acquisition, on
September 5, 1996, replacing its then existing credit facility. At the Company's
option, pricing on the Credit Facility is based on either a debt to cash flow
test or the Company's senior debt ratings. No principal is due on the facility
until its maturity date of September 2001. As of December 31, 1996, there was
$213.0 million outstanding under the facility. The Credit Facility contains
affirmative and negative covenants which include requirements that the Company
maintain certain financial ratios (including minimum net worth, minimum fixed
charge coverage ratio and maximum indebtedness to cash flow), and establishes
certain

A-10
<PAGE> 38

restrictions on investments, mergers and sales of assets. Additionally, the
Company is required to obtain bank consent for acquisitions with an aggregate
purchase price in excess of $75 million and for which more than half of the
consideration is to be paid in cash. The Credit Facility is unsecured but
provides a negative pledge on substantially all assets of the Company. As of
December 31, 1996, the Company was in compliance with the covenants in the
Credit Facility.

Effective October 8, 1996, the Company completed a $450 million senior note
offering. These ten-year notes carry a coupon rate of 7 3/8%. The notes are not
redeemable by the Company prior to maturity and are not entitled to the benefit
of any mandatory sinking fund. The notes are general unsecured obligations of
the Company ranking senior in right of payment to all existing and future
subordinated indebtedness of the Company and pari passu in right of payment with
all existing and future unsubordinated and unsecured obligations of the Company.
The notes are effectively subordinated to all existing and future indebtedness
and other liabilities of the Company's subsidiaries. The notes are rated
BBB/Baa3 by Standard & Poors and Moody's Investor Services, respectively. The
Company is the only physician practice management company to earn an investment
grade debt rating. Net proceeds from the offering were used to reduce amounts
under the Credit Facility.

On October 30, 1996, the Company completed its tender offer for Caremark's
$100 million 6 7/8% notes due August 15, 2003. Of the $100 million principal
amount of such notes outstanding, $99.9 million principal amount were tendered
and purchased. The total consideration for each $1,000 principal amount of
outstanding notes tendered was $1,017.72.

The Company's growth strategy requires substantial capital for the
acquisition of PPM businesses and assets of physician practices, and for their
effective integration, operation and expansion. Affiliated physician practices
may also require capital for renovation, expansion and additional medical
equipment and technology. The Company believes that its existing cash resources,
the use of the Company's Common Stock for selected practice and other
acquisitions and available borrowings under the $1.0 billion Credit Facility or
any successor credit facility, will be sufficient to meet the Company's
anticipated acquisition, expansion and working capital needs for the next twelve
months. The Company expects from time to time to raise additional capital
through the issuance of long-term or short-term indebtedness or the issuance of
additional equity securities in private or public transactions, at such times as
management deems appropriate and the market allows in order to meet the capital
needs of the Company. There can be no assurance that acceptable financing for
future acquisitions or for the integration and expansion of existing networks
can be obtained. Any of such financings could result in increased interest and
amortization expense, decreased income to fund future expansion and dilution of
existing equity positions.

MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Prior to February 21, 1995, the effective date of the initial public
offering of the Company, there was no public market for the Common Stock. The
Common Stock traded on the Nasdaq National Market under the symbol "MPTR" from
February 21, 1995 until February 21, 1996. On February 22, 1996, the Common
Stock was listed on the NYSE under the symbol "MDM".

The following table sets forth for the quarterly periods indicated the high
and low reported bid prices for the Common Stock through February 21, 1996, as
reported on the Nasdaq National Market. After February 21, 1996, the table sets
forth the high and low last sale price as reported on the NYSE Composite Tape.

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1995
First Quarter (from February 21)............................ $24.00 $14.75
Second Quarter.............................................. 24.50 17.75
Third Quarter............................................... 30.00 18.00
Fourth Quarter.............................................. 33.00 26.00
1996
First Quarter............................................... $34.75 $28.50
Second Quarter.............................................. 30.25 20.13
Third Quarter............................................... 23.13 16.63
Fourth Quarter.............................................. 24.50 19.88
1997
First Quarter............................................... $24.63 $18.63
</TABLE>

There were approximately 43,644 holders of record of the Common Stock as of
March 20, 1997.

A-11
<PAGE> 39

QUARTERLY RESULTS (UNAUDITED)

The following tables set forth certain unaudited quarterly financial data
for 1995 and 1996. In the opinion of the Company's management, this unaudited
information has been prepared on the same basis as the audited information and
includes all adjustments (consisting of normal recurring items) necessary to
present fairly the information set forth therein. The operating results for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1995 1995 1996 1996
--------- --------- ------------- ------------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenue................. $806,396 $ 887,121 $919,750 $ 970,110 $1,149,812 $1,196,226
Operating expenses.......... 770,599 846,889 871,279 918,908 1,099,519 1,143,107
Net interest expense........ 6,254 2,213 5,350 3,804 6,741 4,021
Merger expenses............. -- 1,051 3,473 62,040 34,448 --
Losses on investments....... -- -- -- 86,600 -- --
Other, net.................. (406) 5 (27) 236 (144) (229)
-------- --------- -------- --------- ---------- ----------
Income (loss) from
continuing operations
before income taxes....... 29,949 36,963 39,675 (101,478) 9,248 49,327
Income tax expense
(benefit)............... 10,903 13,904 15,156 (55,755) 6,496 16,926
-------- --------- -------- --------- ---------- ----------
Income (loss) from
continuing operations..... 19,046 23,059 24,519 (45,723) 2,752 32,401
Discontinued operations:
Income (loss) from
discontinued
operations.............. (2,605) (144,011) (5,791) (15,935) (71,221) --
Net gains on sales of
discontinued
operations.............. 10,895 (3,810) -- 24,729 2,523 --
-------- --------- -------- --------- ---------- ----------
Income (loss) from
discontinued operations... 8,290 (147,821) (5,791) 8,794 (68,698) --
-------- --------- -------- --------- ---------- ----------
Net income (loss)..... $ 27,336 $(124,762) $ 18,728 $ (36,929) $ (65,946) $ 32,401
======== ========= ======== ========= ========== ==========

<CAPTION>
QUARTER ENDED
----------------------------
SEPTEMBER 30, DECEMBER 31,
1996 1996
------------- ------------

<S> <C> <C>
Net revenue................. $1,199,679 $1,267,782
Operating expenses.......... 1,139,178 1,195,767
Net interest expense........ 5,257 7,911
Merger expenses............. 263,000 11,247
Losses on investments....... -- --
Other, net.................. (37) (1,159)
---------- ----------
Income (loss) from
continuing operations
before income taxes....... (207,719) 54,016
Income tax expense
(benefit)............... (55,465) 26,746
---------- ----------
Income (loss) from
continuing operations..... (152,254) 27,270
Discontinued operations:
Income (loss) from
discontinued
operations.............. -- --
Net gains on sales of
discontinued
operations.............. -- --
---------- ----------
Income (loss) from
discontinued operations... -- --
---------- ----------
Net income (loss)..... $ (152,254) $ 27,270
========== ==========
</TABLE>

The Company's historical unaudited quarterly financial data have been
restated to include the results of all businesses acquired prior to December 31,
1996 that were accounted for as poolings of interests (collectively, the
"Mergers"). The Company's Quarterly Reports on Form 10-Q were filed prior to the
Mergers and thus, differ from the amounts for the quarters included herein. The
differences caused solely by the operation of the merged companies are
summarized as follows:

<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------
MARCH 31, 1996 JUNE 30, 1996 SEPTEMBER 30, 1996
----------------------- ----------------------- ------------------------
FORM 10-Q AS RESTATED FORM 10-Q AS RESTATED FORM 10-Q AS RESTATED
--------- ----------- --------- ----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenue...................... $332,549 $1,149,812 $360,398 $1,196,226 $1,182,015 $1,199,679
Income (loss) from continuing
operations before income
taxes.......................... (21,435) 9,248 16,153 49,327 (207,168) (207,719)
Income tax expense (benefit)..... (5,935) 6,496 6,129 16,926 (55,634) (55,465)
Loss from discontinued
operations..................... -- (68,698) -- -- -- --
Net income (loss)................ (15,500) (65,946) 10,024 32,401 (151,534) (152,254)
</TABLE>

A-12
<PAGE> 40

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Board of Directors
MedPartners, Inc.

We have audited the accompanying consolidated balance sheets of
MedPartners, Inc. as of December 31, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MedPartners,
Inc. at December 31, 1995 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.

Birmingham, Alabama
February 3, 1997

A-13
<PAGE> 41

MEDPARTNERS, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 86,276 $ 123,779
Marketable securities..................................... 35,567 --
Accounts receivable, less allowances for bad debts of
$80,077 in 1995 and $120,350 in 1996................... 506,226 563,519
Inventories............................................... 122,337 150,156
Deferred tax assets, net.................................. 95,026 52,479
Income tax receivable..................................... -- 2,496
Prepaid expenses and other current assets................. 40,216 54,689
---------- ----------
Total current assets................................... 885,648 947,118
Property and equipment, net................................. 458,780 505,060
Intangible assets, net...................................... 370,960 659,202
Deferred tax asset, net..................................... -- 18,333
Other assets................................................ 89,226 136,256
Net assets of discontinued operations....................... 36,300 --
---------- ----------
Total assets........................................... $1,840,914 $2,265,969
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 280,958 $ 280,060
Other accrued expenses and liabilities.................... 220,086 375,618
Accrued medical claims payable............................ 52,434 93,043
Notes payable............................................. 81,900 --
Current portion of long-term debt......................... 15,640 28,084
---------- ----------
Total current liabilities.............................. 651,018 776,805
Long-term debt, net of current portion...................... 531,774 715,657
Other long-term liabilities................................. 42,053 34,010
Deferred tax liabilities, net............................... 23,995 --
Contingencies (Note 13)
Stockholders' equity:
Common stock, $.001 par value; 400,000 shares authorized,
issued -- 146,390 in 1995 and 165,281 in 1996.......... 146 165
Additional paid-in capital................................ 477,362 788,636
Notes receivable from stockholders........................ (1,930) (1,665)
Unrealized loss on marketable securities, net of taxes.... (7) --
Unamortized deferred compensation......................... (2,682) --
Shares held in trust, 9,317 in 1995 and 1996.............. (150,200) (150,200)
Retained earnings......................................... 269,385 102,561
---------- ----------
Total stockholders' equity............................. 592,074 739,497
---------- ----------
Total liabilities and stockholders' equity............. $1,840,914 $2,265,969
========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

A-14
<PAGE> 42

MEDPARTNERS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1994 1995 1996
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net revenue................................................. $ 2,638,654 $ 3,583,377 $ 4,813,499
Operating expenses:
Affiliated physician services............................. 433,758 657,826 980,429
Outside medical expenses.................................. 102,496 149,185 311,900
Clinic expenses........................................... 433,091 705,369 1,040,629
Non-clinic goods and services............................. 1,365,203 1,688,075 2,019,895
General and administrative expenses....................... 148,990 148,515 142,789
Depreciation and amortization............................. 41,832 58,705 81,929
Net interest expense...................................... 15,235 17,621 23,930
Merger expenses........................................... -- 66,564 308,695
Losses on investments..................................... -- 86,600 --
Other, net................................................ (143) (192) (1,569)
----------- ----------- -----------
Income (loss) from continuing operations before
income taxes.................................... 98,192 5,109 (95,128)
Income tax expense (benefit)................................ 44,048 (15,792) (5,297)
----------- ----------- -----------
Income (loss) from continuing operations.......... 54,144 20,901 (89,831)
Discontinued operations:
Income (loss) from discontinued operations net of taxes of
$18,000, $(72,100) and $(35,849) in 1994, 1995 and
1996, respectively..................................... 25,902 (168,342) (71,221)
Net gains on sales of discontinued operations............. -- 31,814 2,523
----------- ----------- -----------
Income (loss) from discontinued operations........ 25,902 (136,528) (68,698)
----------- ----------- -----------
Net income (loss)........................................... $ 80,046 $ (115,627) $ (158,529)
=========== =========== ===========
Earnings per common and common equivalent shares
outstanding:
Income (loss) from continuing operations.................. $ 0.41 $ 0.15 $ (0.58)
Income (loss) from discontinued operations................ 0.20 (0.97) (0.44)
----------- ----------- -----------
Net income (loss)........................................... $ 0.61 $ (0.82) $ (1.02)
=========== =========== ===========
Weighted average common and common equivalent shares
outstanding............................................... 131,783 140,364 155,364
=========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

A-15
<PAGE> 43

MEDPARTNERS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
COMMON STOCK:
Balance, beginning of year................................ $ 111 $ 119 $ 146
Beginning balance of immaterial poolings of interests
entities............................................... -- -- 6
Common stock issued and capital contributions............. 8 9 10
PPSI common stock issued during the two months ended
December 31, 1995...................................... -- -- 1
Conversion of preferred stock............................. -- 7 --
Stock issued in connection with acquisitions.............. -- 2 2
Contributions to employee benefit trust................... -- 9 --
-------- -------- --------
Balance, end of year...................................... 119 146 165
ADDITIONAL PAID-IN-CAPITAL:
Balance, beginning of year................................ 154,350 202,611 477,362
Beginning balance of immaterial poolings of interests
entities............................................... -- 2 620
PPSI common stock issued during the two months ended
December 31, 1995...................................... -- -- 588
Common stock issued and capital contributions............. 61,852 98,812 226,190
Capital distributions..................................... (18,743) (30,970) --
Exercise of stock options................................. 802 1,124 43,996
Deferred compensation on issuance of options.............. 4,350 -- --
Conversion of preferred stock............................. -- 19,994 --
Stock issued in connection with acquisitions.............. -- 35,598 39,880
Contribution to employee benefit trust.................... -- 150,191 --
-------- -------- --------
Balance, end of year...................................... 202,611 477,362 788,636
NOTES RECEIVABLE FROM STOCKHOLDERS:
Balance, beginning of year................................ (2,396) (2,349) (1,930)
Net change in notes receivable from stockholders.......... 47 419 265
-------- -------- --------
Balance, end of year...................................... (2,349) (1,930) (1,665)
UNREALIZED GAIN (LOSS) ON MARKETABLE SECURITIES:
Balance, beginning of year................................ (166) 14 (7)
Unrealized gain (loss) on marketable securities, net of
taxes.................................................. 180 (21) 7
-------- -------- --------
Balance, end of year...................................... 14 (7) --
UNAMORTIZED DEFERRED COMPENSATION:
Balance, beginning of year................................ -- (3,552) (2,682)
Amortization of deferred compensation..................... 798 870 2,682
Deferred compensation on issuance of options.............. (4,350) -- --
-------- -------- --------
Balance, end of year...................................... (3,552) (2,682) --
SHARES HELD IN TRUST:
Balance, beginning of year................................ -- -- (150,200)
Contribution to employee benefit trust.................... -- (150,200) --
-------- -------- --------
Balance, end of year...................................... -- (150,200) (150,200)
RETAINED EARNINGS:
Balance, beginning of year................................ 324,677 396,994 269,385
Beginning balance of immaterial poolings of interests
entities............................................... -- (308) (238)
Net income (loss)......................................... 80,046 (115,627) (158,529)
Dividends and distributions paid.......................... (10,008) (11,674) --
Pro forma tax provision of pooled entities................ 2,279 -- --
Net loss for two months ended December 31, 1995 for
PPSI................................................... -- -- (8,057)
-------- -------- --------
Balance, end of year...................................... 396,994 269,385 102,561
-------- -------- --------
Total stockholders' equity........................ $593,837 $592,074 $739,497
======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

A-16
<PAGE> 44

MEDPARTNERS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM CONTINUING OPERATIONS:
Income (loss) from continuing operations.................... $ 54,144 $ 20,901 $ (89,831)
Adjustments for non-cash items:
Depreciation and amortization............................. 41,832 58,705 81,929
Provision (benefit) for deferred taxes.................... 12,451 (69,273) (37,350)
Merger expenses........................................... -- 66,564 308,695
Loss on sale of investments............................... -- 86,600 --
Other..................................................... 6,755 1,683 94
Changes in operating assets and liabilities, net of effects
of acquisitions........................................... (71,622) (12,384) (103,704)
---------- --------- ---------
Net cash and cash equivalents provided by continuing
operations........................................... 43,560 152,796 159,833
Investing activities:
Cash paid for merger expense.............................. -- (53,600) (143,285)
Net cash used to fund acquisitions........................ (126,697) (205,051) (157,396)
Additions to intangibles.................................. -- (7,235) (19,515)
Purchase of property and equipment........................ (102,702) (124,455) (122,127)
(Purchases) proceeds of marketable securities............. (17,560) 1,636 27,558
Other..................................................... (1,305) 546 74
---------- --------- ---------
Net cash and cash equivalents used in investing
activities........................................... (248,264) (388,159) (414,691)
Financing activities:
Common stock issued and capital contributions............. 128,109 83,407 270,198
Capital distributions..................................... (21,045) (37,771) --
Proceeds from debt........................................ 267,563 156,728 1,781,498
Repayment of debt......................................... (35,188) (85,546) (1,647,866)
Dividends and distributions paid.......................... (7,453) (9,355) --
Other..................................................... 68 (3) 266
---------- --------- ---------
Net cash and cash equivalents provided by financing
activities........................................... 332,054 107,460 404,096
Cash flow from discontinued operations, net of divestiture
proceeds.................................................. (180,000) 114,500 (115,835)
---------- --------- ---------
Net (decrease) increase in cash and cash equivalents........ (52,650) (13,403) 33,403
Cash and cash equivalents at beginning of year.............. 152,329 99,679 87,081
Beginning cash and cash equivalents of immaterial poolings
of interests entities..................................... -- -- 3,295
---------- --------- ---------
Cash and cash equivalents at end of year.................... $ 99,679 $ 86,276 $ 123,779
========== ========= =========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest............................................... $ 18,241 $ 33,294 $ 41,860
========== ========= =========
Income taxes........................................... $ 28,436 $ 14,820 $ (21,351)
========== ========= =========
</TABLE>

Non-cash investing activities include notes and other obligations issued
for acquisitions of $1.2 and $30.8 million in 1994 and 1995, respectively, and
$123.6 million in notes and other securities received from divestitures in 1995.
Non-cash financing activities include the issuance of $45.8 and $39.9 million of
stock for acquisitions in 1995 and 1996, respectively.

See accompanying notes to consolidated financial statements.

A-17
<PAGE> 45

MEDPARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996

1. ACCOUNTING POLICIES

Description of Business

MedPartners, Inc. (The "Original Predecessor") was incorporated in January
1993, and affiliated with its initial physician practice in November 1993.
Mullikin Medical Enterprises, L.P. ("MME") was formed by the merger of several
physician partnerships in 1994, and the original business was organized in 1957.
MedPartners/ Mullikin, Inc. was formed as a result of the November 1995 business
combination between the Original Predecessor and MME. In February and September
of 1996, MedPartners/Mullikin, Inc. combined with Pacific Physician Services,
Inc. ("PPSI") and Caremark International Inc. ("Caremark"), respectively. These
business combinations were accounted for as poolings of interests. The combined
companies were renamed MedPartners, Inc. (herein referred to as the "Company" or
"MedPartners") in conjunction with the business combination with Caremark. The
financial information referred to in this discussion reflects the combined
operations of these entities and several additional immaterial entities
accounted for as poolings of interests.

MedPartners is the largest physician practice management ("PPM") company in
the United States. The Company develops, consolidates and manages integrated
healthcare delivery systems. Through its network of affiliated group and
independent practice association ("IPA") physicians, the Company provides
primary and specialty healthcare services to prepaid enrollees and
fee-for-service patients. The Company also operates one of the largest
independent prescription benefit management ("PBM") programs in the United
States and provides disease management services and therapies for patients with
certain chronic conditions.

The Company offers medical group practices and independent physicians a
range of affiliation models. These affiliations are carried out by the
acquisition of PPM entities or practice assets, either for cash or through
equity exchange, or by affiliation on a contractual basis. The Company enters
into long-term practice management agreements with the affiliated physicians
that provide for the management of their practices by the Company while at the
same time providing for the clinical independence of the physicians.

The Company also manages outpatient prescription drug benefit programs for
clients throughout the United States, including corporations, insurance
companies, unions, government employee groups and managed care organizations.
The Company dispenses national prescriptions daily through four mail service
pharmacies and manages patients' immediate prescription needs through a national
network of retail pharmacies. The Company is in the process of integrating its
PBM program with the PPM business by providing pharmaceutical services to the
affiliated physicians, clinics and HMOs. The Company's disease management
services are intended to meet the healthcare needs of individuals with chronic
diseases or conditions. These services include the design, development and
management of comprehensive programs that comprise drug therapies, physician
support and patient education. The Company currently provides therapies and
services for individuals with such conditions as hemophilia, growth disorders,
immune deficiencies, genetic emphysema, cystic fibrosis and multiple sclerosis.

Basis of Presentation

The consolidated financial statements have been prepared on the accrual
basis of accounting and include the accounts of the Company and its wholly owned
subsidiaries. Through the 20 to 40-year practice management agreements between
the Company's wholly owned subsidiaries and the various professional
corporations (PCs), the Company has assumed full responsibility for the
operating expenses in return for the assignment of the revenue of the PCs. The
Company believes it has, as opposed to affiliates of the Company, perpetual,
unilateral control over the assets and operations of the various PCs, and
notwithstanding the lack of technical majority ownership of the stock of such
entities, consolidation of the various PCs is necessary to present fairly the
financial position and results of

A-18
<PAGE> 46

MEDPARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

operations of the Company because there exists a parent-subsidiary relationship
by means other than record ownership of a majority of voting stock. Control by
the Company is perpetual rather than temporary because of (i) the length of the
original terms of the agreements, (ii) the continuing investment of capital by
the Company, (iii) the employment of the majority of the nonphysician personnel,
and (iv) the nature of the services provided to the PCs by the Company. The
Company's financial relationship with each practice offers the physicians access
to capital, management expertise, sophisticated information systems, and managed
care contracts. The Company's revenue is derived from medical services provided
by physicians under the practice management agreements, which revenue has been
assigned to the Company. During 1996, approximately 55% of physician services
revenue was derived through contracts for prepaid healthcare with HMOs. The
Company contracts directly with the HMOs to provide medical services to HMO
enrollees who have chosen the Company's affiliated physicians, or, in some
cases, physicians who are members of the Company's IPAs. The Company also
contracts with hospitals to provide medical staff for various hospital
departments. The Company's profitability depends on enhancing operating
efficiency, expanding healthcare services provided, increasing market share and
assisting affiliated physicians in managing the delivery of medical care.

Nature of Physician Compensation Arrangements

The Company compensates PCs with which it has contracted to provide
healthcare services to the Company's clinics primarily under four basic
arrangements. In all circumstances, the Company is responsible for the billing
and collection of the revenue related to services provided at the Company's
clinics as well as for paying all expenses of the clinic including physician
compensation. The Company records all such revenue for services performed by the
physicians at the clinics. In no instance is the Company paid a fixed fee to
cover clinic operating expenses. The Company remains at risk for the expenses of
the clinics operations. In the four types of arrangements described below, the
Company is not sharing revenue with the PCs or its physician owners.

Approximately 55% of the Company's revenues from physician practice
management during 1996 was received under capitation arrangements. Under these
arrangements, the Company contracts with licensed HMOs for a broad range of
health care services and in turn subcontracts for the delivery of health care
with hospitals, ancillary providers, and professional medical organizations,
including PCs that are affiliated with the Company through management
agreements. Pursuant to these arrangements the PC is paid on a per member per
month basis by the Company. From this amount, the PC pays liability insurance
premiums and compensates its physician owners. The PCs do not have the authority
to participate in the negotiations of contracts with HMOs.

Under the second type of arrangement, which represents approximately 20% of
the Company's revenues from physician practice management during 1996, the
Company pays the PC for the health care services provided at MedPartners'
clinics at a negotiated fixed dollar amount. At the Company's sole discretion,
the physicians are eligible to receive a bonus based on performance criteria and
goals. The amount of the discretionary bonus is determined solely by the
Company's management and is not directly correlated to clinic revenue and gross
profit. In these arrangements, the Company is responsible for the billing and
collection of all revenues for the services provided at its clinics as well as
paying all expenses, including physician compensation.

Under the third type of arrangement, which represents approximately 16% of
the Company's revenues from physician practice management during 1996, the PC is
compensated on a negotiated fee-for-service basis for health care services
performed at the Company's clinics. In these arrangements the Company bills and
collects for all services rendered at its clinics and pays all expenses of the
clinics, including physician compensation, which is based on the fee for service
revenue generated at the clinics (which typically represents between 40 to 70
percent of the clinic's net revenues). Again, the Company is not reimbursed for
the clinic expenses, rather it is responsible and at risk for all such expenses.

Under the fourth type of arrangement, representing approximately 9% of the
Company's revenues from physician practice management during 1996, the PC
receives a salary plus bonus and a profit sharing payment of a percentage of
clinic earnings net of certain expenses.

The fee retained by the Company includes direct management expenses of
operating the clinics plus additional amounts which reflect a portion or all of
the residual equity interest in the clinics after payment of physician
compensation (including discretionary bonuses, if any), other medical costs and
management expenses. Under the four basic arrangements discussed above, these
additional amounts (representing clinic earnings) retained by

A-19
<PAGE> 47

MEDPARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

MedPartners take the following forms: (1) 100% of clinic earnings (as defined
above); (2) 100% of clinic earnings; (3) 100% of clinic earnings; and (4) a
variable percentage of the clinic's earnings (as defined above).

Use of Estimates

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

Cash Equivalents

The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The carrying amounts
of all cash and cash equivalents approximate fair value.

Marketable Securities

Effective August 1, 1994, the Company adopted Financial Accounting
Standards Board Statement No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," which requires that investments in equity securities
that have readily determinable fair values and investments in debt securities be
classified in three categories: held-to-maturity, trading and
available-for-sale. Based on the nature of the assets held by the Company and
management's investment strategy, the Company's investments have been classified
as available-for-sale.

Available-for-sale securities are carried at fair value, with the
unrealized gains and losses, net of tax, reported in a separate component of
stockholders' equity unless a decline in value is judged other than temporary.
When this is the case, unrealized losses are reflected in income. The amortized
cost of debt securities in this category is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in interest income. The cost of securities sold is based on the specific
identification method.

Inventories

Inventories, which are primarily finished goods, consist of pharmaceutical
drugs, medical equipment and supplies and are stated at the lower of cost
(first-in, first-out method) or market.

Property and Equipment

Property and equipment are stated at cost, which for the used assets being
acquired is usually determined by an independent appraisal. Depreciation of
property and equipment is calculated using either the declining balance or the
straight-line method over the shorter of the estimated useful lives of the
assets or the term of the underlying leases. Estimated useful lives range from 3
to 10 years for equipment, 10 to 20 years for leasehold improvements and 10 to
40 years for buildings and improvements based on type and condition of assets.
Routine maintenance and repairs are charged to expense as incurred, while costs
of betterments and renewals are capitalized.

Interest costs associated with the construction of certain capital assets
are capitalized as part of the cost of those assets. Interest costs
approximating $4.3 million were capitalized in 1996. The Company also
capitalizes purchased and internally developed software costs to the extent they
are expected to benefit future operations.

Intangible Assets

Excess of cost over fair value of assets acquired (goodwill) is being
amortized using the straight-line method over terms of the related practice
management agreements, generally 20 to 40 years. The carrying value of goodwill
is reviewed if the facts and circumstances suggest that it may be impaired. If
this review indicates that goodwill will not be recoverable, as determined based
on the undiscounted cash flows of the entity acquired over the remaining
amortization period, the carrying value of the goodwill is reduced by the
estimated shortfall of cash flows. Costs of obtaining practice management
agreements are capitalized as incurred and are amortized using the straight-line
method. These costs include all direct costs of obtaining such agreements, which
include such items as filing fees, legal fees and travel and related development
costs. The Company has elected to amortize these costs over a period not to
exceed the term of the related practice management agreements. Other intangible
assets include costs associated with obtaining long-term financing, which are
being amortized, and included in interest expense, systematically over the terms
of the related debt agreements.

A-20
<PAGE> 48

MEDPARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Restatement of Financial Statements

The Company has merged with several entities during 1996 in transactions
that were accounted for as poolings of interests. Accordingly, the financial
statements for all periods prior to the effective dates of these mergers have
been restated to include these entities (see Note 11).

Income Taxes

The Company is a corporation subject to federal and state income taxes.
Deferred income taxes are provided for temporary differences between financial
and income tax reporting relating primarily to net operating losses which must
be carried forward to future periods for income tax reporting purposes.

Prior to the poolings of interests noted previously, several entities were
S Corporations and MME and related real estate entities were partnerships and
were therefore not subject to federal and state income taxes. Pro forma income
tax provisions are reflected in income tax expense in the consolidated
statements of operations for 1994 to provide for additional federal and state
income taxes which would have been incurred had these entities been taxed as C
Corporations. The pro forma income tax expense included in 1994 operations was
$2.3 million.

Net Revenue

Net revenue is reported at the estimated realizable amounts from patients,
third-party payors and others for services rendered. Revenue under certain
third-party payor agreements is subject to audit and retroactive adjustments.
Provisions for estimated third-party payor settlements and adjustments are
estimated in the period the related services are rendered and are adjusted in
future periods as final settlements are determined.

During 1994, 1995 and 1996, approximately 6% of net revenue was received
from governmental programs. Governmental programs pay physician services based
on fee schedules which are determined by the related government agency.

The Company has contracts with various managed care organizations to
provide physician services based on negotiated fee schedules. Under various
contracts with HMOs, capitation is received to cover all physicians and hospital
services needed by the HMO members. Capitation payments are recognized as
revenue on the accrual basis, and represents approximately 24%, 28% and 29% of
the Company's total net revenue in 1994, 1995 and 1996, respectively.
Liabilities for physician services provided and hospital services incurred are
accrued in the month services are rendered. The provision for accrued claims
payable, which represents the amount payable for services incurred by patients
not yet paid, is validated by actuarial review. Management believes that the
provision at December 31, 1996 is adequate to cover claims which will ultimately
be paid.

Reclassifications

Certain prior-year balances have been reclassified to conform with the
current year's presentation. Such reclassifications had no material effect on
the previously reported consolidated financial position, results of operations
or cash flows of the Company.

Fiscal Year

At January 1, 1996, PPSI changed its fiscal year-end from July 31 to
December 31. Amounts consolidated for PPSI prior to January 1, 1996 were based
on an October 31 year-end. As a result, the consolidated financial statements
for the years ended December 31, 1994 and 1995 include the 12 months of
operations of PPSI for the years ended October 31, 1994 and 1995.

Stock Option Plans

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its stock-based compensation plans. The
Company applies APB 25 and related interpretations in accounting for its plans
because the alternative fair value accounting provided for under FASB Statement
No. 123, "Accounting for Stock-Based Compensation," requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.

A-21
<PAGE> 49

MEDPARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Impairment of Long-Lived Assets

Effective December 31, 1995, the Company adopted FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." Statement 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. The Statement also addresses the
accounting for long-lived assets that are expected to be disposed of. Statement
121 is applicable for most long-lived assets, identifiable intangibles and
goodwill related to those assets; it does not apply to financial instruments and
deferred taxes. Management has determined that long-lived assets are fairly
stated in the accompanying balance sheets, and that no indicators of impairment
are present. In accordance with the new rules, the Company's prior year
financial statements have not been restated to reflect the change in accounting
principle.

2. DISCONTINUED OPERATIONS

During 1995, Caremark divested several non-strategic businesses. In
accordance with APB 30, which addresses the reporting for disposition of
business segments, the Company's Consolidated Financial Statements present the
operating results and net assets of discontinued operations separately from
continuing operations. Prior periods have been restated to conform with this
presentation.

Effective March 31, 1995, Caremark sold its Clozaril(R) Patient Management
System to Health Management, Inc. for $23.3 million in cash and notes. This
business involved managing the care of schizophrenia patients nationwide through
the distribution of the Clozaril drug and related testing services to monitor
patients for potentially serious side effects. Net revenue of this business was
$12.3 million for the three months ended March 31, 1995 and $84.0 million for
the year ended December 31, 1994. The after-tax gain on disposition of this
business was $11.1 million.

Effective April 1, 1995, Caremark sold its home infusion business to Coram
Healthcare Corporation ("Coram") for $309 million in cash and securities,
subject to post-closing adjustments based on the net assets transferred. The
sale included Caremark's home intravenous infusion therapy, women's health
services and the Home Care Management System. Certain severance and legal
obligations remained with Caremark (see Note 13). Net revenue of this business
was $96.1 million for the period ended April 1, 1995 and $441.9 million for the
year ended December 31, 1994. The after-tax loss on disposition of this business
was $4.0 million. In 1995 net losses from this business reflected in
discontinued operations include $154.8 million related to the legal settlement
discussed in Note 13.

Effective September 15, 1995, Caremark sold its Oncology management
services business to Preferred Oncology Networks of America, Inc., for
securities valued at $3.6 million. The business provides management services to
single-specialty oncology practices. Net revenue of this business for the 1995
period up to the date of sale was $8.9 million and $29.4 million for the year
ended December 1994. There was no after-tax gain or loss on the disposition.

Effective December 1, 1995, Caremark sold its Caremark Orthopedic Services,
Inc. subsidiary to HealthSouth Corporation for $127.0 million in cash, subject
to post-closing adjustments. This business provides outpatient physical therapy
and rehabilitation services. Net revenue of this business for the 1995 period up
to the date of sale was $69.1 million and $55.8 million for the year ended
December 31, 1994. The after-tax gain on disposition of this business was $24.7
million.

Effective February 29, 1996, Caremark sold its Nephrology Services business
to Total Renal Care, Inc. for $49.0 million in cash, subject to certain
post-closing adjustments. The after-tax gain on disposition of this business,
net of disposal costs, was $2.1 million, which was included in 1995 discontinued
operations.

3. FINANCIAL INSTRUMENTS

The Company's financial instruments include cash and cash equivalents,
investments in marketable and non-marketable securities and debt obligations.
The carrying value of marketable and non-marketable securities, which
approximated fair value, was $84.1 and $44.8 million at December 31, 1995 and
1996, respectively. The carrying value of debt obligations was $168.6 and $450.0
million at December 31, 1995 and 1996, respectively. The fair value of these
obligations approximated $156.4 and $451.9 million at December 31, 1995 and
1996, respectively. The fair

A-22
<PAGE> 50

MEDPARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

value of marketable securities is determined using market quotes and rates. The
fair value of non-marketable securities are estimated based on information
provided by these companies. The fair value of long-term debt has been estimated
using market quotes.

During 1995, the Company recorded a pre-tax charge to income of $86.6
million ($52.0 million after tax) to reflect unrealized losses on investments
that were judged other than temporary.

Interest expense totaled $21.8, $31.0 and $34.5 million in 1994, 1995 and
1996, respectively. Interest income totaled $6.6, $13.4 and $10.6 million in
1994, 1995 and 1996, respectively.

4. INTANGIBLE ASSETS

Goodwill, which totaled $327.0 and $610.9 million at December 31, 1995 and
1996, respectively, represents the excess of consideration paid for companies
acquired in purchase transactions over the fair value of net assets acquired.
Also included in intangible assets for the years ended December 31, 1995 and
1996 were organizational costs of $20.3 and $23.1 million, respectively. As of
December 31, 1995 and 1996, intangible assets, including goodwill, are stated
net of accumulated amortization of $26.8 and $55.3 million, respectively.

5. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 38,498 $ 54,340
Buildings and leasehold improvements........................ 191,937 184,817
Equipment................................................... 305,076 386,059
Construction in progress.................................... 81,879 91,923
-------- --------
617,390 717,139
Less accumulated depreciation and amortization.............. (158,610) (212,079)
-------- --------
$458,780 $505,060
======== ========
</TABLE>

The net book value of capitalized lease property approximated $9.8 and
$11.1 million at December 31, 1995 and 1996, respectively. Capitalized software
costs included in construction in progress approximated $56.5 million at
December 31, 1996, the majority of which was placed into service on January 1,
1997.

6. LONG-TERM DEBT

Long-term debt consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Advances under Credit Facility, due 2001.................... $290,000 $213,000
6 7/8% Senior Notes due 2003, less unamortized discount of
$0.4 million.............................................. 99,600 --
Bonds Payable with interest at 7 3/8%, interest only paid
semi-annually, due in 2006................................ -- 450,000
Convertible subordinated debentures with interest at 5.50%,
interest only paid semi-annually, due in 2003............. 69,000 --
Notes payable to physicians and stockholders in annual
installments through 2001, interest rates ranging from 5%
to 12%.................................................... 15,329 14,118
Other long-term notes payable............................... 60,739 48,370
Capital lease obligations................................... 12,746 18,253
-------- --------
547,414 743,741
-------- --------
Less amounts due within one year............................ (15,640) (28,084)
-------- --------
$531,774 $715,657
======== ========
</TABLE>

A-23
<PAGE> 51

MEDPARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company entered into a $1 billion Revolving Credit and Reimbursement
Agreement (the "Credit Facility"), which became effective simultaneously with
the closing of the Caremark acquisition on September 5, 1996, replacing its then
existing credit facility. At the Company's option, pricing on the Credit
Facility is based on either a debt to cash flow test or the Company's senior
debt ratings. No principal is due on the facility until its maturity date of
September 2001. As of December 31, 1996, there was $213 million outstanding
under the facility. The rate approximated 6.5% at December 31, 1996. The Credit
Facility contains affirmative and negative covenants which, among other things,
require the Company to maintain certain financial ratios (including minimum net
worth, minimum fixed charge coverage ratio, maximum indebtedness to cash flow),
and set certain restrictions on investments, mergers and sales of assets.
Additionally, the Company is required to obtain bank consent for acquisitions
with an aggregate purchase price in excess of $75 million and which have more
than half of the consideration paid in cash. The Credit Facility is unsecured
but provides a negative pledge on substantially all assets of the Company. As of
December 31, 1996, the Company was in compliance with the covenants in the
Credit Facility.

Effective October 8, 1996, the Company completed a $450 million Senior Note
offering. The ten year notes carry a coupon rate of 7 3/8%. Interest on the
notes is payable semi-annually on April 1 and October 1 of each year. The notes
are not redeemable by the Company prior to maturity and are not entitled to the
benefit of any mandatory sinking fund. The notes are general unsecured
obligations of the Company, ranking senior in right of payment to all existing
and future subordinated indebtedness of the Company and pari passu in right of
payment with all existing and future unsubordinated and unsecured obligations of
the Company. The notes are effectively subordinated to all existing and future
secured indebtedness of the Company and to all existing and future indebtedness
and other liabilities of the Company's subsidiaries. Net proceeds from the note
offering were used to reduce amounts under the Credit Facility.

On October 30, 1996, the Company completed its tender offer for Caremark's
$100 million 6 7/8% notes due August 15, 2003. Of the $100 million principal
amount of such notes outstanding, approximately $99.9 million principal amount
were tendered and purchased. The total consideration for each $1,000 principal
amount of outstanding notes tendered was $1,017.72.

The following is a schedule of principal maturities of long-term debt as of
December 31, 1996.

<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1997........................................................ $ 30,093
1998........................................................ 17,745
1999........................................................ 7,924
2000........................................................ 6,449
2001........................................................ 215,674
Thereafter.................................................. 469,984
Amounts representing interest and discounts................. (4,128)
--------
Total............................................. $743,741
========
</TABLE>

Operating Leases: Operating leases generally consist of short-term lease
agreements for professional office space where the medical practices are located
and administrative office space. These leases generally have five-year terms
with renewal options. The following is a schedule of future minimum lease
payments under noncancelable operating leases as of December 31, 1996.

<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1997........................................................ $ 76,481
1998........................................................ 77,351
1999........................................................ 60,837
2000........................................................ 51,660
2001........................................................ 43,734
Thereafter.................................................. 170,794
--------
Total............................................. $480,857
========
</TABLE>

A-24
<PAGE> 52

MEDPARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. INCOME TAX EXPENSE

At December 31, 1996, the Company had a cumulative net operating loss
("NOL") carryforward for federal income tax purposes of approximately $184
million available to reduce future amounts of taxable income. If not utilized to
offset future taxable income, the net operating loss carryforwards will expire
on various dates through 2011.

Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities were as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Merger/acquisition costs.................................. $38,326 $51,696
Bad debts................................................. 15,007 15,971
Securities write-down..................................... 33,708 --
Accrued and deferred compensation benefits................ 6,780 --
Accrued vacation.......................................... -- 5,427
NOL carryforward.......................................... 23,970 72,484
Alternative minimum tax credit carryforward............... -- 20,195
Other..................................................... 17,273 29,190
------- -------
Gross deferred tax assets................................... 135,064 194,963
Valuation allowance for deferred tax assets................. (1,249) (2,419)
Deferred tax liabilities
State taxes............................................... 1,721 2,264
Merger reserves........................................... -- 4,235
Legal reserve............................................. 26,800 4,400
Shared risk receivable.................................... 7,182 7,135
Securities write-down..................................... -- 13,449
Excess tax depreciation................................... 2,974 30,363
Goodwill.................................................. 8,103 9,648
Other amortization........................................ -- 31,115
Other..................................................... 16,004 19,123
------- -------
Gross deferred tax liabilities.............................. 62,784 121,732
------- -------
Net deferred tax asset...................................... $71,031 $70,812
======= =======
</TABLE>

Income tax expense (benefit) on continuing operations is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................... $24,580 $ 44,640 $ 28,205
State..................................................... 7,017 8,841 3,848
------- -------- --------
31,597 53,481 32,053
Deferred:
Federal................................................... 10,722 (59,602) (31,125)
State..................................................... 1,729 (9,671) (6,225)
------- -------- --------
12,451 (69,273) (37,350)
------- -------- --------
$44,048 $(15,792) $ (5,297)
======= ======== ========
</TABLE>

A-25
<PAGE> 53

MEDPARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal tax at statutory rate............................... $34,367 $ 1,788 $(33,295)
Add (deduct):
State income tax, net of federal tax benefit.............. 5,284 (2,037) (1,369)
Increase (decrease) in valuation allowance................ -- (14,240) 1,170
Non deductible merger expense............................. -- -- 24,786
Other..................................................... 4,397 (1,303) 3,411
------- -------- --------
$44,048 $(15,792) $ (5,297)
======= ======== ========
</TABLE>

8. CAPITALIZATION

The Company's Third Restated Certificate of Incorporation provides that the
Company may issue 9.5 million shares of Preferred Stock, par value $0.001 per
share, .5 million shares of Series C Junior Participating Preferred Stock, par
value $0.001 per share, and 400 million shares of Common Stock, par value $0.001
per share. As of December 31, 1996 no shares of the preferred stock were
outstanding.

On February 28, 1995, the Company completed an initial public offering of
5.1 million shares of its common stock. Gross and net proceeds of the offering
were $65.8 million and $60.4 million, respectively. Proceeds of the offering
were used to pay outstanding indebtedness under the bank credit facility. Net
proceeds were also used to fund acquisitions of certain assets of physician
practices, expansion of physician services, working capital and other general
corporate purposes.

On March 13, 1996, the Company completed a secondary public offering of 6.6
million shares of its common stock. The net proceeds of the offering were $194.0
million. Proceeds of the offering were used to pay outstanding indebtedness
under the then existing credit facility. In April 1996, $69 million of the
proceeds were used to repay PPSI's convertible subordinated debentures. The
remainder of the net proceeds were used to fund acquisitions of certain assets
of physician practices, expansion of physician services, working capital and
other general corporate purposes.

9. STOCK BASED COMPENSATION PLANS

The Company sponsors employee stock purchase plans that promote the sale of
its common stock to employees. The purchase price to employees is the lower of
85% of the closing market price on the date of subscription or 85% of the
closing market price on the date funds are actually used to purchase stock for
employees. Under the plans the Company sold 743,117, 582,132 and 267,232 shares
to employees in 1994, 1995 and 1996, respectively. The compensation cost for the
stock purchase plan is included in the pro forma information below. Compensation
cost is recognized for the fair value of the employee's purchase rights, which
was estimated using the same valuation model and assumptions below with the
exception of an expected purchase right expected life of 1 year. The
weighted-average fair value of those purchase rights granted in 1995 and 1996
was $6.47 and $8.66, respectively.

The Company offers participation in stock option plans to certain employees
and individuals. All of the outstanding options under these plans were granted
at 100% of the market value of the stock on the dates of grant. Awarded options
typically vest and become exercisable in incremental installments over five
years and expire no later than ten years and one day from the date of grant. The
number of shares authorized under the various plans was 22.5 million as of
December 31, 1996.

A-26
<PAGE> 54

MEDPARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes stock option activity for the indicated
years:

<TABLE>
<CAPTION>
1995 1996
------------------------------- -------------------------------
WEIGHTED- WEIGHTED-
OPTIONS AVERAGE OPTIONS AVERAGE
(IN THOUSANDS) EXERCISE PRICE (IN THOUSANDS) EXERCISE PRICE
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Outstanding:
Beginning of year..................... 13,895 $ 10.39 15,292 $ 13.73
Granted............................... 5,681 19.19 11,641 19.26
Exercised............................. (1,796) (6.78) (4,130) (10.78)
Canceled/expired...................... (2,488) (12.55) (5,841) (24.04)
------ ------
End of year........................... 15,292 13.73 16,962 14.69
Exercisable at end of year.............. 4,926 13.66 11,611 13.75
Weighted-average fair value of options
granted during the year............... $10.13 $12.45
</TABLE>

The following table summarizes information about stock options outstanding
at December 31, 1996:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ---------------------------------
OPTIONS WEIGHTED-AVERAGE OPTIONS
EXERCISE PRICE OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
RANGE AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
- --------------------- -------------- ---------------- ---------------- -------------- ----------------
(IN THOUSANDS) (YEARS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
under $12.00....... 547 7.28 $ 0.55 246 $ 0.57
$12.00-$16.99...... 13,933 7.93 14.31 10,758 13.71
$17.00 and above... 2,482 9.57 19.89 607 19.74
</TABLE>

Under various plans, the Company has made grants of restricted common stock
to provide incentive compensation to key employees. Restricted stock activity is
summarized below:

<TABLE>
<CAPTION>
1995 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Restricted stock outstanding:
Beginning of year......................................... 320 278
Granted................................................... 339 1
Canceled.................................................. (26) (6)
Vested (free of restrictions)............................. (355) (273)
---- ----
End of year............................................... 278 --
==== ====
</TABLE>

Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its stock-based compensation plans under the fair value method as
described in Statement 123. The fair value for these options and employee
purchase rights was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions:

<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Risk-free interest rates.................................... 6.16% 6.28%
Expected volatility......................................... .431 .431
Expected option lives (years)............................... 5.6 5.6
Expected stock purchase lives (years)....................... 1.0 1.0
</TABLE>

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

A-27
<PAGE> 55

MEDPARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of Statement 123, the Company's net income and
earnings per share would have been reduced to pro forma net income (loss) from
continuing operations of $9.7 and $(134.6) million and pro forma net losses of
$(126.8) and $(203.3) million for the years ended December 31, 1995 and 1996,
respectively. Per share amounts would have been reduced to pro forma net income
(loss) from continuing operations of $0.07 and $(0.87) and pro forma net losses
per share of $(0.90) and $(1.31) for the years ended December 31, 1995 and 1996,
respectively.

10. ACQUISITIONS

During the years ended December 31, 1994, 1995 and 1996, the Company,
through its wholly-owned subsidiaries, acquired certain operating assets of
various medical practices. Simultaneously with each medical practice
acquisition, the Company entered into a practice management agreement which
generally has a 20-40 year term. Pursuant to the practice management agreements,
the Company manages all aspects of the affiliated practice other than the
provision of medical services, which is controlled by the physician groups. For
providing services under the practice management agreement, the physicians
receive compensation which varies from practice to practice.

In May 1995, Caremark entered into a long-term affiliation agreement with
Friendly Hills HealthCare Network ("Friendly Hills"), an integrated health care
delivery system headquartered in La Habra, California. Friendly Hills operates
18 medical offices and an acute care hospital. Caremark acquired substantially
all of the assets of Friendly Hills for approximately $140 million and agreed to
provide various management and administrative services. The transaction has been
accounted for by the purchase method of accounting. The Company invested
approximately $143.2 million in cash, stock and notes for other acquisitions in
1995.

In January 1996, Caremark completed its agreement with CIGNA Healthcare of
California, a managed healthcare subsidiary of CIGNA Corporation, to acquire
substantially all of the assets of CIGNA Medical Group, CIGNA Healthcare's Los
Angeles area staff model delivery system ("CIGNA") for approximately $80.4
million in cash. The transaction has been accounted for by the purchase method
of accounting. During the year ended December 31, 1996, $157.4 million in cash
and 2 million shares of stock valued at $39.9 million were given in exchange for
the net assets of CIGNA and other entities. Results of operations would not have
been materially different in 1994, 1995 and 1996 had these transactions occurred
as of the beginning of the respective years.

All of the aforementioned acquisitions have been accounted for by the
purchase method of accounting. As such, operating results of acquired businesses
are included in the Company's Consolidated Financial Statements as of their
respective dates of acquisition.

A-28
<PAGE> 56

MEDPARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. MERGERS

Effective February 22, 1996 and September 5, 1996, the Company merged with
PPSI and Caremark, respectively, in transactions that were accounted for as
poolings of interests. The Company exchanged 10,981,904 and 90,508,558 shares of
its common stock for all of the outstanding common stock of PPSI and Caremark,
respectively. During the year ended December 31, 1996, the Company also
exchanged 11,296,786 shares of its common stock in additional transactions
accounted for as poolings of interests. The Company's historical financial
statements for all periods have been restated to include the results of all
material transactions accounted for as poolings of interests.

<TABLE>
<CAPTION>
OTHER
POOLINGS COMBINED
MEDPARTNERS PPSI CAREMARK OF INTERESTS (AS REPORTED)
----------- -------- ---------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994
Net revenue...................... $ 506,818 $308,226 $1,775,200 $ 48,410 $2,638,654
Net (loss) income................ (10,660) 7,598 80,400 2,708 80,046
Year ended December 31,1995
Net revenue...................... 742,388 411,132 2,374,300 55,557 3,583,377
Net (loss) income................ (9,717) 10,205 (116,300) 185 (115,627)
Year ended December 31, 1996
Net revenue...................... 1,071,819 410,102 3,203,512 128,066 4,813,499
Net (loss) income................ (141,680) (10,464) (3,359) (3,026) (158,529)
</TABLE>

Prior to its merger with the Company, PPSI reported on a fiscal year ending
on July 31. The restated financial statements for all periods prior to and
including December 31, 1995 are based on a combination of the Company's results
for its December 31 fiscal year and an October 31 fiscal year for PPSI.
Beginning January 1, 1996, PPSI adopted a December 31 fiscal year end;
accordingly, all consolidated financial statements for periods after December
31, 1995 are based on a consolidation of all of the Company's subsidiaries on a
December 31 year end. PPSI's historical results of operations for the two months
ending December 31,1995 are not included in the Company's consolidated
statements of operations or cash flows. An adjustment has been made to
stockholders' equity as of January 1, 1996 to adjust for the effect of excluding
PPSI's results of operations for the two months ending December 31, 1995. The
net loss for the two month period ended December 31, 1995 relates primarily to
increase in PPSI's reserves to conform to the Company's methodology of
calculating reserves. The following is a summary of operations and cash flow for
the two months ending December 31, 1995 (in thousands):

<TABLE>
<S> <C>
Statement of Operations Data:
Net revenue............................................... $ 69,850
Operating expenses:
Affiliated physician services............................. 32,600
Outside medical expenses.................................. 14,861
Clinic expenses........................................... 26,034
General and administrative expenses....................... 5,235
Depreciation and amortization............................. 2,371
Net interest expense...................................... 426
Loss on disposal of assets................................ 41
--------
Net operating expenses................................. 81,568
--------
Loss before taxes......................................... (11,718)
Income tax benefit........................................ (3,661)
--------
Net loss.................................................. $ (8,057)
========
Statement of Cash Flow Data:
Net cash used by operating activities..................... $ (3,569)
Net cash provided by investing activities................. 4,455
Net cash used in financing activities..................... (81)
--------
Net increase in cash and cash equivalents................. $ 805
========
</TABLE>

A-29
<PAGE> 57

MEDPARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Included in pre-tax loss for the year ended December 31, 1996 are merger
costs totaling $308.7 million. Approximately $32.5 and $251.3 million relate to
the mergers with PPSI and Caremark, respectively. The components of this cost
are as follows (in thousands):

<TABLE>
<S> <C>
Investment banking fees..................................... $ 31,774
Professional fees........................................... 16,674
Other transaction costs..................................... 11,645
Transition and debt restructuring........................... 39,011
Severance costs for identified employees.................... 56,948
Impairment of assets........................................ 41,616
Abandonment of facilities................................... 15,921
Noncompatible technology.................................... 9,498
Conforming of accounting policies........................... 23,728
Operational restructuring................................... 30,324
Other charges............................................... 31,556
--------
Total....................................................... $308,695
========
</TABLE>

12. RETIREMENT SAVINGS PLAN

Effective April 4, 1994, the Company adopted the MedPartners, Inc. and
Subsidiaries Employee Retirement Savings Plan (the "Plan"). The Plan is a Code
Section 401(k) Plan which requires the attainment of age 21 and one year of
service, with a minimum of 1,000 hours worked to become a participant in the
Plan. Service for a predecessor employer will be considered for participation
requirements in the Plan for all employees employed through acquisition
activities. The Company, at its sole discretion, may contribute an amount which
it designates as a qualified nonelective contribution. The Company made a
required contribution of approximately 3% percent of non-key employee salaries
for the Plan year ended December 31, 1996, however, no additional contributions
are anticipated at this time. Company contributions are gradually vested over a
six-year service period. The various entities that were acquired or merged into
the Company during 1996 also had various employee retirement plans, that will or
have been incorporated into the Company's Plan. Participants of Caremark's
401(k) Plan may contribute up to 12% of their annual compensation to the plan
and Caremark matches the participants' contributions up to 3% of compensation.
The expenses related to all plans during the years ended December 31, 1994, 1995
and 1996 were approximately $7.9 million, $6.0 million and $7.7 million,
respectively.

Caremark sponsored retirement plans for all qualifying domestic employees
and certain employees in other countries. Benefits are typically based on years
of service and the employee's compensation during five of the last 10 years of
employment as defined by the plans. Caremark's funding policy is to make
contributions that meet or exceed the minimum requirements of the Employee
Retirement Income Security Act of 1974, based on the projected unit credit
actuarial cost method, and to limit such contributions to amounts currently
deductible for federal income tax reporting purposes.

A-30
<PAGE> 58

MEDPARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes the components of net pension expense and
related actuarial assumptions used at the January 1 valuation date for the
respective years related to the Caremark sponsored defined benefit plan:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Assumptions:
Discount rate............................................. 8.75% 7.25% 8.75%
Increase in compensation levels........................... 5.0% 5.0% 5.0%
Expected long-term return on assets....................... 10.5% 9.5% 9.5%
Components (in thousands):
Service cost-benefits earned.............................. $4,600 $2,100 $3,024
Interest cost on projected obligation..................... 2,300 2,200 2,635
Actual return on assets................................... (1,300) (1,700) (3,121)
Net amortizations......................................... 700 100 698
Deferred asset gain....................................... -- -- 1,233
Merger expenses:
Special termination benefits.............................. -- -- 4,675
Curtailment loss.......................................... -- -- 502
------ ------ ------
Net pension expense....................................... $6,300 $2,700 $9,646
====== ====== ======
</TABLE>

The following table presents the funded status of the Caremark plans, the
net pension liability recognized in the consolidated balance sheets and related
actuarial assumptions as of December 31:

<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Assumptions:
Discount rate............................................. 7.25% 8.75%
Increase in compensation levels........................... 5.0% 5.0%
Funded status and net pension liability (in thousands):
Actuarial present value of benefit obligations:
Vested benefits........................................ $22,200 $37,453
Accumulated benefits................................... 25,000 41,141
Effect of future salary increases...................... 7,200 --
------- -------
Projected benefits..................................... 32,200 41,141
Less: plan assets at fair value(1).......................... 20,900 24,977
------- -------
Projected benefit obligations in excess of plan assets...... 11,300 16,164
Less: unrecognized net loss................................. (4,800) --
------- -------
Net pension liability....................................... $ 6,500 $16,164
======= =======
</TABLE>

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

(1) Primarily equity and fixed income securities.

13. CONTINGENCIES

On September 11, 1995, Coram Healthcare Corporation ("Coram") filed a
complaint in the San Francisco Superior Court against Caremark International
Inc. and its subsidiary, Caremark Inc., and 50 unnamed individual defendants.
The complaint, which arises from Caremark's sale to Coram of Caremark's home
infusion therapy business in April 1995 for approximately $209.0 million in cash
and $100.0 million in securities, alleges breach of the Asset Sale and Note
Purchase Agreement, dated January 29, 1995, as amended on April 1, 1995, between
Coram and Caremark, breach of related contracts, fraud, negligent
misrepresentation and a right to contractual indemnity. Requested relief in
Coram's amended complaint includes specific performance, declaratory relief,
injunctive relief and damages of $5.2 billion. Caremark filed counterclaims
against Coram in this lawsuit and also filed a lawsuit in the United States
District Court in Chicago claiming that Coram committed securities fraud in its
sale to Caremark of its securities in connection with the sale of Caremark's
home infusion business to Coram. The lawsuit filed in federal court in Chicago
has been dismissed, and Caremark's appeal of the dismissal was argued on May 10,
1996 and is now under submission. Coram's lawsuit is currently in the discovery
phase, with a scheduled trial date during the second quarter of 1997. In October
1996, Coram agreed to merge with Integrated Health

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MEDPARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Services, Inc. ("IHS"). In connection with the merger agreement, IHS and the
Company have agreed to a settlement of the Coram litigation, contingent upon
consummation of the proposed merger, expected to be completed sometime during
the second quarter of 1997. Under the settlement proposal, the notes that are
now payable by Coram to Caremark will be canceled and replaced with a new
two-year note in the approximate principal amount of $57.5 million. Caremark had
previously established a reserve for a portion of the $100 million in securities
and, therefore, the terms of the new note will not require any additional charge
against earnings by the Company.

In March 1996, Caremark agreed to settle all disputes with a number of
private payors. The settlements resulted in an after-tax charge of $42.3
million. These disputes related to businesses that were covered by Caremark's
settlement with federal and state agencies in June 1995 discussed below. In
addition, Caremark agreed to pay $23.3 million after-tax to cover the private
payors' pre-settlement and settlement-related expenses. An after-tax charge for
the above amounts has been recorded in first quarter 1996 discontinued
operations. During the year ended December 31, 1996, Caremark paid $105.1
million, with an additional $3.3 million plus interest to be paid over the next
six months, related to the settlements.

In June 1995, Caremark agreed to settle an investigation of Caremark with
the U.S. Department of Justice, the Office of the Inspector General of the U.S.
Department of Health and Human Services, the Veterans Administration, the
Federal Employees Health Benefits Program, the Civilian Health and Medical
Program of the Uniformed Services and related state investigative agencies in
all 50 states and the District of Columbia (the "OIG investigation"). Under the
terms of the OIG Settlement, which covered allegations dating back to 1986, a
subsidiary of Caremark pled guilty to two counts of mail fraud, one each in
Minnesota and Ohio, resulting in the payment of civil penalties and criminal
fines. The basis of these guilty pleas was Caremark's failure to provide certain
information to CHAMPUS, FEHBP and federal funded healthcare benefit programs,
concerning financial relationships between Caremark and a physician in each of
Minnesota and Ohio. Caremark took an after-tax charge to discontinued operations
of $154.8 million in 1995 for these settlement payments, costs to defend ongoing
derivative, security and related lawsuits and other associated costs.

The Company cannot determine at this time what costs may be incurred in
connection with future disposition of nongovernmental claims or litigation. The
Company does not believe that the above-referenced settlements will materially
affect its ability to pursue its long-term business strategy. There can be no
assurances, however, that additional costs, claims and damages will not occur or
that the ultimate costs related to the settlements will not exceed estimates in
the preceding paragraphs.

In May 1996, three home infusion companies, purporting to represent a class
consisting of all of Caremark's competitors in the alternate site infusion
therapy industry, filed a complaint against Caremark International Inc.,
Caremark, Inc. and two other corporations in the United States District Court
for the District of Hawaii alleging violations of the federal conspiracy laws,
the antitrust laws and of California's unfair business practice statute. The
complaint seeks unspecified treble damages, attorneys' fees and expenses. The
Company intends to defend this case vigorously. Management is unable at this
time to estimate the impact, if any, of the ultimate resolution of this matter.

In August and September 1994, stockholders, each purporting to represent a
class, filed complaints against Caremark and certain officers and employees of
Caremark in the United States District Court for the Northern District of
Illinois, alleging violations of the Securities Act of 1933 and the Securities
Exchange Act of 1934, and fraud and negligence in connection with public
disclosures by Caremark regarding Caremark's business practices and the status
of the OIG investigation discussed above. The complaints seek unspecified
damages, declaratory and equitable relief, and attorneys' fees and expenses. In
June 1996, the complaint filed by one group of stockholders alleging violations
of the Securities Exchange Act of 1934 only, was certified as a class. The
parties to all of the complaints continue to engage in discovery proceedings.
The Company intends to defend these cases vigorously. Management is unable at
this time to estimate the impact, if any, of the ultimate resolution of these
matters.

In late August 1994, certain patients of a physician who prescribed human
growth hormone distributed by Caremark and the sponsor of a health insurance
plan of one of those patients filed complaints against Caremark, employees of
Caremark and others in the United States District Court for the District of
Minnesota. Each complaint purported to be on behalf of a class and alleged
violations of the federal mail and wire fraud statutes, the federal conspiracy
statute and the state consumer fraud statute, as well as conspiracy to breach a
fiduciary duty, negligence and fraud. Each complaint sought unspecified treble
damages, and attorneys' fees and expenses. In

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<PAGE> 60

MEDPARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

July 1996, these plaintiffs also filed a separate lawsuit in the Minnesota State
Court in the County of Hennepin against a subsidiary of Caremark purporting to
be on behalf of a class and alleging all of the claims contained in the
complaint filed with the Minnesota federal court other than the federal claims
contained therein. The state complaint seeks unspecified damages, attorneys'
fees and expenses and an award of punitive damages. In November 1996, in
response to a motion by the plaintiffs, the Court dismissed the United States
District Court cases without prejudice. In July 1995, another patient of the
same physician filed a separate complaint in the District of South Dakota
against the physician, Caremark and another corporation alleging violations of
the federal laws prohibiting payment of remuneration to induce referral of
Medicare and Medicaid beneficiaries, and the federal mail fraud and conspiracy
statutes. The complaint also alleges the intentional infliction of emotional
distress and seeks trebling of at least $15.9 million in general damages,
attorneys' fees and costs, and an award of punitive damages. In August 1995, the
parties to the case filed in South Dakota agreed to a stay of all proceedings
until final judgment has been entered in a criminal case that is presently
pending against this physician. The Company intends to defend these cases
vigorously. Management is unable at this time to estimate the impact, if any, of
the ultimate resolution of these matters.

Beginning in September 1994, Caremark was named as a defendant in a series
of new lawsuits added to a pending group of actions (including a class action)
brought in 1993 under the antitrust laws by local and chain retail pharmacies
against brand name pharmaceutical manufacturers, wholesalers and prescription
benefit managers other than Caremark. The new lawsuits, filed in federal
district courts in at least 38 states (including the United States District
Court for the Northern District of Illinois), allege that at least 24
pharmaceutical manufacturers provided unlawful price and service discounts to
certain favored buyers and conspired among themselves to deny similar discounts
to the complaining retail pharmacies (approximately 3,900 in number). The
complaints charge that certain defendant prescription benefit managers,
including Caremark, were favored buyers who knowingly induced or received
discriminatory prices from the manufacturers, in violation of the
Robinson-Patman Act. Each complaint seeks unspecified treble damages,
declaratory and equitable relief, and attorneys' fees and expenses. All of these
actions have been transferred by the Judicial Panel for Multidistrict Litigation
to the United States District Court for the Northern District of Illinois for
coordinated pretrial procedures. Caremark was not named in the class action. In
April 1995, the Court entered a stay of pretrial proceedings as to certain
Robinson-Patman Act claims in this litigation, including the Robinson-Patman Act
claims brought against Caremark, pending the conclusion of a first trial of
certain of such claims brought by a limited number of plaintiffs against five
defendants not including Caremark. On July 1, 1996, the district court directed
entry of a partial final order in the class action approving an amended
settlement with certain of pharmaceutical manufacturers. The amended settlement
provides for a cash payment by the defendants in the class action (which does
not include Caremark) of approximately $351.0 million to class members in
settlement of conspiracy claims as well as a commitment from the settling
manufacturers to abide by certain injunctive provisions. All class action claims
against non-settling manufacturers as well as all opt out and other claims
generally, including all Robinson-Patman Act claims against Caremark, remain
unaffected by the settlement. The district court also certified to the court of
appeals for interlocutory review certain orders relating to non-settled
conspiracy claims against the pharmaceuticals manufacturers and wholesalers.
These interlocutory orders do not relate to any of the claims brought against
Caremark. The Company intends to defend these cases vigorously. Although
management believes, based on information currently available, that the ultimate
resolution of this matter is not likely to have a material adverse effect on the
operating results and financial condition of the Company, there can be no
assurance that the ultimate resolution of this matter, if adversely determined,
would not have a material adverse effect on the operating results and financial
condition of the Company.

In December 1994, Caremark was notified by the Federal Trade Commission
(the "FTC") that it was conducting a civil investigation of the industry
concerning whether acquisitions, alliances, agreements or activities between
pharmacy benefit managers and pharmaceutical manufacturers, including Caremark's
alliance agreements with certain drug manufacturers, violate Sections 3 or 7 of
the Clayton Act or Section 5 of the Federal Trade Commission Act. The specific
nature, scope, timing and outcome of this investigation are not currently
determinable. Under the statutes, if violations are found, the FTC could seek
remedies in the form of injunctive relief to set aside or modify Caremark's
alliance agreements and an order to cease and desist from certain marketing
practices and from entering into or continuing with certain types of agreements.
Management is unable at this time to estimate the impact, if any, of the
ultimate resolution of this matter.

In May 1996, two stockholders, each purporting to represent a class, filed
complaints against Caremark and each of its directors in the Court of Chancery
of the State of Delaware alleging breaches of the directors' fiduciary

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<PAGE> 61

MEDPARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

duty in connection with Caremark's then proposed merger with the Company. The
complaints seek unspecified damages, injunctive relief, and attorneys' fees and
expenses. The plaintiffs in these actions have made no effort to pursue these
claims and the Company does not believe that these complaints will have a
material adverse effect on the operating results and financial condition of the
Company.

Although the Company cannot predict with certainty the outcome of
proceedings described above, based on information currently available,
management believes that the ultimate resolution of such proceedings,
individually and in the aggregate, is not likely to have a material adverse
effect on the Company.

The Company is party to various other commitments, claims and routine
litigation arising in the ordinary course of business. Management does not
believe that the result of such commitments, claims and litigation, individually
or in the aggregate, will have a material adverse effect on the Company's
business or its results of operations, cash flows or financial condition.

14. SUBSEQUENT EVENTS

On January 20, 1997, the Company agreed to merge with InPhyNet Medical
Management Inc. ("InPhyNet"), a provider of hospital based physician services
headquartered in the Ft. Lauderdale area. In 1996, InPhyNet provided physician
practice management services at 188 service sites in 26 states with
hospital-based services and capitated networks. The consideration for this
transaction is based on a fixed exchange ratio of 1.311 shares of MedPartners
common stock for each share of InPhyNet common stock. Based on this ratio,
approximately 22 million shares of the Company's common stock will be issued in
exchange for all outstanding shares of InPhyNet common stock, valuing the
transaction at approximately $493 million. The transaction is expected to be
accounted for as a pooling of interests and is expected to close during the
first six months of 1997.

The pro forma effect on the consolidated statement of operations of the
Company had the transaction occurred on January 1, 1994 is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net revenue............................................ $2,909,024 $3,908,717 $5,222,019
Pro forma net income (loss)............................ 89,412 (104,339) (141,837)
Pro forma net income (loss) per share.................. 0.60 (0.65) (0.80)
Number of shares used in pro forma net income (loss)
per share calculations............................... 148,437 160,079 176,368
</TABLE>

A-34
<PAGE> 62
APPENDIX A

MEDPARTNERS

1997 LONG TERM INCENTIVE COMPENSATION PLAN

<PAGE> 63

CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Article 1. Establishment, Objectives and Duration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.1 Establishment of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.2 Objectives of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.3 Duration of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Article 2. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.1 "Affiliate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.2 "Award" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.3 "Award Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.4 "Beneficial Owner" or "Beneficial Ownership" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.5 "Board" or "Board of Directors" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.6 "Cause" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.7 "Change in Control" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.8 "Code" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.9 "Committee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.10 "Company" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.11 "Director" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.12 "Disability" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.13 "Effective Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.14 "Eligible Person" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.15 "Employee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.16 "Exchange Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.17 "Fair Market Value" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.18 "Immediate Family Members" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.19 "Incentive Stock Option" or "ISO" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.20 "Insider" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.21 "Non-Employee Director". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.22 "Nonqualified Stock Option" or "NQSO" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.23 "Option" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.24 "Option Price" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.25 "Participant" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.26 "Period of Restriction" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.27 "Person" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.28 "Plan" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.29 "Restricted Stock" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.30 "Retirement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.31 "Shares" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.32 "Subsidiary" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

</TABLE>

<PAGE> 64

<S> <C>
Article 3. Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.1 The Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.2 Authority of the Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.3 Decisions Binding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.4 Grants to Non-Insiders by Chief Executive Officer . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.5 Costs of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Article 4. Shares Subject to the Plan and Maximum Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.1 Number of Shares Available for Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.2 Lapsed Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.3 Adjustments in Authorized Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Article 5. Eligibility and Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.1 Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.2 Actual Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Article 6. Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.1 Grant of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.2 Award Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.3 Option Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.4 Duration of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.5 Exercise of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.6 Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.7 Restrictions on Share Transferability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.8 Termination of Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.9 Nontransferability of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(a) Incentive Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(b) Nonqualified Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Article 7. Restricted Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.1 Grant of Restricted Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.2 Restricted Stock Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.3 Transferability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.4 Other Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.5 Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.6 Dividends and Other Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.7 Termination of Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Article 8. Beneficiary Designation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Article 9. Deferrals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Article 10. Rights of Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
10.1 Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
10.2 Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

</TABLE>

<PAGE> 65

<TABLE>
<CAPTION>
<S> <C>
Article 11. Change in Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
11.1 Treatment of Outstanding Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
11.2 Termination, Amendment, and Modifications of Change-in-Control Provisions . . . . . . . . . . . . . 16

Article 12. Amendment, Modification, and Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
12.1 Amendment, Modification, and Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
12.2 Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events . . . . . . . . . 17
12.3 Awards Previously Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Article 13. Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
13.1 Tax Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
13.2 Share Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Article 14. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Article 15. Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Article 16. Legal Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
16.1 Gender and Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
16.2 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
16.3 Requirements of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
16.4 Securities Law Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
16.5 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

</TABLE>

<PAGE> 66

ARTICLE 1. ESTABLISHMENT, OBJECTIVES AND DURATION

1.1 ESTABLISHMENT OF THE PLAN. MedPartners, Inc., a Delaware
corporation (hereinafter referred to as the "Company"), hereby establishes an
incentive compensation plan to be known as the "MedPartners 1997 Long Term
Incentive Compensation Plan" (hereinafter referred to as the "Plan"), as set
forth in this document. The Plan permits the grant of Incentive Stock Options,
Nonqualified Stock Options and Restricted Stock.

Subject to approval by the Company's stockholders, the Plan shall
become effective as of February 25, 1997 (the "Effective Date") and shall
remain in effect as provided in Section 1.3 hereof.

1.2 OBJECTIVES OF THE PLAN. The objectives of the Plan are to
optimize the profitability and growth of the Company through the use of
incentives which are consistent with the Company's objectives and which link
the interests of Participants to those of the Company's stockholders; to
provide Participants with an incentive for excellence in individual
performance; and to promote teamwork among Participants.

The Plan is further intended to provide flexibility to the Company in
its ability to motivate, attract, and retain the services of Participants who
make significant contributions to the Company's success and to allow
Participants to share in the success of the Company.

1.3 DURATION OF THE PLAN. The Plan shall commence on the
Effective Date, as described in Section 1.1 hereof, and shall remain in effect,
subject to the right of the Board of Directors or the Committee to amend or
terminate the Plan at any time pursuant to Article 12 hereof, until all Shares
subject to it shall have been purchased or acquired according to the Plan's
provisions. However, in no event may an Incentive Stock Option be granted
under the Plan on or after February 25, 2007.

ARTICLE 2. DEFINITIONS

Whenever used in the Plan, the following terms shall have the meanings
set forth below, and when the meaning is intended, the initial letter of the
word shall be capitalized:

2.1 "AFFILIATE" means a "parent corporation" or "subsidiary
corporation" as defined in Section 424 of the Code.

2.2 "AWARD" means, individually or collectively, a grant under
this Plan of Incentive Stock Options, Nonqualified Stock Options or Restricted
Stock.

2.3 "AWARD AGREEMENT" means an agreement entered into by the
Company and each Participant setting forth the terms and provisions applicable
to Awards granted under this Plan.

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2.4 "BENEFICIAL OWNER" or "BENEFICIAL OWNERSHIP" shall have the
meaning ascribed to such term in Rule 13d-3 of the General Rules and
Regulations under the Exchange Act.

2.5 "BOARD" or "BOARD OF DIRECTORS" means the Board of Directors
of the Company.

2.6 "CAUSE" shall be determined by the Committee, exercising good
faith and reasonable judgment, and shall mean the occurrence of any one or more
of the following:

(i) The willful and continued failure by the Participant
to substantially perform his duties (other than any such failure
resulting from the Participant's Disability) after a written demand
for substantial performance is delivered by the Committee to the
Participant that specifically identifies the manner in which the
Committee believes that the Participant has not substantially
performed his duties, and the Participant has failed to remedy the
situation within 30 calendar days of receiving such notice; or

(ii) The Participant's conviction for committing an act of
fraud, embezzlement, theft or another act constituting a felony; or

(iii) The willful engaging by the Participant in gross
misconduct materially and demonstrably injurious to the Company, as
determined by the Committee. However, no act or failure to act on the
Participant's part shall be considered "willful" unless done, or
omitted to be done, by the Participant not in good faith and without
reasonable belief that his action or omission was in the best interest
of the Company.

2.7 "CHANGE IN CONTROL" of the Company shall be deemed to have
occurred as of the first day that any one or more of the following conditions
shall have been satisfied:

(i) The acquisition by any Person of Beneficial Ownership
of 20% or more of either (A) the then outstanding shares of Common
Stock of the Company, or (B) the combined voting power of the
outstanding voting securities of the Company entitled to vote
generally in the selection of Directors; provided, however, that for
purposes of this subsection, the following transactions shall not
constitute a Change of Control: (1) any acquisition directly from the
Company through a public offering of shares of Common Stock of the
Company, (2) any acquisition by the Company, (3) any acquisition by
any employee benefit plan (or related trust) sponsored or maintained
by the Company or any corporation controlled by the Company, or (4)
any acquisition by any corporation pursuant to a transaction which
complies with clauses (A), (B) and (C) of subsection (iii);

(ii) The cessation, for any reason, of the individuals who
constitute the Company's Board of Directors as of the date hereof
("Incumbent Board") to

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constitute at least a majority of the Company's Board of Directors;
provided, however, that any individual becoming a Director following
the date hereof whose election, or nomination for election by the
Company's stockholders, was approved by a vote of at least a majority
of the Directors then comprising the Incumbent Board shall be
considered as though such individual was a member of the Incumbent
Board, but excluding, for this purpose, any such individual whose
initial assumption of office occurs because of an actual or threatened
election contest with respect to the election or removal of Directors
or other actual or threatened solicitation of proxies or consents by
or on behalf of a Person other than the Company's Board of Directors;

(iii) The consummation of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all
of the assets of the Company ("Business Combination") unless,
following such Business Combination, (A) all or substantially all of
the individuals and entities who were the Beneficial Owners,
respectively, of the outstanding shares of Common Stock of the Company
and the outstanding voting securities of the Company immediately
before such Business Combination beneficially own, directly or
indirectly, more than 50% of, respectively, the then outstanding
shares of Common Stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in the
election of Directors, as the case may be, of the Company resulting
from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or
all or substantially all of the Company's assets either directly or
through one or more subsidiaries) in substantially the same
proportions as their ownership immediately before such Business
Combination of the outstanding shares of Common Stock and the
outstanding voting securities of the Company, as the case may be; (B)
no party (excluding any corporation resulting from such Business
Combination or any employee benefit plan (or related trust) of the
Company or such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of the
corporation resulting from such Business Combination or the combined
voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed before
the Business Combination; and (C) at least a majority of the members
of the board of directors of the corporation resulting from such
Business Combination were members of the Company's Board of Directors
at the time of the execution of the initial agreement, or of the
action of the Company's Board of Directors, providing for such
Business Combination; or

(iv) The approval by the stockholders of the Company of a
complete liquidation or dissolution of the Company.

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2.8 "CODE" means the Internal Revenue Code of 1986, as amended
from time to time.

2.9 "COMMITTEE" means the Compensation Committee of the Board, as
specified in Article 3 herein, or such other Committee appointed by the Board
to administer the Plan with respect to grants of Awards.

2.10 "COMPANY" means MedPartners, Inc., and also means any
corporation of which a majority of the voting capital stock is owned directly
or indirectly by MedPartners, Inc. or by any of its Subsidiaries, and any other
corporation designated by the Committee as being a Company hereunder (but only
during the period of such ownership or designation).

2.11 "DIRECTOR" means any individual who is a member of the Board
of Directors of the Company.

2.12 "DISABILITY", as applied to a Participant, means that the
Participant (i) has established to the satisfaction of the Committee that the
Participant is unable to engage in any substantial gainful activity by reason
of any medically determinable physical or mental impairment which can be
expected to last for a continuous period of not less than 12 months (all within
the meaning of Section 22(e)(3) of the Code), and (ii) has satisfied any
requirement imposed by the Committee in regard to evidence of such disability.

2.13 "EFFECTIVE DATE" shall have the meaning ascribed to such term
in Section 1.1 hereof.

2.14 "ELIGIBLE PERSON" shall mean all Employees, Directors or
consultants of the Company or any Affiliate; provided, however, that no Award
may be granted to anyone who is not an "employee" as that term is defined in
General Instruction A.(1)(a) of Form S-8, as such definition may be amended
from time to time, without first receiving advice and guidance from the
Company's outside counsel as to the effect of such grant.

2.15 "EMPLOYEE" means any key officer or employee of the Company.

2.16 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor act thereto.

2.17 "FAIR MARKET VALUE" shall be determined on the basis of the
closing sale price on the principal securities exchange on which the Shares are
traded or, if there is no such sale on the relevant date, then on the last
previous day on which a sale was reported.

2.18 "IMMEDIATE FAMILY MEMBERS" means the spouse, children and
grandchildren of a Participant.

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2.19 "INCENTIVE STOCK OPTION" or "ISO" means an option to purchase
Shares granted under Article 6 herein and which is designated as an Incentive
Stock Option and which is intended to meet the requirements of Code Section
422.

2.20 "INSIDER" shall mean an individual who is, on the relevant
date, a Director, a 10% Beneficial Owner of any class of the Company's equity
securities that is registered pursuant to Section 12 of the Exchange Act or an
officer of the Company, as defined under Section 16 of the Exchange Act and as
determined by the Board of Directors from time to time.

2.21 "NON-EMPLOYEE DIRECTOR" means an individual who is a member of
the Board of Directors of the Company but who is not an Employee of the
Company.

2.22 "NONQUALIFIED STOCK OPTION" or "NQSO" means an option to
purchase Shares granted under Article 6 herein and which is not intended to
meet the requirements of Code Section 422.

2.23 "OPTION" means an Incentive Stock Option or a Nonqualified
Stock Option, as described in Article 6 herein.

2.24 "OPTION PRICE" means the price at which a Share may be
purchased by a Participant pursuant to an Option.

2.25 "PARTICIPANT" means an Eligible Person who has outstanding an
Award granted under the Plan.

2.26 "PERIOD OF RESTRICTION" means the period during which the
transfer of Shares of Restricted Stock is limited in some way (based on the
passage of time, the achievement of performance objectives, or upon the
occurrence of other events as determined by the Committee, at its discretion),
and the Shares of Restricted Stock are subject to a substantial risk of
forfeiture, as provided in Article 7 herein.

2.27 "PERSON" shall have the meaning ascribed to such term in
Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d)
thereof, including a "group" as defined in Section 13(d) thereof.

2.28 "PLAN" means the MedPartners 1997 Long Term Incentive
Compensation Plan.

2.29 "RESTRICTED STOCK" means an Award granted to a Participant
pursuant to Article 7 herein.

2.30 "RETIREMENT" as applied to a Participant, means the
Participant's termination of employment in a manner which qualifies the
Participant to receive immediately payable retirement benefits under the
applicable retirement plan maintained by the Company (the "Retirement Plan"),

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under the successor or replacement of such Retirement Plan if it is then no
longer in effect, or under any other retirement plan maintained or adopted by
the Company which is determined by the Committee to be the functional
equivalent of such Retirement Plan; or, with respect to a Participant who may
not or has not participated in a retirement plan maintained by the Company or
an Affiliate, "Retirement" shall have the meaning determined by the Committee
from time to time.

2.31 "SHARES" means Common Stock of MedPartners, Inc., par value
$.001 per share.

2.32 "SUBSIDIARY" means any corporation, partnership, joint venture
or other entity in which the Company has a majority voting interest.

ARTICLE 3. ADMINISTRATION

3.1 THE COMMITTEE. The Plan shall be administered by the
Committee, or by any other committee appointed by the Board, which Committee
shall consist solely of two or more "Non-Employee Directors" within the meaning
of Rule 16b-3 under the Exchange Act, or any successor provision. The members
of the Committee shall be appointed from time to time by, and shall serve at
the discretion of, the Board of Directors.

3.2 AUTHORITY OF THE COMMITTEE. Except as limited by law or by
the Certificate of Incorporation or Bylaws of the Company, and subject to the
provisions herein, including Section 3.4, the Committee shall have full power
to select Employees who shall participate in the Plan; determine the sizes and
types of Awards; determine the terms and conditions of Awards in a manner
consistent with the Plan; construe and interpret the Plan and any agreement or
instrument entered into under the Plan as they apply to Employees; establish,
amend, or waive rules and regulations for the Plan's administration as they
apply to Employees; alter, amend, suspend or terminate the Plan in whole or in
part; and (subject to the provisions of Article 12 herein) amend the terms and
conditions of any outstanding Award to the extent such terms and conditions are
within the discretion of the Committee as provided in the Plan. Further, the
Committee shall make all other determinations which may be necessary or
advisable for the administration of the Plan, as the Plan applies to Employees.
As permitted by law, the Committee may delegate its authority as identified
herein.

3.3 DECISIONS BINDING. All determinations and decisions made by
the Committee pursuant to the provisions of the Plan and all related orders and
resolutions of the Board shall be final, conclusive and binding on all persons,
including the Company, its stockholders, Employees, Participants and their
estates and beneficiaries.

3.4 GRANTS TO NON-INSIDERS BY CHIEF EXECUTIVE OFFICER. To the
extent permissible under governing rules and regulations, and, in particular,
Section 141(c) of the General Corporation Law of Delaware, the Chief Executive
Officer of the Company shall have the authority to make

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and administer grants of Awards under this Plan to non-Insiders upon such terms
and conditions as the Chief Executive Officer shall determine; provided,
however, that the total number of Awards granted by the Chief Executive Officer
each year shall be subject to approval by the Committee.

3.5 COSTS OF PLAN. The costs and expenses incurred in the
operation and administration of the Plan shall be borne by the Company.

ARTICLE 4. SHARES SUBJECT TO THE PLAN AND MAXIMUM AWARDS

4.1 NUMBER OF SHARES AVAILABLE FOR GRANTS. Subject to adjustment
as provided in Section 4.3 herein, the number of Shares hereby reserved for
issuance to Participants under the Plan shall be 6,725,000.

The number of Shares reserved for issuance under the Plan shall
automatically increase on the first day of each calendar year during the term
of this Plan, beginning with the 1998 calendar year, by an amount equal to 1%
of the Shares outstanding on December 31 of the immediately preceding year.
However, such additional Shares shall not be available for grants of Incentive
Stock Options, unless and until the increase in the number of Shares provided
for herein is subsequently approved by the stockholders of the Company in
accordance with Section 422 of the Code.

Notwithstanding the foregoing, the maximum number of Shares of
Restricted Stock granted pursuant to Article 7 herein shall be an amount equal
to one-fifth of the total number of Shares reserved for issuance under the
Plan.

4.2 LAPSED AWARDS. If any Award granted under this Plan is
canceled, terminates, expires or lapses for any reason, any Shares subject to
such Award again shall be available for the grant of an Award under the Plan.

4.3 ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any change
in corporate capitalization, such as a stock split, or a corporate transaction,
such as any merger, consolidation, separation, including a spin-off, or other
distribution of stock or property of the Company, any reorganization (whether
or not such reorganization comes within the definition of such term in Code
Section 368) or any partial or complete liquidation of the Company, such
adjustment shall be made in the number and class of Shares which may be
delivered under Section 4.1, in the number and class of and/or price of Shares
subject to outstanding Awards granted under the Plan, and in the Award limits
set forth in Section 4.1, as may be determined to be appropriate and equitable
by the Committee, in its sole discretion, to prevent dilution or enlargement of
rights; provided, however, that the number of Shares subject to any Award shall
always be a whole number.

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ARTICLE 5. ELIGIBILITY AND PARTICIPATION

5.1 ELIGIBILITY. All Eligible Persons are eligible to
participate in this Plan.

5.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan,
the Committee may, from time to time, select from all Eligible Persons, those
to whom Awards shall be granted and shall determine the nature and amount of
each Award.

ARTICLE 6. STOCK OPTIONS

6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the
Plan, Options may be granted to Participants in such number, and upon such
terms, and at any time and from time to time as shall be determined by the
Committee.

6.2 AWARD AGREEMENT. Each Option grant shall be evidenced by an
Award Agreement that shall specify the Option Price, the duration of the
Option, the number of Shares to which the Option pertains, and such other
provisions as the Committee shall determine. The Award Agreement also shall
specify whether the Option is intended to be an ISO within the meaning of Code
Section 422, or an NQSO whose grant is intended not to fall under the
provisions of Code Section 422.

6.3 OPTION PRICE. The Option Price for each grant of an Option
under this Plan shall be at least equal to 100% of the Fair Market Value of a
Share on the date the Option is granted.

6.4 DURATION OF OPTIONS. Each Option granted to an Employee shall
expire at such time as the Committee shall determine at the time of grant;
provided, however, that no Incentive Stock Option shall be exercisable later
than the tenth anniversary date of its grant.

6.5 EXERCISE OF OPTIONS. Options granted under this Article 6
shall be exercisable at such times and be subject to such restrictions and
conditions as the Committee shall in each instance approve, which need not be
the same for each grant or for each Participant.

6.6 PAYMENT. Options granted under this Article 6 shall be
exercised by the delivery of a written notice of exercise to the Company,
setting forth the number of Shares with respect to which the Option is to be
exercised, accompanied by full payment for the Shares.

The Option Price upon exercise of any Option shall be payable to the
Company in full either: (a) in cash or its equivalent, or (b) if permitted in
the governing Award Agreement, by tendering previously acquired Shares having
an aggregate Fair Market Value at the time of exercise equal to the total
Option Price (provided that the Shares which are tendered must have been held
by the Participant for at least six months prior to their tender to satisfy the
Option Price), or (c) if permitted in the governing Award Agreement, by a
combination of (a) and (b).

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The Committee also may allow cashless exercise subject to applicable
securities law restrictions, or by any other means which the Committee
determines to be consistent with the Plan's purpose and applicable law.

As soon as practicable after receipt of a written notification of
exercise and full payment, the Company shall deliver to the Participant, in the
Participant's name, Share certificates in an appropriate amount based upon the
number of Shares purchased under the Option(s).

6.7 RESTRICTIONS ON SHARE TRANSFERABILITY. The Committee may
impose such restrictions on any Shares acquired pursuant to the exercise of an
Option granted under this Article 6 as it may deem advisable, including,
without limitation, restrictions under applicable federal securities laws,
under the requirements of any stock exchange or market upon which such Shares
are then listed and/or traded, and under any blue sky or state securities laws
applicable to such Shares.

6.8 TERMINATION OF EMPLOYMENT. Each Option, to the extent it has
not been previously exercised, shall terminate upon the earliest to occur of:
(i) the expiration of the Option period set forth in the Option Award
Agreement; (ii) for ISOs, the expiration of three months following the
Participant's Retirement (following the Participant's Retirement, NQSOs shall
terminate upon the expiration of the Option period set forth in the Option
Award Agreement); (iii) the expiration of 12 months following the Participant's
death or Disability; (iv) immediately upon termination for Cause; or (v) the
expiration of 90 days following the Participant's termination of employment for
any reason other than Cause, Change in Control, death, Disability, or
Retirement. Upon a termination of employment related to a Change in Control,
options shall be treated in the manner set forth in Article 11.

6.9 NONTRANSFERABILITY OF OPTIONS.

(a) INCENTIVE STOCK OPTIONS. No ISO granted under the Plan may be
sold, transferred, pledged, assigned or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution. Further, all
ISOs granted to a Participant under the Plan shall be exercisable during his or
her lifetime only by such Participant.

(b) NONQUALIFIED STOCK OPTIONS. The Committee may, in its
discretion, authorize all or a portion of NQSOs granted to a Participant to be
on terms which permit transfer by such Participant to (i) Immediate Family
Members, (ii) a trust or trusts for the exclusive benefit of such Immediate
Family Members, or (iii) a partnership in which such Immediate Family Members
are the only partners, provided that (x) there may be no consideration for any
such transfer, (y) the Award Agreement pursuant to which such Options are
granted must be approved by the Committee, and must expressly provide for
transferability in a manner consistent with this Section, and (z) subsequent
transfers of transferred Options shall be prohibited except those by will or
the laws of descent and distribution. Following transfer, any such Options
shall continue to be subject to the same terms and conditions as were
applicable immediately prior to transfer, provided that

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for purposes of this Plan, the term "Participant" shall be deemed to refer to
the transferee. The events of termination of employment shall continue to be
applied with respect to the original Participant, following which the Options
shall be exercisable by the transferee only to the extent, and for the periods
specified at Section 6.9. Notwithstanding the foregoing, should the Committee
provide that Options granted be transferable, the Company by such action incurs
no obligation to notify or otherwise provide notice to a transferee of early
termination of the Option. In the event of a transfer, as set forth above, the
original Participant is and will remain subject to and responsible for any
applicable withholding taxes upon the exercise of such Options.

ARTICLE 7. RESTRICTED STOCK

7.1 GRANT OF RESTRICTED STOCK. Subject to the terms and
provisions of the Plan, the Committee, at any time and from time to time, may
grant Shares of Restricted Stock to Participants in such amounts as the
Committee shall determine. Without limiting the generality of the foregoing,
Restricted Shares may be granted in connection with payouts under other
compensation programs of the Company.

7.2 RESTRICTED STOCK AGREEMENT. Each Restricted Stock grant shall
be evidenced by a Restricted Stock Award Agreement that shall specify the
Period(s) of Restriction, the number of Shares of Restricted Stock granted, and
such other provisions as the Committee shall determine.

7.3 TRANSFERABILITY. Except as provided in this Article 7, the
Shares of Restricted Stock granted herein may not be sold, transferred,
pledged, assigned or otherwise alienated or hypothecated until the end of the
applicable Period of Restriction established by the Committee and specified in
the Restricted Stock Award Agreement, or upon earlier satisfaction of any other
conditions, as specified by the Committee in its sole discretion and set forth
in the Restricted Stock Award Agreement. All rights with respect to the
Restricted Stock granted to a Participant under the Plan shall be available
during his or her lifetime only to such Participant.

7.4 OTHER RESTRICTIONS. Subject to Article 8 herein, the
Committee shall impose such other conditions and/or restrictions on any Shares
of Restricted Stock granted pursuant to the Plan as it may deem advisable
including, without limitation, a requirement that Participants pay a stipulated
purchase price for each Share of Restricted Stock, restrictions based upon the
achievement of specific performance objectives (Company-wide, business unit,
and/or individual), time-based restrictions on vesting following the attainment
of the performance objectives, and/or restrictions under applicable federal or
state securities laws.

At the discretion of the Committee, the Company may retain the
certificates representing Shares of Restricted Stock in the Company's
possession until such time as all conditions and/or restrictions applicable to
such Shares have been satisfied.

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Except as otherwise provided in this Article 7, Shares of Restricted
Stock covered by each Restricted Stock grant made under the Plan shall become
freely transferable by the Participant after the last day of the applicable
Period of Restriction.

7.5 VOTING RIGHTS. During the Period of Restriction, Participants
holding Shares of Restricted Stock granted hereunder may exercise full voting
rights with respect to those Shares.

7.6 DIVIDENDS AND OTHER DISTRIBUTIONS. During the Period of
Restriction, Participants holding Shares of Restricted Stock granted hereunder
may be credited with regular cash dividends paid with respect to the underlying
Shares while they are so held. Such dividends may be paid currently, accrued
as contingent cash obligations, or converted into additional shares of
Restricted Stock, upon such terms as the Committee establishes.

The Committee may apply any restrictions to the dividends that the
Committee deems appropriate.

In the event that any dividend constitutes a "derivative security" or
an "equity security" pursuant to Rule 16(a) under the Exchange Act, such
dividend shall be subject to a vesting period equal to the remaining vesting
period of the Shares of Restricted Stock with respect to which the dividend is
paid.

7.7 TERMINATION OF EMPLOYMENT. Upon a Participant's death,
Disability, or Retirement, all Restricted Shares shall vest immediately. Each
Restricted Stock Award Agreement shall set forth the extent to which the
Participant shall have the right to retain unvested Restricted Shares following
termination of the Participant's employment with the Company in all other
circumstances. Such provisions shall be determined in the sole discretion of
the Committee, shall be included in the Award Agreement entered into with each
Participant, need not be uniform among all Shares of Restricted Stock issued
pursuant to the Plan, and may reflect distinctions based on the reasons for
termination of employment.

ARTICLE 8. BENEFICIARY DESIGNATION

A Participant under the Plan may make written designation of a
beneficiary on forms prescribed by and filed with the Corporate Secretary.
Such beneficiary, or if no such designation of any beneficiary has been made,
the legal representative of such Participant or such other person entitled
thereto as determined by a court of competent jurisdiction, may exercise, in
accordance with and subject to the provisions of Article 6, any unterminated
and unexpired Option granted to such Participant to the same extent that the
Participant himself could have exercised such Option were he alive or able;
provided, however, that no Option granted under the Plan shall be exercisable
for more Shares than the Participant could have purchased thereunder on the
date his employment by, or other relationship with, the Company and its
Subsidiaries was terminated.

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ARTICLE 9. DEFERRALS

The Committee may permit or require a Participant to defer such
Participant's receipt of the payment of cash or the delivery of Shares that
would otherwise be due to such Participant by virtue of the exercise of an
Option, the lapse or waiver of restrictions with respect to Restricted Stock,
or the satisfaction of any requirements or objectives with respect to
performance measures, if any. If any such deferral election is required or
permitted, the Committee shall, in its sole discretion, establish rules and
procedures for such payment deferrals.

ARTICLE 10. RIGHTS OF EMPLOYEES

10.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit
in any way the right of the Company to terminate any Participant's employment
at any time, nor confer upon any Participant any right to continue in the
employ of the Company.

10.2 PARTICIPATION. No Employee shall have the right to be
selected to receive an Award under this Plan, or, having been so selected, to
be selected to receive a future Award.

ARTICLE 11. CHANGE IN CONTROL

11.1 TREATMENT OF OUTSTANDING AWARDS. Upon the occurrence of a
Change in Control, unless otherwise specifically prohibited under applicable
laws, or by the rules and regulations of any governing governmental agencies or
national securities exchanges:

(a) Any and all Options granted hereunder shall become
immediately exercisable, and shall remain exercisable throughout their
entire term; and

(b) Any restriction periods and restrictions imposed on
Shares of Restricted Stock shall lapse; provided, however, that the
degree of vesting associated with Restricted Stock which has been
conditioned upon the achievement of performance conditions pursuant to
Section 7.4 herein shall be determined in the manner set forth in
Section 7.7 herein.

11.2 TERMINATION, AMENDMENT, AND MODIFICATIONS OF CHANGE-IN-CONTROL
PROVISIONS. Notwithstanding any other provision of this Plan or any Award
Agreement provision, the provisions of this Article 11 may not be terminated,
amended, or modified on or after the date of a Change in Control to affect
adversely any Award theretofore granted under the Plan without the prior
written consent of the Participant with respect to said Participant's
outstanding Awards.

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ARTICLE 12. AMENDMENT, MODIFICATION, AND TERMINATION

12.1 AMENDMENT, MODIFICATION, AND TERMINATION. Subject to Section
12.2 herein, the Board or the Committee may at any time and from time to time,
alter, amend, suspend or terminate the Plan in whole or in part.

Neither the Company nor the Board or Committee on its behalf may
cancel outstanding Awards and issue substitute Awards in replacement thereof or
reduce the exercise price of any outstanding Options.

12.2 ADJUSTMENT OF AWARDS UPON THE OCCURRENCE OF CERTAIN UNUSUAL OR
NONRECURRING EVENTS. The Committee may make adjustments in the terms and
conditions of, and the criteria included in, Awards in recognition of unusual
or nonrecurring events (including, without limitation, the events described in
Section 4.3 hereof) affecting the Company or the financial statements of the
Company or of changes in applicable laws, regulations, or accounting
principles, whenever the Committee determines that such adjustments are
appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan.

12.3 AWARDS PREVIOUSLY GRANTED. No termination, amendment, or
modification of the Plan shall adversely affect in any material way any Award
previously granted under the Plan, without the written consent of the
Participant holding such Award.

ARTICLE 13. WITHHOLDING

13.1 TAX WITHHOLDING. The Company shall have the power and the
right to deduct or withhold, or require a Participant to remit to the Company,
an amount sufficient to satisfy federal, state, and local taxes, domestic or
foreign, required by law or regulation to be withheld with respect to any
taxable event arising as a result of this Plan.

13.2 SHARE WITHHOLDING. With respect to withholding required upon
the exercise of Options, upon the lapse of restrictions on Restricted Stock, or
upon any other taxable event arising as a result of Awards granted hereunder,
Participants may elect to satisfy the withholding requirement, in whole or in
part, by having the Company withhold Shares having a Fair Market Value on the
date the tax is to be determined equal to the minimum statutory total tax which
could be withheld on the transaction. All such elections shall be made in
writing, signed by the Participant, and shall be subject to any restrictions or
limitations that the Committee, in its sole discretion, deems appropriate.

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ARTICLE 14. INDEMNIFICATION

Each person who is or shall have been a member of the Committee, or of
the Board, shall be indemnified and held harmless by the Company against and
from any loss, cost, liability, or expense that may be imposed upon or
reasonably incurred by him or her in connection with or resulting from any
claim, action, suit, or proceeding to which he or she may be a party or in
which he or she may be involved by reason of any action taken or failure to act
under the Plan and against and from any and all amounts paid by him or her in
settlement thereof, with the Company's approval, or paid by him or her in
satisfaction of any judgment in any such action, suit, or proceeding against
him or her, provided he or she shall give the Company an opportunity, at its
own expense, to handle and defend the same before he or she undertakes to
handle and defend it on his or her own behalf. The foregoing right of
indemnification shall not be exclusive of any other rights of indemnification
to which such persons may be entitled under the Company's Certificate of
Incorporation or Bylaws, as a matter of law, or otherwise, or any power that
the Company may have to indemnify them or hold them harmless.

ARTICLE 15. SUCCESSORS

All obligations of the Company under the Plan with respect to Awards
granted hereunder shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase, of
all or substantially all of the business and/or assets of the Company, or a
merger, consolidation or otherwise.

ARTICLE 16. LEGAL CONSTRUCTION

16.1 GENDER AND NUMBER. Except where otherwise indicated by the
context, any masculine term used herein also shall include the feminine; the
plural shall include the singular; and, the singular shall include the plural.

16.2 SEVERABILITY. In the event any provision of the Plan shall be
held illegal or invalid for any reason, the illegality or invalidity shall not
affect the remaining parts of the Plan, and the Plan shall be construed and
enforced as if the illegal or invalid provision had not been included.

16.3 REQUIREMENTS OF LAW. The granting of Awards and the issuance
of Shares under the Plan shall be subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.

16.4 SECURITIES LAW COMPLIANCE. With respect to Insiders,
transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the Exchange Act. To the
extent any provision of the Plan or action by the Committee fails to so

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<PAGE> 80

comply, it shall be deemed null and void, to the extent permitted by law and
deemed advisable by the Committee.

16.5 GOVERNING LAW. To the extent not preempted by federal law,
the Plan, and all agreements hereunder, shall be construed in accordance with
and governed by the laws of the state of Delaware.

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Appendix B

MEDPARTNERS, INC.
EMPLOYEE STOCK PURCHASE PLAN

ARTICLE I
PURPOSE

1.1 PURPOSE. The MedPartners, Inc. Employee Stock Purchase Plan (the
"Plan") has been established to provide eligible employees of MedPartners, Inc.
(the "Company") and its subsidiaries an opportunity to purchase shares of the
Company's Common Stock, par value $.001 per share (the "Common Stock"), on a
more advantageous basis than would otherwise be available, thereby increasing
their interest in the Company. It is the intention of the Company that the Plan
qualify as an "employee stock purchase plan" under Section 423 of the Internal
Revenue Code of 1986, as amended (the "Code"). The provisions of the Plan shall
be construed in a manner consistent with the requirements of that section of the
Code.

ARTICLE II
DEFINITIONS

As used herein, the following words and phrases shall have the
following meanings:

2.1 "ADMINISTRATION AGENT" shall mean the third-party administration
firm selected by the Board to provide the administrative services with respect
to the Plan as set forth herein.

2.2 "BOARD" shall mean the Board of Directors of the Company.

2.3 "BROKERAGE AGENT" shall mean the registered broker-dealer selected
by the Board to administer the brokerage accounts of Participating Employees.

2.4 "COMMON STOCK" shall mean the Company's Common Stock, par value
$.001 per share.

2.5 The "COMPANY" shall mean MedPartners, Inc., a Delaware corporation,
or its successors.

2.6 "CONTRIBUTION ACCOUNT" shall mean an account established on behalf
of a Participating Employee to which the Participating Employee's contributions
made pursuant to Article V shall be credited.

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2.7 A Participating Employee's "CONTRIBUTION RATE" shall be the amount
selected by the Participating Employee to be contributed by payroll deduction to
his or her Contribution Account, as outlined in Section 5.5.

2.8 The "EFFECTIVE DATE" of this Plan shall be January 1, 1997. The
"EFFECTIVE DATE" of a particular Employee's enrollment in the Plan shall be the
first day of the calendar quarter following such Employee's election to
participate in the Plan made in accordance with the provisions of Article V,
except that February 1, 1997 shall be the Effective Date of enrollment for
Employees who enroll during the Extended Enrollment Period.

2.9 "EMPLOYEE" shall mean any person who is employed by the Company or
a subsidiary of the Company.

2.10 "EMPLOYEE PLAN YEAR" shall mean the 12-month period following the
Effective Date of a Participating Employee's enrollment in the Plan; provided,
however, that the initial Employee Plan Year for Employees who enroll during the
Extended Enrollment Period shall be the 11-month period from February 1, 1997 to
December 31, 1997.

2.11 The "EXTENDED ENROLLMENT PERIOD" shall mean the period from
December 9, 1996 through December 31, 1996 during which eligible Employees may
enroll in the Plan effective as of February 1, 1997.

2.12 "ISSUE PRICE" shall mean the purchase price of shares of the
Company's Common Stock to be charged to a Participating Employee on the Purchase
Date, as determined in accordance with Section 7.1.

2.13 "MARKET PRICE" shall mean the closing sale price of a share of
Common Stock for the day upon which the Market Price is to be determined as
reported on the National Association of Securities Dealers' New York Stock
Exchange Composite Reporting Tape (or, if the Common Stock is not traded on the
New York Stock Exchange, the closing sale price on the exchange on which it is
traded or as reported by an applicable automated quotation system) (the
"Composite Tape"). Notwithstanding the foregoing, if the Common Stock is no
longer reported on the Composite Tape, the Market Price of the Company's Common
Stock as of a particular date shall be determined using such method as shall be
determined by the Board.

2.14 "PARTICIPATING EMPLOYEE" shall mean any eligible Employee opting
to participate in the Plan.

2.15 "PLAN" shall mean the MedPartners, Inc. Employee Stock Purchase
Plan, as set forth herein, and all subsequent amendments hereto.

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2.16 "PURCHASE DATE" shall mean the New York Stock Exchange's last
trading date during an Employee Plan Year.

ARTICLE III
ADMINISTRATION

3.1 BOARD'S ADMINISTRATION OF AND AUTHORITY AND RESPONSIBILITIES WITH
RESPECT TO THE PLAN. The Plan shall be administered by the Board. The Board
shall have full power and authority to administer the Plan, to interpret and
construe any provision of the Plan finally and conclusively with respect to all
persons having any interest thereunder, to adopt rules and regulations not
inconsistent with the Plan for carrying out the Plan, providing for matters not
specifically covered thereby, and to alter, amend or revoke any rules or
regulations so adopted; provided, however, that the Administration Agent and
Brokerage Agent shall have the responsibilities with respect to the Plan set
forth below and elsewhere herein. No member of the Board shall be liable to the
Company, any stockholder, any employee of the Company or its subsidiaries or any
participant in the Plan for any action or determination in good faith with
respect to the Plan.

3.2 ADMINISTRATION AND BROKERAGE AGENTS. The Board will select and
designate a third-party administration firm and a registered broker-dealer to
provide the administrative and brokerage services, respectively, with respect to
the Plan as set forth herein. The Board may from time to time replace and
redesignate either the Administration Agent or the Brokerage Agent.

ARTICLE IV
SHARES SUBJECT TO PLAN

4.1 SHARES SUBJECT TO PLAN. The Company hereby reserves 5,000,000
shares of Common Stock for issuance under the Plan. These shares shall be
authorized and unissued shares. To the extent provided by resolution of the
Board, such shares may be uncertificated.

4.2 ADJUSTMENTS TO SHARES RESERVED. In the event of any merger,
consolidation, reorganization, recapitalization, spin-off, stock dividend, stock
split, reverse stock split, exchange or other distribution with respect to
shares of Common Stock or other change in the corporate structure or
capitalization affecting the Common Stock, the type and number of shares of
stock which are or may be subject to the Plan or contributed amounts under the
Plan shall be equitably adjusted by the Board, in its sole discretion, to
preserve the value of benefits under the Plan.

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<PAGE> 84

ARTICLE V
ELIGIBILITY AND ENROLLMENT

5.1 INITIAL ELIGIBILITY. Subject to the limitations set forth below,
every Employee of the Company and its subsidiaries who has been employed by the
Company or a subsidiary for at least the 60 consecutive days preceding the
Effective Date of such person's enrollment is eligible to participate in the
Plan.

5.2 LIMITATIONS ON PARTICIPATION. Notwithstanding any provisions of the
Plan to the contrary, no Employee shall be entitled to participate, select a
Contribution Rate, contribute amounts to his or her Contribution Account or
otherwise purchase Common Stock under the Plan (or any other employee stock
purchase plan of the Company and its subsidiaries, if any) to the extent:

(a) that such participation, contribution or purchase, as the
case may be, is at a rate that exceeds $25,000 in fair market value of
the Common Stock in any calendar year (as determined under Section 423
of the Code); or

(b) that, giving effect to such participation, contribution
or purchase, as the case may be, such Employee would own or
beneficially own Common Stock possessing five percent or more of the
total combined voting power or value of all classes of stock of the
Company.

5.3 ENROLLMENT. The Company or the Administration Agent shall furnish
information relating to the Plan and Plan enrollment to each Employee who is or
becomes eligible to participate. If the Employee elects to participate in the
Plan (and thus become a Participating Employee), he or she shall enroll
according to the enrollment procedures set forth in the information provided by
the Company or the Administration Agent. Upon enrollment, the Company or the
Administration Agent will provide a confirmation statement to the Participating
Employee. If an eligible Employee does not elect to participate as of the first
calendar quarter available for such Employee's election (or as of February 1,
1997 by enrolling during the Extended Enrollment Period), the Employee may
nonetheless elect to participate commencing with any subsequent calendar
quarter.

5.4 EFFECTS OF ENROLLMENT. Enrollment in the Plan is for one year from
the Effective Date of enrollment (the "Employee Plan Year"), except that
enrollment during the Extended Enrollment Period shall be for the 11-month
period ended December 31, 1997. Amounts contributed by the Participating
Employee will be applied to the purchase of shares of Common Stock in accordance
with the provisions of Article VII at the end of such Employee Plan Year.
Enrollment continues, and is automatically renewed at the end of an Employee
Plan Year for an additional Employee Plan Year, unless and until payroll
deductions and Plan participation have been specifically discontinued in
accordance with the provisions of Article VI.

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<PAGE> 85

5.5 PARTICIPATING EMPLOYEE'S CONTRIBUTION RATE. In order to participate
in the Plan, an Employee must elect to participate in accordance with Section
5.3 and must authorize the Company or its subsidiary, as applicable, to deduct
from payroll on behalf of such Participating Employee a specified amount per pay
period. Such amount may not be less than $5.00 nor more than $800.00 per pay
period; provided, however, that such minimum and maximum amounts may be adjusted
by the Company at any time and from time to time for the sake of administrative
convenience and/or to ensure continued compliance with the provisions of Section
423 of the Code.

ARTICLE VI
DEDUCTIONS, MODIFICATIONS & PLAN WITHDRAWAL

6.1 DEDUCTIONS. Payroll deductions at the Participating Employee's
Contribution Rate shall begin on the first pay date following the Effective Date
of such Participating Employee's enrollment in the Plan. The Participating
Employee's contributions shall be allocated to and deemed a part of the
Participating Employee's Contribution Account. Participating Employee
contributions will not be permitted to begin at any time other than the
beginning of a calendar quarter (except for contributions by enrollees during
the Extended Enrollment Period, which will begin following February 1, 1997). No
interest shall accrue or be paid on any amounts withheld under the Plan.

6.2 MODIFICATIONS IN CONTRIBUTION RATE. The Participating Employee's
Contribution Rate, once established, shall remain in effect for all of the
Employee Plan Year and subsequent Employee Plan Years unless changed by the
Participating Employee in the manner specified by the Company or the
Administration Agent. Notwithstanding anything herein to the contrary, a
Participating Employee may only reduce his or her Contribution Rate during any
Employee Plan Year. The Contribution Rate may not be increased during an
Employee Plan Year.

6.3 DISCONTINUING CONTRIBUTIONS. At any time during an Employee Plan
Year, a Participating Employee may notify the Company or the Administration
Agent that he or she wishes to discontinue his or her contributions for such
Employee Plan Year. This notice shall be communicated in the manner specified by
the Company or the Administration Agent. A Participating Employee who has
discontinued contributions under the Plan may not resume contributions until his
or her Employee Plan Year has expired.

6.4 WITHDRAWAL FROM PLAN. At any time, a Participating Employee may
notify the Company or the Administration Agent that he or she wishes to
discontinue participation in the Plan. This notice shall be communicated in the
manner specified by the Company or the Administration Agent. A Participating
Employee who has discontinued participation in the Plan may not re-enroll in the
Plan until his or her Employee Plan Year has expired. Upon withdrawal from the
Plan pursuant to this Article

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VI, the Employee shall be issued a payroll check in the amount of his or her
Contribution Account as of the effective date of withdrawal as soon as
administratively feasible.

ARTICLE VII
PURCHASE OF COMMON STOCK

7.1 PURCHASES. On each Purchase Date (which shall be the last trading
day of each Employee Plan Year), the funds in a Participating Employee's
Contribution Account shall be used to purchase the maximum number of whole
shares of Common Stock determined by dividing the Issue Price into the balance
in such Contribution Account (subject to the limitations set forth in Section
7.2). The Issue Price of the shares of Common Stock issued under the Plan shall
be equal to the lesser of: (i) 85% of the Market Price on the last trading date
(or "Purchase Date") of an Employee Plan Year, or (ii) 85% of the Market Price
on the first trading date of an Employee Plan Year. Any funds remaining in a
Participating Employees' Contribution Account following the purchase shall be
determined by the Brokerage Agent and returned to the Participating Employee,
without interest, in accordance with such procedures as the Brokerage Agent may
establish.

7.2 OVER-ALLOTMENTS. If the total number of shares to be purchased by
all Participating Employees on a Purchase Date exceeds the number of shares
authorized under Article IV of the Plan, a pro-rata allocation of the available
shares will be made among all Participating Employees based on the amount of the
balances in their respective Contribution Accounts through the Purchase Date.

7.3 ISSUED SHARES. A Participating Employee's shares of Common Stock
will be deposited in a brokerage account opened on behalf of the Participating
Employee with the Brokerage Agent. All fees and commissions associated with the
operation of such brokerage account shall be the responsibility of the
Participating Employee.

ARTICLE VIII
CHANGES IN STATUS AFFECTING ELIGIBILITY

8.1 TERMINATION OF EMPLOYMENT. Effective upon the termination of the
Participating Employee's employment for any reason, including without limitation
death or retirement, such person's participation in the Plan shall be deemed
discontinued and authorized payroll deductions credited to his or her
Contribution Account will be returned to him or her in accordance with the
provisions of Section 6.4.

8.2 TEMPORARY ABSENCE. If a Participating Employee temporarily leaves
the employ of the Company or its subsidiaries by reason of leave of absence,
temporary lay-off or temporary disability, the Participating Employee may, for a
period of up to 180 days, continue his or her participation in the Plan. During
any such period, the

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Participating Employee shall make regular payments to the Administration Agent
(in lieu of payroll deductions) at the applicable Contribution Rate (as may or
may not be adjusted pursuant to Article VI), and such amounts shall be credited
to the Participating Employee's Contribution Account. To the extent a Purchase
Date occurs during such continuation period, amounts in the Contribution Account
shall be applied to the purchase of shares of Common Stock as herein provided.
However, notwithstanding anything herein to the contrary, if the Participating
Employee has not resumed employment with the Company or its subsidiaries when
such 180-day period has ended, he or she shall be treated as having discontinued
his or her participation in the Plan as of such date, and the balance in his or
her Contribution Account will be returned.

ARTICLE IX
GENERAL PROVISIONS

9.1 TERM OF PLAN. Subject to the approval of the stockholders of the
Company, this Plan will become effective on the Effective Date. The Plan shall
remain in effect until all of the shares of Common Stock reserved for issuance
hereunder have been issued and balances maintained in the Participating Employee
Contribution Accounts have been distributed, unless earlier terminated by the
Board.

9.2 AMENDMENT OR TERMINATION BY BOARD. The Board may at any time or
from time to time amend the Plan in any respect. The Board may terminate the
Plan at any time. If the Plan is terminated, unless otherwise specified, the
date of termination shall be treated as a Purchase Date. All funds in
Participating Employee Contribution Accounts as of the termination date which
are not applied toward purchases of shares of Common Stock shall be refunded to
the Participating Employees.

9.3 TRANSFERABILITY. Neither the right of an Employee to purchase
shares of Common Stock hereunder, nor such Participating Employee's Contribution
Account balance, may be transferred, pledged or assigned by the Employee
(except, in the event of the Employee's death, by will or the laws of descent
and distribution). Any such attempted transfer, pledge, assignment or other
disposition shall be treated as an election of the Participating Employee to
discontinue his or her participation in the Plan.

9.4 COMPLIANCE WITH SECURITIES LAWS. Notwithstanding any other
provision of the Plan, the Company shall have no obligation to issue any shares
of Common Stock under the Plan unless such issuance would comply with all
applicable laws, including Federal and state securities laws, and the applicable
regulations or requirements of any securities exchanges or similar entities.

9.5 INVESTMENT INTENT. Prior to the issuance of any shares of Common
Stock under the Plan, the Company may require a written statement that the
recipient is acquiring the shares for investment and not for the purpose or with
the intention of distributing the shares and will not dispose of them in
violation of the registration

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<PAGE> 88

requirements of the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.

9.6 COMPLIANCE WITH SECTION 16(B). With respect to any person who is
subject to Section 16(a) of the Securities Exchange Act of 1934, as amended, the
Board may, at any time, add such conditions and limitations respecting
eligibility or participation under the Plan as it deems necessary or desirable
to comply with the requirements of Rule 16b-3 thereunder; provided, however,
that any rights or privileges that are extended to such persons shall be
extended uniformly to all eligible employees.

9.7 WITHHOLDING TAXES. Amounts withheld, shares issued and payments
made pursuant to the Plan may be subject to withholding taxes, and the Company
and its subsidiaries shall have the right to withhold from any payment or
distribution of shares or to collect as a condition of any payment or
distribution under the Plan, as applicable, any taxes required by law to be
withheld.

9.8 NO CONTINUED EMPLOYMENT. The Plan does not constitute a contract of
employment or continued service, and participation in the Plan will not give any
Employee the right to be retained in the employ of the Company or any right or
claim to any benefit under the Plan unless such right or claim has specifically
accrued under the terms of the Plan.

9.9 TREATMENT AS STOCKHOLDER. Any contribution made by a Participating
Employee under the Plan shall not create any rights in such Participating
Employee as a stockholder of the Company until shares of Common Stock are
registered in the name of such person.

9.10 VOTING OF ISSUED SHARES. The Brokerage Agent will vote the Common
Stock held in brokerage accounts on behalf of Participating Employees in
accordance with instructions received from such Participating Employees. The
Brokerage Agent will transmit to Participating Employees all proxy material and
other reports furnished by the Company to its stockholders.

9.11 GOVERNING LAW. The law of the State of Delaware will govern all
matters relating to this Plan except to the extent it is superseded by the laws
of the United States.

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APPENDIX C

MEDPARTNERS, INC.
ANNUAL MEETING OF STOCKHOLDERS
MAY 13, 1997
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF MEDPARTNERS, INC.

The undersigned hereby appoints Larry R. House and Harold O. Knight, Jr., and
each of them, with full power of substitution, attorneys and proxies of the
undersigned to vote the shares of Common Stock, par value $.001 per share, of
MedPartners, Inc. ("MedPartners"), which the undersigned could vote, and with
all power the undersigned would possess, if personally present at the Annual
Meeting of Stockholders of MedPartners, Inc. to be held at The Wynfrey Hotel,
1000 Riverchase Galleria, Birmingham, Alabama, on Tuesday, May 13, 1997, at 4:00
p.m., Central Time, and any adjournment thereof:

<TABLE>
<S> <C>
1. Election of Directors
[] FOR all nominees listed below to serve a term of three years
each (except as marked to the contrary below)
[] WITHHOLD AUTHORITY to vote for all nominees listed below
INSTRUCTION: To withhold authority to vote for any
individual nominee, mark a line through the nominee's name
in the list below.
Richard M. Scrushy Ted H.
McCourtney Rosalio J. Lopez, M.D. C. A.
Lance Piccolo
2. Approval of the MedPartners 1997 Long Term Incentive
Compensation Plan.
[] FOR [] AGAINST [] ABSTAIN
3. Approval of the MedPartners Employee Stock Purchase Plan.
[] FOR [] AGAINST [] ABSTAIN
</TABLE>

(Continued and to be dated and signed on other side)

(Continued from other side)

4. In their discretion, to act upon any matters incidental to the foregoing
and such other business as may properly come before the Annual Meeting, or
any adjournment thereof.

This Proxy, when properly executed, will be voted in the manner directed
herein by the undersigned stockholder. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR ITEMS 1, 2 AND 3 ABOVE. Any holder who wishes to withhold the
discretionary authority referred to in Item 4 above should mark a line through
the entire Item.

Receipt of the Proxy Statement, dated April 11, 1997, is hereby acknowledged.

Dated:

----------------------------------------------------------------------------,
1997

------------------------------
Signature(s)

------------------------------
(Please sign exactly and as
fully as your name appears on
your stock certificate. If
shares are held jointly, each
stockholder must sign.)

PLEASE MARK, SIGN, DATE AND RETURN PROMPTLY, USING THE ENCLOSED ENVELOPE.
NO POSTAGE IS REQUIRED.